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will not be an allowable cost in any re- [47 FR 50253, Nov. 5, 1982]
sulting contract (see § 1-3.808-5 and 1-

8 1-3.808-5 Solicitation notice and con(d) Contracting officers are not re tract clause. quired to use an overall profit or fee

(a)The contracting officer shall objective higher than that proposed

insert the notice set forth below in all by the prospective contractor.

solicitations that will result in con(e)(1) The contracting officer shall

tracts with reimbursable costs subject not negotiate a price or fee that ex

to the cost principles for contracts ceeds the following statutory limita

with commercial organizations (see tions imposed by 10 U.S.C. 2306(d) and

Subpart 1-15.2): 41 U.S.C. 254(b):

(i) For experimental, developmental, FACILITIES CAPITAL COST OF MONEY or research work performed under a

Facilities capital cost of money (see FPR cost-plus-fixed-fee contract, the fee

§ 1-15.205-51(a)) will be an allowable cost shall not exceed 15 percent of the con

under the contemplated contract, but only tract's estimated cost, excluding fee.

if the contractor specifically identifies or (ii) For architect-engineering sery

proposes it in the cost proposal for the conices for public works or utilities, the tract and elects to claim this cost by checkcontract price or the estimated cost ing the appropriate box below. If the conand fee for production and delivery of tractor does not specifically identify or prodesigns, plans, drawings, and specifica pose facilities capital cost of money and tions shall not exceed 6 percent of the does not elect to claim this cost, the conestimated cost of construction of the tract will include the Waiver of Facilities public work or utility, excluding fees.

Capital Cost of Money clause. (iii) For other cost-plus-fixed-fee

The prospective contractor has specificontracts, the fee shall not exceed 10

cally identified or proposed facilities capital

cost of money in its cost proposal and elects percent of the contract's estimated

to claim this cost as an allowable cost under cost, excluding fee.

the contract. (2) The limitations in paragraphs

The prospective contractor has not spe(e)(1) (i) and (iii) of this section shall

cifically identified or proposed facilities capapply also to the maximum fees on ital cost of money in its proposal and elects cost-plus-incentive-fee and cost-plus- not to claim it as an allowable cost under award-fee contracts. However, the the contract. agency head or a designee may waive the maximum fee limitation for a spe

(End of notice) cific cost-plus-incentive-fee or cost

(b) The contracting officer shall plus-award-fee contract. (3) The estimated costs on which the

insert the clause set forth below in maximum fees are computed pursuant

contracts with reimbursable costs subto the statutory limitations set forth

ject to the cost principles for commerin paragraph (e)(1) of this section

cial organizations in Subpart 1-15.2, shall include facilities capital cost of

when the contractor has not specifimoney when this cost is included in

cally identified or proposed facilities cost estimates.

capital cost of money in its proposal (f) The contracting officer shall not

and has elected not to claim it as an require any prospective contractor to allowable cost under the contract (see submit details of its profit or fee ob- election under paragraph (a) of this jective, but shall consider them if they section): are submitted voluntarily.

WAIVER OF FACILITIES CAPITAL Cost of (g) If a change or modification calls

MONEY for essentially the same type and mix of work as the basic contract or is of The Contractor is aware that facilities relatively small dollar value compared

capital cost of money is an allowable cost to the total contract value, the con

but waives the right to claim it under this

contract. tracting officer may use the basic contract's profit or fee rate as the prene

(End of clause) gotiation objective for that change or modification.

[47 FR 50253, Nov. 5, 1982)

§ 1-3.808–6 Profit analysis factors.

(a) Common factors. Unless it is clearly inappropriate or not applicable, each factor outlined in paragraphs (a) (1) through (6) of this section shall be considered by agencies in developing their structured approaches and by contracting officers in analyzing profit when not using a structured approach.

(1) Contractor effort. This factor measures the complexity of the work and the resources required of the prospective contractor for contract performance. Greater profit opportunity should be provided under contracts requiring a high degree of professional and managerial skill and to prospective contractors whose skills, facilities, and technical assets can be expected to lead to efficient and economical contract performance. The following factors (i) through (iv) shall be considered in determining contractor effort, but they may be modified in specific situations to accommodate differences in the categories used by prospective contractors for listing costs:

(i) Material acquisition. This subfactor measures the managerial and technical effort needed to obtain the required purchased parts and material, subcontracted items, and special tool. ing. Considerations include (A) the complexity of the items required, (B) the number of purchase orders and subcontracts to be awarded and ad ministered, (C) whether established sources are available or new or second sources must be developed, and (D) whether material will be obtained through routine purchase orders or through complex subcontracts requiring detailed specifications. Profit consideration should correspond to the managerial and technical effort involved.

(ii) Conversion direct labor. This subfactor measures the contribution of direct engineering, manufacturing, and other labor to converting the raw materials, data, and subcontracted items into the contract items. Considerations include the diversity of engineering, scientific, and manufacturing labor skills required and the amount and quality of supervision and coordination needed to perform the contract task.

(iii) Conversion-related indirect costs. This subfactor measures how much the indirect costs contribute to contract performance. The labor elements in the allocable indirect cost should be given the profit consideration they would receive if treated as direct labor. The other elements of indirect costs should be evaluated to determine whether they (A) merit only limited profit consideration because of their routine nature, or (B) are elements that contribute significantly to the proposed contract.

(iv) General management. This subfactor measures the prospective contractor's other indirect costs and general and administrative (G&A) expense, their composition, and how much they contribute to contract performance. Considerations include (A) how labor in the overhead pools would be treated if it were direct labor, (B) whether elements within the pools are routine expenses or instead are elements that contribute significantly to the proposed contract, and (C) whether the elements require routine as opposed to unusual managerial effort and attention.

(2) Contract cost risk. (i) This factor measures the degree of cost responsibility and associated risk that the prospective contractor will assume (A) as a result of the contract type contemplated, and (B) considering the reliability of the cost estimate in relation to the complexity and duration of the contract task. Determination of contract type should be closely related to the risks involved in timely, cost-effective, and efficient performance. This factor should compensate contractors proportionately for assuming greater cost risks.

(ii) The contractor assumes the greatest cost risk in a closely priced firm fixed-price contract under which it agrees to perform a complex undertaking on time and at a predetermined price. Some firm fixed-price contracts may entail substantially less cost risk than others because, for example, the contract task is less complex or many of the contractor's costs are known at the time of price agreement, in which case the risk factor should be reduced accordingly. The contractor assumes the least cost risk in a cost-plus-fixed

fee level-of-effort contract, under of the contractor's operating capital which it is reimbursed those costs de investment required for effective contermined to be allocable and allowable, tract performance. This level will vary, plus the fixed fee.

depending on such circumstances as (iii) In evaluating assumption of cost (A) the nature of the work and durarisk, contracting officers shall, except tion of the contract, (B) contract type in unusual circumstances, treat time and dollar magnitude, (C) the reimand materials, labor-hour, and fixed- bursement or progress payment rate, price level-of-effort contracts as cost- (D) the contractor's financial manageplus-fixed-fee contracts.

ment practices, and (E) the frequency (3) Federal socioeconomic programs. of and time lag between billings and This factor, which may be a negative Government payments. These circumor positive consideration, measures the stances should be taken into account degree of support given by the pro- in determining what profit adjustspective contractor to Federal socio- ment, if any, is appropriate under this economic programs, such as those in subfactor. volving small business concerns, small (5) Cost-control and other past acbusiness concerns owned and con complishments. This factor, which trolled by socially and economically may be a negative or positive considerdisadvantaged individuals, handi ation, allows additional profit opportucapped sheltered workshops, labor sur- nities to a prospective contractor that plus areas, and energy conservation. has previously demonstrated its ability Greater profit opportunity should be to perform similar tasks effectively provided under contracts with contrac- and economically. In addition, considtors adhering to the spirit and intent eration should be given to (i) measures of these programs.

taken by the prospective contractor (4) Capital investments. This factor that result in productivity improvetakes into account the contribution of ments, and (ii) other cost reduction accontractor investments to efficient complishments that will benefit the and economical contract performance. Government in follow-on contracts. The following subfactors shall be con (6) Independent development. Under sidered in the analysis:

this factor, the contractor may be pro(i) Facilities. This subfactor, which vided additional profit opportunities may be either a negative or a positive in recognition of independent developconsideration, includes consideration ment efforts relevant to the contract of the equipment's and facilities' (A) end item, including manufacturing or age, (B) undepreciated value, (C) cost- engineering processes, specialized or effectiveness, (D) general or special unique services, or other technologies. purpose, and (E) remaining life com- The contracting officer should considpared with the length of the contem- er the extent of the Government's plated program. Also to be considered contribution to the contractor's indeare any undue reliance on Govern- pendent research and development ment-owned facilities and equipment, program during the contractor fiscal any contractor failure to provide the years in which the applicable developkinds or quantities of facilities re- ment was taking place. quired for efficient contract perform- (b) Additional factors. In order to ance, and any special contract provi- foster achievement of program objecsions that will affect the contractor's tives, each agency may include addifacilities capital investment risk. tional factors in its structured apWhen applicable, the prospective con proach or take them into account in tractor's computation of facilities capi. the profit analysis of individual contal cost of money for pricing purposes tract actions. under CAS 414 (see $ $ 1-15.205-51 and (c) Nonprofit organizations. The 1-3.1301) can help the contracting offi profit policy was designed for arriving cer identify the level of facilities in at profit or fee objectives for other vestment to be employed in contract than nonprofit organizations. Howevperformance.

er, if appropriate adjustments are (ii) Operating capital. This subfac- made to reflect differences between tor includes consideration of the level profit and nonprofit organizations, the profit analysis factors and the struc- tration personnel in connection with tured approaches developed by agen analyses of contractors' cost represencies may be used for arriving at fee ob tations and related matters, including jectives for nonprofit organizations. counsel (with or without an audit) on

(1) For purposes of this paragraph, accounting and financial subjects. nonprofit organizations are defined as (b) Auditors reports on contract prothose entities organized and operated posals. (1) The contracting officer or exclusively for charitable, scientific, or his authorized representative shall reeducational purposes, of which no part quest an audit review by the contract of the net earnings inure to the bene audit activity in accordance with this fit of any private shareholder or indi. paragraph (b). Audit reviews shall be vidual, of which no substantial part of

requested prior to the negotiation of the activities is carrying on propagan any contract or modification resulting da or otherwise attempting to influ from proposals in excess of $100,000 ence legislation or participating in any which are for firm fixed-price, fixedpolitical campaign on behalf of any

price with economic price adjustment, candidate for public office, and which fixed-price redeterminable (prospecare exempt from Federal income tax

tive), and time and materials or laboration under Section 501 of the Inter

hour type contracts, and for interim nal Revenue Code.

and final price redetermination and (2) In developing appropriate adjust

settlement of incentive type contracts; ment factors for nonprofit organiza

$250,000 for fixed-price incentive, costtions, the following items should be plus-incentive-fee or fixed-price redeconsidered:

terminable (retroactive) type con(i) Tax position benefits;

tracts; or $500,000 for cost-reimburse(ii) Granting of financing through

ment, cost-sharing, cost-plus-award-fee letters of credit or other means;

or cost-plus-a-fixed-fee type contracts, (iii) Facility requirements of the

when the price is based on cost or pricnonprofit organizations; and

ing data (81-3.807-3) submitted by the (iv) Any other pertinent factors

contractor. These include initial which may work to either the advan

prices, estimated cost of cost-reimtage or disadvantage of the contactor

bursement type contracts, economic in its position as a nonprofit organiza

price adjustments, target prices, and tion.

modifications of formally advertised (47 FR 50254, Nov. 5, 1982]

contracts. In arriving at the aggregate

amount involved in a contract or modi§ 1-3.809 Contract audit as a pricing aid. fication, all supplies and services shall

Contract audit as a pricing aid shall be included (including construction) be utilized to the fullest extent appro which properly would be grouped topriate as provided by this section, gether in a single transaction. Reexcept as otherwise provided by the quirements shall not be split into sevhead of the agency if audit resources eral contracts or modifications which are unavailable.

individually would be less than (but in (a) General. Contract auditors are the aggregate would be more than) professional accountants who, al the amounts set forth in this parathough organizationally independent, graph (b)(1) for the type of contract are the principal advisors to contract anticipated. ing officers on contractor accounting (i) The requirement to audit proposand contract audit matters. Contract als as set forth in paragraph (b)(1) of audit services include:

this section may be waived by the con(1) The submission of audit reports tracting officer whenever it is clear which set forth the results of auditors' that information already available is reviews and analyses of cost data sub adequate for determining the reasonmitted by contractors as part of pric- ableness of the price of the proposed ing proposals, reviews of contractors' procurement. Examples of such inforaccounting systems, estimating meth- mation include recent preaward audits ods, and other related matters; and of proposals submitted by the offeror,

(2) Personal consultation and advice preaward surveys, or other recent fato procurement and contract adminis- vorable audit experience. In such

cases, the contract files shall be docu- cate the additional time needed. The mented to reflect the reasons for any contracting officer shall promptly such waivers. However, independent advise the auditor whether the extenGovernment estimates of cost or price sion of the report due date can be shall not be used as the sole justifica granted. tion for waiver (see § 1-3.811(a)(4).

(3) When requesting the contract (ii) Audits should be requested for auditor to review and evaluate a conproposals which are less than the tractor's proposal, the contracting ofthresholds set forth in paragraph ficer shall identify any areas where he (b)(1) of this section where a valid desires particular pricing effort. If need exists, such as:

there are audit work program con(A) Inadequate knowledge concern flicts, priorities should be worked out ing the contractor's accounting poli- jointly between the auditor and the cies, cost systems, or substantially contracting officer. Arrangements changed methods or levels of oper- should be made by the auditor ation;

through the contracting officer for (B) Previous unfavorable experience technical assistance, as needed. indicating doubtful reliability of the (4) In accordance with Subpart 1contractor's estimating, accounting, or 3.12, Cost Accounting Standards, and purchasing methods; or

Part 1-15, Contract Cost Principles (C) Procurement of a new product and Procedures, the cognizant confor which cost experience is lacking. tract auditor shall be responsible for

(iii) The terms “audit review” and making recommendations to the con“audit” are used interchangeably to tracting officer as to whether: refer to examinations by contract (i) A contractor's Disclosure Stateauditors, of contractors' statements of ment (see § 1-3.1203(a)), submitted as (a) costs to be incurred (cost esti- a condition to contracting, adequately mates), or (b) costs actually incurred, describes the actual or proposed cost to the extent deemed appropriate by accounting practices as required by the auditors in the light of their expe- Pub. L. 91-379, 50 U.S.C. App. 2168, as rience with the contractors, and rely. implemented by the Cost Accounting ing upon their appraisals of the effec- Standards Board; tiveness of contractors' policies, proce- (ii) A contractor's disclosed cost acdures, controls, and practices. Such counting practices are in compliance audit reviews or audits may consist of with Part 1-15 and applicable Cost ACdesk reviews, test checks of a limited counting Standards; number of transactions, or examina (iii) A contractor's or subcontractor's tions in depth, at the discretion of the failure to comply with applicable Cost auditor.

Accounting Standards or to follow (2) The contracting officer shall es- consistently his disclosed cost accounttablish the due date for receipt of the ing practices has resulted, or may auditor's report and in so doing shall result, in any increased cost paid by allow as much time as possible for the the Government; and audit work. Within the time available (iv) A contractor's or subcontractor's the overall scope and depth of the proposed price changes, submitted as a audit shall be determined by, and be result of changes made to previously the full responsibility of, the contract disclosed or established cost account. auditor. Any particular areas identi ing practices, are fair and reasonable. fied by the contracting officer for spe- (5) The auditor, as part of his report, cial emphasis shall be specifically in shall set forth the basis and method cluded in the report. Since time is used by the contractor in preparing highly important in most negotiation his proposal. Also, the report shall situations, the auditors should give clearly identify the contractor's origisufficient priority to reports for for- nal proposal and all subsequent writward pricing to meet established due ten formal submissions to the condates. If the time available is not ade- tracting officer or to the auditor, of quate to permit satisfactory coverage cost or pricing data identified as such of the proposal, the auditor shall so by the contractor. In addition, cost or advise the contracting officer and indi- pricing data not submitted by the con

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