will not be an allowable cost in any resulting contract (see § 1-3.808-5 and 115.205-51(a)(2)(iii)).

(d) Contracting officers are not required to use an overall profit or fee objective higher than that proposed by the prospective contractor.

(e)(1) The contracting officer shall not negotiate a price or fee that exceeds the following statutory limitations imposed by 10 U.S.C. 2306(d) and 41 U.S.C. 254(b):

(i) For experimental, developmental, or research work performed under a cost-plus-fixed-fee contract, the fee shall not exceed 15 percent of the contract's estimated cost, excluding fee.

(ii) For architect-engineering services for public works or utilities, the contract price or the estimated cost and fee for production and delivery of designs, plans, drawings, and specifications shall not exceed 6 percent of the estimated cost of construction of the public work or utility, excluding fees.

(iii) For other cost-plus-fixed-fee contracts, the fee shall not exceed 10 percent of the contract's estimated cost, excluding fee.

(2) The limitations in paragraphs (e)(1) (i) and (iii) of this section shall apply also to the maximum fees on cost-plus-incentive-fee and cost-plusaward-fee contracts. However, the agency head or a designee may waive the maximum fee limitation for a specific cost-plus-incentive-fee or costplus-award-fee contract.

(3) The estimated costs on which the maximum fees are computed pursuant to the statutory limitations set forth in paragraph (e)(1) of this section shall include facilities capital cost of money when this cost is included in cost estimates.

(f) The contracting officer shall not require any prospective contractor to submit details of its profit or fee objective, but shall consider them if they are submitted voluntarily.

(g) If a change or modification calls for essentially the same type and mix of work as the basic contract or is of relatively small dollar value compared to the total contract value, the contracting officer may use the basic contract's profit or fee rate as the prenegotiation objective for that change or modification.

[47 FR 50253, Nov. 5, 1982]

§ 1-3.808-5 Solicitation notice and contract clause.

(a)The contracting officer shall insert the notice set forth below in all solicitations that will result in contracts with reimbursable costs subject to the cost principles for contracts with commercial organizations (see Subpart 1-15.2):

FACILITIES CAPITAL COST OF MONEY

Facilities capital cost of money (see FPR § 1-15.205-51(a)) will be an allowable cost under the contemplated contract, but only if the contractor specifically identifies or proposes it in the cost proposal for the contract and elects to claim this cost by checking the appropriate box below. If the contractor does not specifically identify or propose facilities capital cost of money and does not elect to claim this cost, the contract will include the Waiver of Facilities Capital Cost of Money clause.

The prospective contractor has specifically identified or proposed facilities capital cost of money in its cost proposal and elects to claim this cost as an allowable cost under the contract.

The prospective contractor has not specifically identified or proposed facilities capital cost of money in its proposal and elects not to claim it as an allowable cost under the contract.

(End of notice)

(b) The contracting officer shall insert the clause set forth below in contracts with reimbursable costs subject to the cost principles for commercial organizations in Subpart 1-15.2, when the contractor has not specifically identified or proposed facilities capital cost of money in its proposal and has elected not to claim it as an allowable cost under the contract (see election under paragraph (a) of this section):

WAIVER OF FACILITIES CAPITAL COST OF

MONEY

The Contractor is aware that facilities capital cost of money is an allowable cost but waives the right to claim it under this contract.

(End of clause)

[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 tooling. Considerations include (A) the complexity of the items required, (B) the number of purchase orders and subcontracts to be awarded and administered, (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 which it is reimbursed those costs determined to be allocable and allowable, plus the fixed fee.

(iii) In evaluating assumption of cost risk, contracting officers shall, except in unusual circumstances, treat time and materials, labor-hour, and fixedprice level-of-effort contracts as costplus-fixed-fee contracts.

(3) Federal socioeconomic programs. This factor, which may be a negative or positive consideration, measures the degree of support given by the prospective contractor to Federal socioeconomic programs, such as those involving small business concerns, small business concerns owned and controlled by socially and economically disadvantaged individuals, handicapped sheltered workshops, labor surplus areas, and energy conservation. Greater profit opportunity should be provided under contracts with contractors adhering to the spirit and intent of these programs.

(4) Capital investments. This factor takes into account the contribution of contractor investments to efficient and economical contract performance. The following subfactors shall be considered in the analysis:

(i) Facilities. This subfactor, which may be either a negative or a positive consideration, includes consideration of the equipment's and facilities' (A) age, (B) undepreciated value, (C) costeffectiveness, (D) general or special purpose, and (E) remaining life compared with the length of the contemplated program. Also to be considered are any undue reliance on Government-owned facilities and equipment, any contractor failure to provide the kinds or quantities of facilities required for efficient contract performance, and any special contract provisions that will affect the contractor's facilities capital investment risk. When applicable, the prospective contractor's computation of facilities capital cost of money for pricing purposes under CAS 414 (see §§ 1-15.205-51 and 1-3.1301) can help the contracting officer identify the level of facilities investment to be employed in contract performance.

(ii) Operating capital. This subfactor includes consideration of the level

of the contractor's operating capital investment required for effective contract performance. This level will vary, depending on such circumstances as (A) the nature of the work and duration of the contract, (B) contract type and dollar magnitude, (C) the reimbursement or progress payment rate, (D) the contractor's financial management practices, and (E) the frequency of and time lag between billings and Government payments. These circumstances should be taken into account in determining what profit adjustment, if any, is appropriate under this subfactor.

(5) Cost-control and other past accomplishments. This factor, which may be a negative or positive consideration, allows additional profit opportunities to a prospective contractor that has previously demonstrated its ability to perform similar tasks effectively and economically. In addition, consideration should be given to (i) measures taken by the prospective contractor that result in productivity improvements, and (ii) other cost reduction accomplishments that will benefit the Government in follow-on contracts.

(6) Independent development. Under this factor, the contractor may be provided additional profit opportunities in recognition of independent development efforts relevant to the contract end item, including manufacturing or engineering processes, specialized or unique services, or other technologies. The contracting officer should consider the extent of the Government's contribution to the contractor's independent research and development program during the contractor fiscal years in which the applicable development was taking place.

(b) Additional factors. In order to foster achievement of program objectives, each agency may include additional factors in its structured approach or take them into account in the profit analysis of individual contract actions.

(c) Nonprofit organizations. The profit policy was designed for arriving at profit or fee objectives for other than nonprofit organizations. However, if appropriate adjustments are made to reflect differences between profit and nonprofit organizations, the

profit analysis factors and the structured approaches developed by agencies may be used for arriving at fee objectives for nonprofit organizations.

(1) For purposes of this paragraph, nonprofit organizations are defined as those entities organized and operated exclusively for charitable, scientific, or educational purposes, of which no part of the net earnings inure to the benefit of any private shareholder or individual, of which no substantial part of the activities is carrying on propaganda or otherwise attempting to influence legislation or participating in any political campaign on behalf of any candidate for public office, and which are exempt from Federal income taxation under Section 501 of the Internal Revenue Code.

(2) In developing appropriate adjustment factors for nonprofit organizations, the following items should be considered:

(i) Tax position benefits;

(ii) Granting of financing through letters of credit or other means;

(iii) Facility requirements of the nonprofit organizations; and

(iv) Any other pertinent factors which may work to either the advantage or disadvantage of the contactor in its position as a nonprofit organization.

[47 FR 50254, Nov. 5, 1982]

§ 1-3.809 Contract audit as a pricing aid.

Contract audit as a pricing aid shall be utilized to the fullest extent appropriate as provided by this section, except as otherwise provided by the head of the agency if audit resources are unavailable.

(a) General. Contract auditors are professional accountants who, although organizationally independent, are the principal advisors to contracting officers on contractor accounting and contract audit matters. Contract audit services include:

(1) The submission of audit reports which set forth the results of auditors' reviews and analyses of cost data submitted by contractors as part of pricing proposals, reviews of contractors' accounting systems, estimating methods, and other related matters; and

(2) Personal consultation and advice to procurement and contract adminis

tration personnel in connection with analyses of contractors' cost representations and related matters, including counsel (with or without an audit) on accounting and financial subjects.

con

(b) Auditors reports on contract proposals. (1) The contracting officer or his authorized representative shall request an audit review by the contract audit activity in accordance with this paragraph (b). Audit reviews shall be requested prior to the negotiation of any contract or modification resulting from proposals in excess of $100,000 which are for firm fixed-price, fixedprice with economic price adjustment, fixed-price redeterminable (prospective), and time and materials or laborhour type contracts, and for interim and final price redetermination and settlement of incentive type contracts; $250,000 for fixed-price incentive, costplus-incentive-fee or fixed-price redeterminable (retroactive) type tracts; or $500,000 for cost-reimbursement, cost-sharing, cost-plus-award-fee or cost-plus-a-fixed-fee type contracts, when the price is based on cost or pricing data (§1-3.807-3) submitted by the contractor. These include initial prices, estimated cost of cost-reimbursement type contracts, economic price adjustments, target prices, and modifications of formally advertised contracts. In arriving at the aggregate amount involved in a contract or modification, all supplies and services shall be included (including construction) which properly would be grouped together in a single transaction. Requirements shall not be split into several contracts or modifications which individually would be less than (but in the aggregate would be more than) the amounts set forth in this paragraph (b)(1) for the type of contract anticipated.

(i) The requirement to audit proposals as set forth in paragraph (b)(1) of this section may be waived by the contracting officer whenever it is clear that information already available is adequate for determining the reasonableness of the price of the proposed procurement. Examples of such information include recent preaward audits of proposals submitted by the offeror, preaward surveys, or other recent favorable audit experience. In such

cases, the contract files shall be documented to reflect the reasons for any such waivers. However, independent Government estimates of cost or price shall not be used as the sole justification for waiver (see § 1-3.811(a)(4)).

(ii) Audits should be requested for proposals which are less than the thresholds set forth in paragraph (b)(1) of this section where a valid need exists, such as:

(A) Inadequate knowledge concerning the contractor's accounting policies, cost systems, or substantially changed methods or levels of operation;

(B) Previous unfavorable experience indicating doubtful reliability of the contractor's estimating, accounting, or purchasing methods; or

(C) Procurement of a new product for which cost experience is lacking.

(iii) The terms "audit review" and “audit" are used interchangeably to refer to examinations by contract auditors, of contractors' statements of (a) costs to be incurred (cost estimates), or (b) costs actually incurred, to the extent deemed appropriate by the auditors in the light of their experience with the contractors, and relying upon their appraisals of the effectiveness of contractors' policies, procedures, controls, and practices. Such audit reviews or audits may consist of desk reviews, test checks of a limited number of transactions, or examinations in depth, at the discretion of the auditor.

(2) The contracting officer shall establish the due date for receipt of the auditor's report and in so doing shall allow as much time as possible for the audit work. Within the time available the overall scope and depth of the audit shall be determined by, and be the full responsibility of, the contract auditor. Any particular areas identified by the contracting officer for special emphasis shall be specifically included in the report. Since time is highly important in most negotiation situations, the auditors should give sufficient priority to reports for forward pricing to meet established due dates. If the time available is not adequate to permit satisfactory coverage of the proposal, the auditor shall so advise the contracting officer and indi

Icate the additional time needed. The contracting officer shall promptly advise the auditor whether the extension of the report due date can be granted.

(3) When requesting the contract auditor to review and evaluate a contractor's proposal, the contracting officer shall identify any areas where he desires particular pricing effort. If there are audit work program conflicts, priorities should be worked out jointly between the auditor and the contracting officer. Arrangements should be made by the auditor through the contracting officer for technical assistance, as needed.

(4) In accordance with Subpart 13.12, Cost Accounting Standards, and Part 1-15, Contract Cost Principles and Procedures, the cognizant contract auditor shall be responsible for making recommendations to the contracting officer as to whether:

(i) A contractor's Disclosure Statement (see § 1-3.1203(a)), submitted as a condition to contracting, adequately describes the actual or proposed cost accounting practices as required by Pub. L. 91-379, 50 U.S.C. App. 2168, as implemented by the Cost Accounting Standards Board;

(ii) A contractor's disclosed cost accounting practices are in compliance with Part 1-15 and applicable Cost Accounting Standards;

(iii) A contractor's or subcontractor's failure to comply with applicable Cost Accounting Standards or to follow consistently his disclosed cost accounting practices has resulted, or may result, in any increased cost paid by the Government; and

(iv) A contractor's or subcontractor's proposed price changes, submitted as a result of changes made to previously disclosed or established cost accounting practices, are fair and reasonable.

(5) The auditor, as part of his report, shall set forth the basis and method used by the contractor in preparing his proposal. Also, the report shall clearly identify the contractor's original proposal and all subsequent written formal submissions to the contracting officer or to the auditor, of cost or pricing data identified as such by the contractor. In addition, cost or pricing data not submitted by the con