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tractor but otherwise coming to the contractor his conclusions and recomauditor which has a significant effect mendations to the contracting officer on the proposed cost or price shall also on the contractor's proposal. No porbe described in the advisory audit tion of the advisory audit report shall report. If the auditor determines that be furnished to the contractor without the cost or pricing data submitted by the concurrence of the contracting of. the contractor is not accurate, com- ficer. The auditor shall not disclose to plete, and current, the auditor shall the contractor the results of technical describe the deficiency and explain its analysis and similar information that significance in the audit report. Where would prejudice the Government's nethe resulting overall effect on the pro- gotiating position. The above limitaposed cost or price is of such magni- tions are not intended to preclude distude that the contractor's proposal is closure of discrepancies or mistakes of of little use as a basis for negotiation, fact such as duplications, omissions, the audit report shall so state. None of and errors in computations, contained the above is intended to relieve the in the contractor's cost or pricing data contractor of his obligation to submit supporting the proposal. accurate, complete, and current cost or (9) If, in the opinion of the contractpricing data.

ing officer, or auditor, the review of a (6) Reports of technical analysis and prime contractor's proposal requires review should be furnished to the audit reviews of subcontractors' cost auditor at the earliest possible date, estimates at the subcontractors' plants and, where practicable, at least 5 days (after due consideration of reviews prior to the due date of the audit performed by the prime contractor), report, to enable the auditor to in- such reviews should be arranged clude the financial effect of technical through audit channels. Criteria as to findings in the audit report (for exam necessity for audit of subcontracts ple, the necessary computations of shall be in accordance with guidelines dollar amounts arising from changes applicable to prime contracts. Where in proposed kinds and quantities of technical reviews are needed they materials, labor hours, etc.). In the shall be arranged through the conevent the technical analyses are not tracting officer. available in time to be reflected in the (10) The audit report shall be made audit report, the audit report shall so a part of the official contract file. state. If technical analyses are re- (c) Additional function of the conceived later by the auditor, he shall tract auditor. (1) Under cost-reimissue a supplemental report if the bursement type contracts, the cost-restatus of the negotiation is such that a imbursement portion of fixed-price report would serve a useful purpose. contracts, letter contracts which proThe original of all technical reports vide for reimbursement of costs, time received by the auditor shall be made and materials contracts, and labora part of the audit report.

hour (negotiated or formally adver(7) The audit report, giving the fi- tised) contracts: nancial effect of related technical and (i) The auditor shall conduct periodother evaluations, shall be forwarded ic audits of contractors as is warranted by the auditor to the contracting offi- by the financial condition, integrity, cer. If any information disclosed sub- reliability of the contractor, prior sequent to the receipt of the audit audit experience, adequacy of the acreport is such as to significantly affect counting system, and the amount of the audit findings, the contracting of- unaudited claims. Advisory audit reficer should promptly advise the audi- ports shall be prepared by the auditor tor, who shall determine whether to at such times when the report is issue a supplemental report.

needed or desirable, and (where possi(8) Information generated through ble) should be rendered no less fresources other than the contractor's quently than once yearly. When the records may be available to the con circumstances warrant, arrangements tracting officer which may affect the may be made for the contract auditor Government's negotiating position. to examine contractor's reimburseThe auditor shall not disclose to the ment vouchers or invoices, and transmit those approved for payment to the (3)(i) The establishment, maintecognizant contracting or disbursing of. nance, and consistent use of formal ficer. If the contract auditor questions cost estimating systems by contractors costs or considers them unallowable, is to the mutual benefit of the Govhe shall provide the contracting offi ernment and industry, particularly cer with reasons and justification where a large portion of the contractherefor. The contracting officer, if he tor's business is Government work and agrees with the contract auditor, shall there are a number of significant propromptly notify the contractor in writ- posals requiring review. Procuring acing of the costs questioned and sus tivities should encourage contractors pended, or disapproved. In the case of to formalize and follow good estimatcosts disapproved (including disap- ing procedures. It is recognized that proval of costs previously questioned estimating procedures will vary among and suspended, where the difference contractors, and may vary between cannot be resolved), the written notice plants or divisions of a contractor due to the contractor shall include a com- to differences in products, size and plete statement, as prescribed by methods of operations, production vs. agency procedures or regulations, to research, and other factors. While the effect that the notice constitutes a formal systems do not eliminate the final decision of the contracting offi- need for judgmental factors to be apcer, the effective date of such decision, plied by contractors in developing cost the contractor's right to appeal there proposals, they do provide a sound from, and the specific procedure to be foundation for the systematic and orfollowed if the contractor decides to derly application of these judgment make such an appeal.

factors to specific proposals. The con(ii) The contract auditor shall be re sistent preparation of proposals in acsponsible for performing audits of con cordance with an acceptable estimattracts in which pricing or payment is ing system is of material benefit in enbased upon cost or other financial in suring both the contractor and the formation furnished by the contrac- Government that proposals are realistor, when such audit is required or tically and reasonably priced, that the considered desirable.

§ 1-3.807-3 requirements for utilizing (iii) The contract auditor shall be re- current, accurate, and complete cost sponsible for making appropriate rec and pricing data in developing the proommendations to the contracting offi posal are met, and that underestimatcer concerning the establishment of ing and overestimating of contract overhead rates (billing, provisional, or costs are minimized. Some of the adpredetermined), when such rates are vantages of sound estimating proceprovided for in the contract (see Sub dures are: a greater degree of confipart 1-3.7, Negotiated Overhead dence can normally be placed in the Rates).

accuracy and reliability of contractors' (2) Preaward surveys (see § 1-1.310 individual proposals; it expedites the 9) of potential contractor's compe negotiation process; it reduces the tence to perform proposed contracts amount of detailed explanation of estishall be arranged by the contracting mating processes on each individual officer. Where information is required proposal; and, as in the case of the on the adequacy of the contractor's ac- well established practice regarding accounting system or its suitability for ceptable accounting systems, reduces administration of the proposed type of the scope of reviews performed by contract, such information shall audit and other technical and procurealways be obtained by the contracting ment personnel. officer from the auditor (see § 1-3.801- (ii) When an audit is performed pur3(b)(3)). The contracting officer shall suant to 1-3.809(b)(1), the contract be responsible for compliance with the auditor shall determine whether the agency's implementing policies and contractor's estimating systems or procedures concerning the contrac- methods are acceptable to the Govern

S financial competence or credit ment. Among the matters to be considneeds (see also 1-1.310).

ered in determining the acceptability


of the estimating systems or methods ered in subsequent proposal reviews, are the following:

and by contracting officers in negoti(A) Responsibilities within the con ating with, and in determining the reatractor's organization for originating, sonableness of prices proposed by, reviewing, and approving estimates;

that contractor. Where these deficien(B) Procedures followed in develop

cies continue to exist and where they ing estimates for each of the direct

have adverse effect on prices, the and indirect elements of cost;

problem should be brought to the at(C) The source of data used in devel

tention of procurement officials at a oping the estimates and in ensuring

level necessary to bring about correcthat such data are current, complete,

tive action. and accurate;

(4) In accordance with Subpart 1(D) The documentation developed and maintained by the contractor to

3.12, Cost Accounting Standards, and

Part 1-15, Contract Cost Principles support the estimate; (E) Management support of the pro

and Procedures, the cognizant congram review including approval of the

tract auditor shall be responsible for estimate, controls established to

making recommendations to the conensure consistent compliance with es

tracting officer as to whether: timating procedures; and personnel (i) A contractor's disclosure statetraining and evaluation programs; and ment (see § 1-3.1203(a)), submitted as

(F) The extent of coordination and a condition of contracting, adequately communication between the various describes the actual or proposed cost elements of the contractor's organiza accounting practices as required by tion responsible for the estimate.

Pub. L. 91-379, 50 U.S.C. App. 2168, as (iii) If the contractor's estimating implemented by the Cost Accounting systems or methods are not acceptable

Standards Board; to the Government, the contracting

(ii) A contractor's disclosed cost acofficer shall determine whether an es

counting practices are in compliance timating system survey should be un

with Part 1-15 and applicable Cost ACdertaken as a team effort (including

counting Standards; the contract auditor and other quali

(iii) A contractor's or subcontractor's fied technical specialists) after consid

failure to comply with applicable Cost eration of criteria such as: (A) The significance (including esti

Accounting Standards or to follow mated cost or price) of all present and

and consistently his disclosed cost accountestimated future Government procure

ing practices has resulted or may ments, provided, that if only a one result in any increased cost paid by time procurement is involved, other the Government; and appropriate methods may be used to (iv) A contractor's or subcontractor's establish the reliability and reason proposed price changes, submitted as a ableness of the contractor's cost or result of changes made to previously pricing data;

disclosed or established cost account(B) The benefits which might accrue ing practices, are fair and reasonable. to the Government in view of the cost

(34 FR 2662, Feb. 27, 1969, as amended at 37 of the survey; and (C) The findings and corrective ac

FR 13092, July 1, 1972; 39 FR 43058, Dec.

10, 1974; 47 FR 57024, Dec. 22, 1982] tions taken in connection with previous estimating surveys, if any.

8 1-3.810 Exchange of information. (iv) A copy of the survey report, together with a copy of the official In appropriate cases it is desirable to notice of corrective action (see 1

exchange and coordinate specialized 3.801-3(b)(3)) required, shall be fur information regarding a contractor benished to each agency procuring activ tween procurement activities or agenity having business with that contrac- cies, since it will provide uniformity of tor, and (upon request) to other pro treatment of major issues (see, for excurement agencies. Any significant de- ample, $$ 1-3.705 and 1-3.706). ficiencies in the system not corrected

(34 FR 2664, Feb. 27, 1969) by the contractor shall also be consid

§ 1-3.811 Record of price negotiation.

(b) Whenever an audit review has (a) At the conclusion of each negoti. been made pursuant to § 1-3.809, the ation of an initial. revised. or final contracting officer shall forward a price, the contracting officer shall pre

copy of the record of negotiation to pare a memorandum setting forth the the cognizant contract audit office, for principal elements of the price negoti

use by that office and the auditor to ation, for inclusion in the contract file improve the usefulness of the audit and for the use of any reviewing au work and related reports to negotiathorities. The memorandum shall in tion officials. Where appropriate, the clude the following information, to the negotiation memorandum should inextent applicable:

clude (or be supplemented by) infor(1) The name, position, and organi mation on how the contract audit adzation of conferees representing the visory services can be made more efcontractor and the Government;

fective in future negotiations with this (2) The purpose of the negotiation; (or other) contractor(s). (3) If cost or pricing data was re

(34 FR 2664, Feb. 27, 1969) quired to be submitted and certified pursuant to $ $ 1-3.807-3 and 1-3.807-4,

§ 1-3.812 Disposition of postaward audits. respectively, the memorandum shall reflect the extent to which the con An auditor's advisory report of tracting officer:

postaward reviews of cost or pricing (i) Did not rely on the factual cost or data may result either from a specific pricing data submitted and did not use request of a contracting officer (see such data in negotiating the price; and § 1-3.807-5(c)) or from audit action ini

(ii) Recognized in the negotiation tiated independent of a contracting of. that any cost or pricing data submit ficer's request. The contracting officer ted by the contractor was inaccurate, shall prepare a memorandum on each incomplete, or noncurrent; the action audit report indicating (a) whether detaken by the contracting officer and fective data was submitted and relied the contractor as a result; and the upon (see § 1-3.811), and (b) the reeffect, if any, of such defective data on sults of any contract action taken. A the price negotiated.

copy of the memorandum shall be for(4) If cost or pricing data was not re warded to the auditor issuing the quired in the case of any price negotia report. tion in excess of $100,000, the memorandum shall include a statement of

(34 FR 2664, Feb. 27, 1969) the basis for determining that: (i) The

§ 1-3.813 Preproduction and startup and price resulted from or was based on

other nonrecurring costs. adequate price competition, established catalog or market prices of com

(a) Estimates of preproduction and mercial items sold in substantial quan startup costs include such costs as pretities to the general public, or prices

production engineering, special toolset by law or regulation (see § 1-3.807 ing, special plant rearrangement, 1), or (ii) information already available training programs, and such nonrecuris adequate for the proposed procure- ring costs as initial rework, initial ment (see § 1-3.809(b)(1)(i));

spoilage, and pilot runs. (5) A summary of the contractor's (b) Since an offeror may propose a proposal, the pertinent advisory audit price which does not include all prereport recommendations, and the rea- production and startup or other nonsons for variation (if any) from such recurring costs for the purpose of obrecommendations;

taining the first production contract (6) The most significant facts or con- and of gaining an advantage over comsiderations controlling the establish petitors in negotiations for future proment of the initial, revised, or final curements, it is important to know price; and

whether the offeror intends to absorb (7) Appropriate explanation (in any portion of these costs or whether fixed-price type contracts) where the he plans to recover them in connection total price negotiated differs signifi. with subsequent pricing actions under cantly from the total price objective. the proposed or future contracts. This

information is needed in evaluating competing proposals to determine which proposal is most likely to result in the lowest overall cost to the Government, particularly where the successful offeror is likely to become, in effect, a sole source for follow on procurement.

(c) When it is anticipated that such costs will be a significant factor in the evaluation of proposals for the pro

ement of an item the request for proposals shall require the offeror to provide the following information:

(1) An estimate of the total of such costs;

(2) The extent to which these costs are included in the proposed price; and

(3) The intent to absorb, or plan for recovery of any remaining costs. When entering into a contract with an offeror who has indicated that he intends to absorb any portion of these costs, the contract shall expressly provide that such portion will not be charged to the Government in any future noncompetitive procurement or other pricing action.

§ 1-3.814 Contract clauses.

Where any cost or pricing data is required in accordance with § 1-3.807-3, the applicable clauses in $ $ 1-3.814-1, 1-3.814-2, and 1-3.814-3 shall be in cluded in the solicitation and in any resultant contract (see § 1-3.807-3(i)). (39 FR 1754, Jan. 14, 1974] § 1-3.814-1 Price reduction for defective

cost or pricing data. (a) Except as provided in § 1-3.8073(b), the following clause shall be included in (1) all negotiated contracts which when entered into exceed $100,000, (2) other negotiated contracts for which, in connection with the initial pricing of the contract (i) a certificate of cost or pricing data is required in accordance with § 1-3.8073(c), or (ii) partial cost or pricing data is obtained in accordance with § 13.807-3. PRICE REDUCTION FOR DEFECTIVE COST OR

PRICING DATA If any price, including profit or fee, negotiated in connection with this contract or any cost reimbursable under this contract

was increased by any significant sums because:

(a) The Contractor furnished cost or pricing data which was not accurate, complete and current as certified in the Contractor's Certificate of Current Cost or Pricing Data;

(b) A subcontractor, pursuant to the clause of this contract entitled "Subcontractor Cost or Pricing Data" or "Subcontractor Cost or Pricing Data-Price Adjustments" or any subcontract clause therein required, furnished cost or pricing data which was not accurate, complete and current as certified in the subcontractor's Certificate of Current Cost or Pricing Data;

(c) A subcontractor or prospective subcontractor furnished cost or pricing data which was required to be accurate, complete and current and to be submitted to support a subcontract cost estimate furnished by the Contractor but which was not accurate, complete and current as of the date certified in the Contractor's Certificate of Current Cost or Pricing Data; or

(d) The Contractor or a subcontractor or prospective subcontractor furnished any data, not within (a), (b) or (c) above, which was not accurate as submitted; the price or cost shall be reduced accordingly and the contract shall be modified in writing as may be necessary to reflect such reduction. However, any reduction in the contract price due to defective subcontract data of a prospective subcontractor when the subcontract was not subsequently awarded to such subcontractor, will be limited to the amount (plus applicable overhead and profit markup) by which the actual subcontract, or actual cost to the Contractor if there was no subcontract, was less than the prospective subcontract cost estimate submitted by the Contractor: Provided, The actual subcontract price was not affected by defective cost or pricing data.

(NOTE: Since the contract is subject to reduction under this clause by reason of defective cost or pricing data submitted in connection with certain subcontracts, it is expected that the Contractor may wish to include a clause in each such subcontract requiring the subcontractor to appropriately indemnify the Contractor. It is also expected that any subcontractor subject to such indemnification will generally require substantially similar indemnification for defective cost or pricing data required to be submitted by his lower tier subcontractors.)

(b) The following clause shall be included in all contracts, both formally advertised and negotiated, which when entered into exceed $100,000, other than those described in § 1-3.8141(a)(1) and (2) However, the clause need not be included where, in accord

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