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(5) Adequacy oy the contractor's ac should describe the Government's minicounting system. Before reaching mum requirements for product perAgreement on price and contract type, formance and schedule completion, its determination should be made that the desired performance and schedule comcontractor's accounting system will per pletion objectives, and the type of conmit timely development of all necessary tract contemplated. The Government's cost data in the form required by the minimum requirements for product perspecific contract type contemplated. formance and schedule completion gen. This may be particularly critical where erally should not be considered subject the contract type requires revision of to negotiation. The solicitation should price while performance is in progress, also indicate the factors on which the or where a cost-reimbursement type of Government will evaluate proposals and contract is being considered and all cur which of those factors the Government rent or past experience with the con considers most important (e.g., greater tractor has been on a fixed-price basis weight may be assigned to the range (see § 1-3.809).

of an aircraft than to its speed). When (6) Other concurrent contracts. I incentive contracts are to be used, conperformance under a proposed procure tractors shall be required to submit tarment involves operations which concur gets and Incentive sharing arrangements rently are required in performance of for meeting or surpassing the Governother work, the nature of the pricing ment's requirements for performance arrangements on the other work may and for schedule completion, together be important in selecting the contract with an estimate of the cost thereof. type for the proposed procurement. The targets proposed by each offeror, the This factor may not be so important estimated cost thereof, and the sharing where close controls exist that will assure arrangements proposed should, to the proper allocation of costs.

extent practical, be considered by the (b) Research. In the majority of re

Government in the contractor selection search programs, including preliminary process. When this approach to conexplorations and studies, the work to be tractor selection has been used, the reperformed cannot be described precisely. sulting development program should be Hence, the negotiation of cost-plus-& performed under an Incentive contract fixed-fee or cost-sharing contracts fre which includes performance, schedule quently is necessary. However, where completion, and cost targets, the requithe level of contractor eitort desired can site test procedures by which attainment be identified and agreed upon in advance of performance targets will be measured, of performance, negotiation of a firm and provisions for varying profits to the fixed-price contract should be consid. extent targets are or are not met. In ered.

order to provide maximum incentive, the (c) Development and test. Where swing of profit variation should in each possible, a final commitment to under case be as wide as practical (see $ 1take specific product development and 3.405-4(b)). The introduction of intest should be avoided until preliminary centives into development is of such exploration and studies have indicated compelling importance that, to the ex& high degree of probability that the tent practical, firms not willing to new development is feasible and the Govern gotiate appropriate Incentive provisions ment generally has determined both its may be excluded from consideration for minimum requirements for product per the award of development contracts. formance and schedule completion and Its desired performance and schedule

§ 1-3.404 Fixed-price contracts. completion objectives. The precision

§ 1-3.404–1 General. with which the performance objectives Fixed-price contracts are of several can be defined will largely determine the types so designed as to facilitate proper type of contract employed, with firm pricing under varying circumstances. fixed-price contracts receiving first con The fixed-price type contracts provide for sideration. In development programs a firm price, or under appropriate cirwhere use of cost and performance in. cumstances may provide for an adjustcentives are considered desirable and able price, for the supplies or services administratively practicable, fixed-price which are being procured. In providing incentive and

cost-plus-incentive-fee for an adjustable price, the contract may contracts are to be considered in that

fix a ceiling price, target price (including order of preference. The solicitation target cost), or minimum price. Unless

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otherwise provided in the contract, any § 1-3.404—3 Fixed-price contract with such ceiling, target, or minimum price escalation. is subject to adjustment only if required

(a) Description. The fixed-price conby the operation of any contract clause which provides for equitable adjustment,

tract with escalation provides for the escalation, or other revision of the con

upward and downward revision of the tract price upon the occurrence of an

stated contract price upon the occurevent or a contingency.

rence of certain contingencies which are

specifically defined in the contract. § 1-3.404–2 Firm fixed-price contract. The risks in a fixed-price contract are (a) Description. The firm fixed-price

reduced by the inclusion of escalation

provisions in which the parties agree to contract provides for a price which is not

revise the stated price upon the happensubject to any adjustment by reason of

Ing of a prescribed contingency. Where the cost experience of the contractor

escalation is agreed upon, upward adin the performance of the contract. This type of contract, when appropri

justments shall be limited by the estab

lishment of a reasonable ceiling, and proately applied as set forth in this Š 1

visions will be included for downward 3.404-2, places maximum risk upon the

adjustments in those instances where the contractor. Because the contractor as

prices or rates fall below the base levels sumes full responsibility, in the form of

provided in the contract. In the estabprofits or losses, for all costs under or

lishment of the base levels from which over the firm fixed price, he has a max

escalation will operate, contingency alImum profit Incentive for effective cost

lowances shall be eliminated from the control and contract performance. Use

base to be set forth in the contract to the of the firm fixed-price contract imposes

extent that escalation is provided for any a minimum administrative burden on the contracting parties.

particular contingency. Generally, es

calation provisions are of two broad (b) Application. The firm fixed-price

types. contract is suitable for use in procure (1) Price escalation provides for adments when reasonably definite design

Justment of the contract price on the or performance specifications are avail

basis of increases or decreases from an able and whenever fair and reasonable

agreed upon level in published or estabprices can be established at the outset,

lished prices of specific Items or in price such as where:

levels of the contract end items. (1) Adequate competition has made (2) Labor and material escalation Initial proposals effective;

provides for adjustment of the contract (2) Prior purchases of the same or price on the basis of increases or desimilar supplies or services under com creases from agreed standards or Indices petitive conditions or supported by valid In wage rates, specific materials costs, or cost or pricing data provide reasonable both. price comparisons;

(b) Application. Use of this type of (3) Cost or pricing information is contract is appropriate where serious available permitting the development of doubt exists as to the stability of market realistic estimates of the probable costs and labor conditions which will exist durof performance;

ing an extended period of production (4) The uncertainties involved in con and where contingencies which would tract performance can be identified and otherwise be included in a firm fixedreasonable estimates of their possible im price contract are identifiable and can pact on costs made, and the contractor is be covered separately by escalation. Its willing to accept a firm fixed price at a usefulness is limited by the dificulties level which represents assumption of a Inherent in its administration. Escareasonable proportion of the risks in lation should be restricted to the extent volved: or

possible, to industry-wide contingencles, (5) Any other reasonable basis for and labor and material escalation should pricing can be used consistent with the be limited to contingencies beyond the purpose of this type of contract.

normal control of the contractor. The firm fixed-price contract is particu 8 1-3.404–4 Fixed-price incentive conlarly suitable in the purchase of standard tract. or modified commerical items, or of any (a) Description—(1) General. The other items for which sound prices can fixed-price incentive contract is a fixedbe developed.

price type contract with provision for

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(b) Application. (1) Fixed-price in 14,0p (2) the sole centive contracts are appropriate when a elit substant use of the firm fixed-price contract 18 as to the Gove inappropriate, and the supplies or serv- All the firm targ

that assumption of a degree of cost te hoed prior to the n

adjustment of profit and establishment Incentive consistent with the circumof the final contract price by a formula stances, the formula for fixing the firm based on the relationship which final target profit should reflect the relative negotiated total cost bears to total target risk involved in establishing an incencosts.

tive arrangement where cost and pricing (2) Firm target. Under the firm tar information were not sufficient to permit get type of incentive contract there is the negotiation of firm targets at the negotiated at the outset a target cost, outset (see § 1-3.404-4(b) (3)). Thus it & target profit, a price celling (but not normally will not provide for as great a a profit ceiling or floor), and a formula degree of contractor cost responsibility for establishing final profit and price. as would a formula for establishing final After performance of the contract, the profit and price. When the production final cost is negotiated and the final point for applying the formula is contract price is then established in ac reached, the firm target cost is then necordance with the formula. Where the gotiated, consideration being given to final cost is less than target cost, appli experienced cost and all other pertinent cation of the formula results in a final factors, and the firm target profit is auprofit greater than the target profit; tomatically determined in accordance conversely, where final cost is more than with the formula. At this point, two target cost, application of the formula alternatives are possible. First, a firm results in a final profit less than the tar fixed price may be negotiated using as get profit, or even a net loss. Thus, a guide the firm target cost plus the within the price ceiling, the formula firm target profit. Second, 11 use of the provides for the Government and the firm fixed price is determined to be incontractor to share the responsibility for appropriate, a formula for establishing costs greater or less than those originally final profit and price may be negotiated, estimated, as determined by a compart using the firm target profit and the Arm son of negotiated final cost with target target cost. As in the firm target type cost. Because the profit resulting from of contract described in § 1-3.404-4(a) application of the formula is in inverse (2), the final cost is negotiated at the relationship to costs, the formula pro completion of the contract and the final vides the contractor in advance with a contract price is then established in accalculable profit incentive to control cordance with the formula for establishcosts. To provide an incentive consistent Ing final profit and price. with the circumstances, the formula (4) Billing price. In either of the should reflect the relative risks involved

types of contract described in (2) and in contract performance. Thus, it is (3) of this 1-3.404-4(a), a billing price appropriate in certain procurements to will be established as an interim basis establish a formula which provides for for payment. This billing price may be contractor assumption of a considerable

adjusted within the ceiling limits, upon or major share of total cost responsibility request of either party to the contract, In such circumstances. when a major share of total cost responsibility is as negotiated costs will be substantially sumed by the contractor, every consider different from the target cost. ation should be given to establishing target profits which reflect assumption of such responsibility.

(3) Successive targets. Under the successive targets type of incentive con

a tract, there is negotiated at the outset an initial target cost, an initial target

sponsibility by the contractor is likely profit, a price ceiling, a formula for fix

to provide him with a positive profit ining the firm target profit, and a produc

centive for effective cost control and tion point at which the formula will be

contract performance. It may also be applied. Generally, the production point will be prior to delivery or shop comple

appropriate to negotiate additional imtion of the first item. This formula does centive provisions covering performance not apply for the life of the contract but levels and more timely delivery (see simply is used to fix the firm target profit $ 1-3.407-2). Contract performance refor the contract. The initial formula quirements must be such that there is shall also provide for a ceiling and floor reasonable opportunity for the incentivo on the firm target profit. To provide an provisions to have a meaningful Impact

09), appropri wallable cost and la not suficient to

team of realistic Art However,

thrould be available d baltdal targets, Mamable assuran

bble Information srity polnt In the

untract so as to ther a firm fixed da formula i

milt and price, h and reasonable wamal Information sme from experie

meh itself, but ma lence on any ot! the or similar item

(0) Limitations. se contracts shall le contractor's & vlequate for price Atelis satisfactor mit and price & - no case should su

the time of Init.

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the cost. Neithe enthue contract i totemination be lange with the

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on the manner in which the contractor 11-3.4045 Prospective price redeter manages the work.

mination at a stated time or times (2) The Arm target type of incentive during performance. contract, described in § 1-3.404–4(a)(2).

(a) Description. This type of conis appropriate for use whenever a arm

tract provides for a firm fixed price for target and a formula for establishing

an initial period of contract deliveries Anal profit and price can be negotiated

or performance and for prospective price at the outset which will provide a falr

redetermination either upward or downand reasonable Incentive.

ward at a stated time or times during the (3) The successive targets type of in performance of the contract. It also centive contract, described in § 1-3.404-4 may provide for a price ceiling, where (a) (3), 18 appropriate for use whenever

appropriate. Once established, celling avallable cost and pricing information

prices are subject to adjustment only is not sumcient to permit the negotia by reason of the operation of other contion of realistic firm targets at the out tract clauses (see § 1-3.404–1).

However, enough information (b) Application. This type of conshould be available to permit negotiation tract is appropriate in procurements of initial targets, and there should be calling for quantity production or servreasonable assurance that additional re ices where it is possible to negotiate Table Information will be avallable at an fair and reasonable firm fixed prices for early point in the performance of the an initial period, but not for subsequent contract so as to permit negotiation of

periods of contract performance. This either a firm fixed price, or firm targets

Initial period should be the longest

period for which it is possible to estaband a formula for establishing final

lish fair and reasonable firm fixed prices profit and price, which will provide a

at the time of original negotiation. The fair and reasonable Incentive. The addi

length of the prospective pricing periods tional information need not in all cases should depend on the circumstances of come from experience under the con each case and should generally be at tract itsell, but may be drawn from ex least twelve months each. Ceiling prices, perlence on any other contracts for the where appropriate, should be based on same or similar items.

the evaluation of the uncertainties in(c) Limitations. Fixed-price Incen

volved in contract performance, and tive contracts shall not be used unless

their possible impact on cost, and should the contractor's accounting system is

be negotiated at a level which repreadequate for price revision purposes and

sents contractor assumption of a rea

sonable degree of risk. permits satisfactory application of the

(c) Limitations. This type of conprofit and price adjustment formulas.

tract shall not be used unless: In no case should such contracts be used

(1) It has been established through where (1) cost or pricing information negotiations that a firm fixed-price conadequate for firm targets is not available tract does not fulfill the requirements at the time of initial contract negotia established by the conditions surround. tion or at a very early point in perform ing the procurement: ance, or (2) the sole or principal purpose (2) The contractor's accounting sysis to shift substantially all cost respon

tem is adequate for price redeterminasibility to the Government. In no case

tion purposes; shall the firm target profit or the for

(3) The prospective pricing period can mula for final profit and price be estab

be made to conform with the operation lished prior to the negotiation of the firm

of the contractor's accounting system;

and target cost. Neither type of fixed-price

(4) Reasonable assurance exists that Incentive contract shall be used unless

price redetermination action will be & determination has been made, in ac

taken promptiy at the time or times cordance with the requirements of Sub

specified. part 1-3.3, that such method of contracting is likely to be less costly than

8 1-3.404–6 (Reserved) other methods, or that it is impractical 8 1-3.404–7 Retroactive price redeterto secure supplies or services of the kind

mination after completion. or quality required without the use of (a) Description. This type of contract such type of contract.

provides for a celling price and retro

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| 113.405-4 Cost-

tract.

Description
teative-fee contrac
rent type contrac
stee which is ad
scordance with th
ttal allowable cost
under this type
exotiated initially

, a minimum ar
1 lee adjustment
mance of the co
Ne to the contra
serdance with the

active price redetermination after com Ushes an estimate of total cost for the
pletion of the contract. The redeter purpose of obligation of funds, and a
mined price should be negotiated so as to celling which the contractor may not
give weight to the management effective. exceed (except at his own risk) without
ness and ingenuity exhibited by the con prior approval or subsequent ratification
tractor during performance, and the of the contracting officer.
basis for such negotiation should be fully (b) Application. The cost-reimburse-
discussed with the contractor when this ment type contract is suitable for use
type of contract is negotiated. Because only when the uncertainties involved in
the price is redetermined on a completely contract performance are of such magnl-
retroactive basis, this contract type (ex tude that cost of performance canno be
cept for the price ceiling) does not pro estimated with sufficient reasonableness
vide the contractor with a calculable to permit use of any type of fixed-price
Incentive for effective cost control, Once contract. In addition, it is essential that
established, the ceiling price is subject to (1) the contractor's cost accounting sys-
adjustment only if required by the opera tem is adequate for the determination of
tion of other contract clauses (see § 1 costs applicable to the contract, and (2)
3.404–1).

appropriate surveillance by Government
(b) Application. This type of contract personnel during performance will give
Is appropriate in procurements where it reasonable assurance that inefficient or
is established at the time of negotiation wasteful methods are not being used.
that a fair and reasonable firm fixed (c) Limitations. The cost-reimburse.
price cannot be negotiated and the ment type contract may be used only
amount involved is so small or the time after a determination, in accordance
for performance so short that use of any with Subpart 1-3.3, that:
other type of contract is impracticable. (1) Such method of contracting is
Even in these situations, however, it likely to be less costly than other meth-
should be used only after negotiation of ods; or
& billing price as fair and reasonable as (2) It is impractical to secure property
the circumstances of the particular pro or services of the kind or quality required
curement permit. Based on an evalua without the use of such type of contract.
tion of the circumstances involved in
contract performance, and their possible

$ 1-3.405–2 Cost contract. impact on cost, the ceiling price should

(a) Description. The cost contract is be negotiated at a level which represents

cost-reimbursement type contract contractor assumption of a reasonable

under which the contractor receives no degree of risk.

fee. (c) Limitations. This type of contract

(b) Application. The following are shall not be used unless the procurement

Illustrative situations in which the use is for research and development at an

of this type of contract may be approestimated cost of $100.000 or less, and

priate: (1) The contractor's accounting sys

(1) Research and development work, tem is adequate for price redetermina.

particularly with nonprofit educational tion purposes

Institutions or other non-profit organl(2) Reasonable assurance exists that

zations. price redetermination action will be

(2) Facilities contracts. taken promptly at the time specified;

(3) Initial small quantity procure(3) A ceiling price is established; and

ments of new items with anticipated sub(4) Written approval has been received

sequent large production runs. from the head of the procuring activity 8 1-3.405-3 Cost-sharing contract unless approval at a higher level is re.

(a) Description. A cost-sharing con quired by the agency.

tract is a cost-reimbursement type con 8 1-3.405 Cost-reimbursement typo con

tract under which the contractor receives tracts.

no fee but is reimbursed only for an

agreed portion of its allowable costs. § 1-3.405–1 General.

(b) Application. A cost-sharing con(a) Description. The cost-reimburse tract is suitable for those procurements ment type of contract provides for pay. which cover production or research proj. ment to the contractor of allowable costs ects which are jointly sponsored by the Incurred in the performance of the con Government and the contractor with tract, to the extent prescribed in the benefit to the contractor in lleu of full contract. This type of contract estab monetary reimbursement of costs. In

156

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reases in fee above Uowable costs are to decreases in

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. The provisio rease in the fee is

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lound necessary 11-3405-1(b), and * adjustment for ted which are like THE With a pos * elective mana

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4. Range of lee

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