Institutions (Public Law 87-638; 10 U.S C. 2306 note). The use of such rates is permissive and not mandatory. In determining whether or not predetermined overhead rates should be used in one or more contracts with an institution, consideration should be given to the degree of stability shown in overhead rates and their bases over a period of years. All anticipated changes in the contractor's volume and overhead shall be taken into consideration. In addition the following procedures shall be employed:

(1) When predetermined overhead rates are proposed for the initial period of contract performance and no such rates have been established for the contractor's current fiscal year (or other appropriate period), the contractor shall provide the contracting officer with (1) a proposal for predetermined overhead rates to be applied until the end of such fiscal year or other period, and (ii) complete data on overhead for such preceding fiscal years (or other periods) as the contracting officer may require, including overhead rates, bases, and supporting cost data. As far as practicable, the contractor's proposal for the initial period, with supporting current cost data, shall be based on the contractor's cost experience under similar contracts. Pending mutual agreement on predetermined overhead rates for the initial period. the contractor shall be reimbursed at billing rates acceptable to the contracting officer, subject to appropriate adjustment when the final rates for that period are established. When mutual agreement is reached. the predetermined rates and the applicable bases and period shall be specified in the contract.

(2) Pursuant to the contract clause in § 1-3.704-2(b), the contractor, as soon as possible, but not later than three (3) months after the expiration of each fiscal year, shall submit to the contracting officer a proposed predetermined overhead rate or rates for use during the contract year based on the contractor's actual cost experience during the immediately preceding fiscal year, together with supporting cost data.

(3) Predetermined overhead rates shall be applicable for a period of not more than 1 year, and should generally be based on an audit of the institution's costs for the year immediately preceding the year in which the rate is being negotiated. If this is not possible, an earlier

audit may be used, but appropriate steps should be taken to identify and evaluate significant variations in costs incurred or bases used which may have a bearing on the reasonableness of the rate proposed by the contractor. Audits by other Government agencies may be utilized. In the case of smaller contracts (e.g., $100,000 or less), an audit made at an earlier date is acceptable provided (1) there have been no significant changes in the contractor's organization, and (ii) it is reasonably apparent that another audit would have little effect on the rate finally agreed upon.

(4) The use of predetermined overhead rates shall be approved at a level above the contracting officer, in accordance with agency procedures, with respect to any of the following:

(1) Where estimated reimbursable costs for the contract are expected to exceed $1 million annually;

(11) Where there has been no recent audit of the overhead; or

(iii) Where there have been frequent or wide fluctuations in overhead rates and their bases over a period of years. § 1-3.704

Contract clauses.

§ 1-3.704-1 Contracts with concerns other than educational institutions.

Insert the following clause in contracts with concerns other than educational institutions where negotiated overhead rates are to be used pursuant to this subpart.

NEGOTIATED OVERHEAD RATES

(a) Notwithstanding the provisions of the clause of this contract entitled "Allowable Cost, Fixed Fee, and Payment," the allowable indirect costs under this contract shall be obtained by applying negotiated overhead rates to bases agreed upon by the parties, as specified below.

(b) The Contractor, as soon as possible but not later than ninety (90) days after the expiration of his fiscal year, or such other perlod as may be specified in the contract, shall submit to the Contracting Officer, with a copy to the cognizant audit activity, a proposed final overhead rate or rates for that period based on the Contractor's actual cost experience during that period, together with supporting cost data. Negotiation of overhead rates by the Contractor and the Contracting Officer shall be undertaken 8.8

1 The contracting agency may substitute the title of its own parallel clause when the title is other than "Allowable Cost, Fixed Fee, and Payment."

promptly as practicable after receipt of the Contractor's proposal.

(c) Allowability of costs and acceptability of cost allocation methods shall be determined in accordance with 2.

as in effect on the date of this contract.

(d) The results of each negotiation shall be set forth in a modification to this contract, which shall specify (1) the agreed final rates, (2) the bases to which the rates apply, and (3) the periods for which the rates apply.

(e) Pending establishment of final overhead rates for any period, the Contractor shall be reimbursed either at negotiated provisional rates as provided in the contract, or at billing rates acceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that period are established. To prevent substantial over or under payment, and to apply either retroactively or prospectively: (1) Provisional rates may, at the request of either party, be revised by mutual agreement and (2) billing rates may be adjusted at any time by the Contracting Officer. Any such revision of negotiated provisional rates provided in the contract shall be set forth in a modification to this contract.

(f) Any failure by the parties to agree on any final rates under this clause shall be considered a dispute concerning a question of fact for decision by the Contracting Officer within the meaning of the "Disputes" clause of this contract.

§ 1-3.704-2 Contracts with educational institutions.

(a) Insert the following clause in contracts with educational institutions where postdetermined overhead rates (see 1-3.701(d) are to be used pursuant to this subpart.

NEGOTIATED OVERHEAD RATES-POSTDETERMINED

(a) Notwithstanding the provisions of the clause of this contract entitled "Allowable Cost and Payment," the allowable indirect costs under this contract shall be obtained by applying negotiated overhead rates to bases agreed upon by the parties, as specified below.

(b) The Contractor, as soon as possible but not later than six (6) months after the close of his fiscal year, or such other period

'In paragraph (c), insert the reference which is appropriate to the agency: Subpart 1-15.2 of the Federal Procurment Regulations (41 CFR 1-15.2), or the corresponding agency regulations, or both; or to an "Allowable Cost" clause in the contract, which lists allowable and unallowable costs.

The contracting agency may substitute the title of its own parallel clause when the title is other than "Allowable Cost and Payment."

as may be specified in the contract, shall submit to the Contracting Officer, with a copy to the cognizant audit activity, a proposed final overhead rate or rates for that period based on the Contractor's actual cost experience during that period, together with supporting cost data. Negotiation of final overhead rates by the Contractor and the Contracting Officer shall be undertaken as promptly as practicable after receipt of the Contractor's proposal.

(c) Allowability of costs and acceptability of cost allocation methods shall be determined in accordance with Subpart 1-15.3 of the Federal Procurement Regulations (41 CFR 1-15.3), as in effect on the date of this contract.

(d) The results of each negotiation shall be set forth in a modification to this contract, which shall specify (1) the agreed final rates, (2) the bases to which the rates apply, and (3) the periods for which the rates apply.

(e) Pending establishment of final overhead rates for any period, the Contractor shall be reimbursed either at negotiated provisional rates as provided in the contract, or at billing rates acceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that period are established. To prevent substantial over or under payment, and to apply either retroactively or prospectively: (1) Provisional rates may, at the request of either party, be revised by mutual agreement, and (2) billing rates may be adjusted at any time by the Contracting Officer. Any such revision of negotiated provisional rates specified in the contract shall be set forth in a modification to this contract.

(f) Any failure by the parties to agree on any final rate of rates under this clause shall be considered a dispute concerning a question of fact for decision by the Contracting Officer within the meaning of the "Disputes" clause of this contract.

(b) Provision may be made in costreimbursement type research and development contracts with educational institutions for payment of reimbursable indirect costs on the basis of predetermined overhead rates (see § 1-3.703 (c)). To the extent appropriate and applicable, this basis may be used with respect to all contracts entered into by an agency with such an institution. Insert the following clause in contracts with educational institutions where such negotiated overhead rates are to be used pursuant to this subpart.

NEGOTIATED OVERHEAD RATES-PREDETERMINED

(a) Notwithstanding the provisions of the clause of this contract entitled "Allowable

Cost and Payment," the allowable indirect costs under this contract shall be obtained by applying predetermined overhead rates to bases agreed upon by the parties, as specified below.

(b) The Contractor, as soon as possible but not later than three (3) months after the close of his fiscal year, or such other period as may be specified in the contract, shall submit to the Contracting Omcer, with a copy to the cognizant audit activity, a proposed predetermined overhead rate or rates based on the Contractor's actual cost experience during that period, together with supporting cost data. Negotiation of predetermined overhead rates by the Contractor and the Contracting Officer shall be undertaken as promptly as practicable after receipt of the Contractor's proposal.

(c) Allowability of costs and acceptability of cost allocation methods shall be determined in accordance with Subpart 1-15.3 of the Federal Procurement Regulations (41 CFR 1-15.3), as in effect on the date of this contract.

(d) The results of each negotiation shall be set forth in a modification to this contract, which shall specify (1) the agreed predetermined overhead rates, (2) the bases to which rates apply, (3) the fiscal year unless the parties agree to a different period for which the rates apply, and (4) the specific Items treated as direct costs or any changes in the items previously agreed to be direct costs.

(e) Pending establishment of predetermined overhead rates for the initial period of contract performance, or for any fiscal year or different period agreed to by the parties, the Contractor shall be reimbursed either at: (1) The rates fixed for the previous fiscal year or other period, or (2) billing rates acceptable to the Contracting Officer, subject to appropriate adjustment when the final rates for that fiscal year or other period are established.

(f) Any failure by the parties to agree on any predetermined overhead rate or rates under this clause shall not be considered a dispute concerning a question of fact for decision by the Contracting Officer within the meaning of the "Disputes" clause of this contract. If for any fiscal year or other period of contract performance the parties fail to agree to a predetermined overhead rate or rates, it is agreed that the allowable indirect costs under this contract shall be obtained by applying negotiated final overhead rates in accordance with the terms of the "Negotiated Overhead Rates-Postdetermined" clause set forth in § 1-3.704-2(a) of the Federal Procurement Regulations (41 CFR 1-3.704-2(a)), as in effect on the date of this contract.

The contracting agency may substitute the title of its own parallel clause when the title is other than "Allowable Cost and Payment."

§ 1-3.704-3 Modification of contract clauses.

When a separate negotiated overhead rate agreement is used in accordance with 1-3.705(g), the clauses in §§ 13.704-1 and 1-3.704-2 may be appropriately modified.

§ 1-3.705 Procedure.

(a) The procedure for the establishment of overhead rates generally consists of a review of the contractor's overhead rate proposal and the related advisory audit report, conduct of 8 negotiation conference, preparation of negotiation report or summary, and execution of contract amendments or supplemental agreements.

(b) When only one procuring activity of an agency is concerned, the contractor's proposal shall be submitted to the contracting officer, with a copy to the cognizant audit activity. Where coordinated negotiations described under § 1-3.706 are involved, the contractor's overhead rate proposals may be submitted to the negotiating activity of the agency sponsoring the negotiation, with a copy to the cognizant audit activity.

(c) The decision to audit or not to audit, and the extent of the audit, involves the exercise of judgment based upon a number of considerations, such as the significance of the amount involved, the dollar volume of Government contracts held by the contractor, previous experience, and the apparent reasonableness of the overhead data furnished by the contractor (see 35 Comp. Gen. 434-436). The determination as to the necessity and extent of an advisory audit report, and the extent of the use of such a report, is solely the responsibility of the contracting officer in accordance with agency procedures. Unless advised to the contrary by the contracting officer, the cognizant audit activity should provide him with an advisory audit report. Such report should set forth the findings of the audit activity, Including the results of discussions of such findings with the contractor. The audit or accounting review shall be governed by the contract cost principles which are applicable to the contract.

(d) To the extent appropriate, particularly when there is a significant difference of opinion between the audit activity and the contractor concerning such matters as the allowability, reasonableness, necessity or allocability of

certain indirect costs, the acceptability of the bases used in developing the overhead rates, the specific items to be treated as direct cost, or other matters, the contracting officer, before the negotiation conference with the contractor, shall:

(1) Solicit the comments and recommendations of other Government procurement activities or agencies (doing business with the same contractor) as to: (1) The proposals made by the contractor; and (ii) the related advisory auidt report;

(2) Obtain the advisory comment and analyses of appropriate legal pricing, audit, and technical personnel as to the rate or rates of overhead, application of cost principles, treatment of particular Items of cost, and other pertinent issues; and

(3) Develop the position of the procurement agency in coordination with other interested procuring activities (f any) of that agency. Failure of those procuring activities to agree as to the agency position shall be resolved in accordance with agency procedures.

(e) Generally, the negotiation conference should be conducted by a contracting officer of the sponsoring activity (see § 1-3.706). He shall arrange for appropriate legal, pricing, technical, or other specialist personnel of his agency to assist him in the preparation for and conduct of the negotiation conference. The audit activity also should be requested to render appropriate assistance and to participate in the negotiation conference. The negotiation shall be governed by the contract cost principles which are applicable to the contract. In the event provisional overhead rates were utilized to effect a termination settlement (see § 1-8.404-4 of this chapter), that fact will not be considered a precedent when negotiating final rates.

(f) At the completion of the negotiation, the contracting officer shall, as promptly as practicable, prepare, and distribute to all interested Government agencies (see § 1-706, a report or summary to become a part of the contract file, to record the results of the negotiation setting forth information such as the following, to the extent appropriate and applicable:

(1) The name, position, and organization of conferees representing the contractor and the Government;

(2) The purpose of the negotiation; (3) A summary of the contractor's overhead rate proposal and the pertinent advisory audit report recommendations;

(4) The various overhead rates, and related bases and periods resulting from the negotiation (see § § 1-15.203 and 115.305 of this chapter);

(5) A discussion of the treatment given to cost items requiring specific consideration, including advance understandings (see § 1-15.107 of this chapter), special contract provisions or limitations, and cost-sharing arrangements (see this § 1-3.707); also, where applicable, similar data on the special treatment of cost items agreed upon for the succeeding period;

(6) The specific items treated as direct cost;

(7) The reasons for variation (if any) from the recommendations of the advisory audit report;

(8) A list of the contracts affected by the negotiation, showing identification number and the estimated total dollar value, or a statement that such information is provided in the advisory audit report;

(9) A specific comment as to the percentage (or dollar factor) and amounts allowed for costs of the contractor's independent research and development programs and the effect of such allowance on rates and total amounts of the related overhead cost group (see § 115.203(b) of this chapter); and

(10) Where applicable, the billing rates, the provisional rates, or, if appropriate, the predetermined rates, for application in the succeeding period.

(g) Contract administration may be simplified by including, as appropriate, provisional, final (as subsequently established), or predetermined negotiated overhead rates in basic agreements (see § 1-3.410-1) when such agreements exist. When no basic agreement exists and negotiated overhead rates are applicable to a substantial number of contracts, the rates may be set forth in a separate negotiated overhead rate agreement, which may be incorporated by reference in the individual contracts affected in the same way that basic agreements are incorporated in contracts. Any agreement that sets forth overhead rates shall state the bases to which they apply and the period of rate applicability, and the contract file shall contain the negotiation report or

When more than one procuring activity of an agency has cost-reimbursement type contracts with the same contractor, the activity having the preponderance of such contracts should, generally, sponsor and conduct any required negotiation of overhead rates. Alternatively, an

agency may designate one or more of its offices or activities to sponsor and conduct coordinated negotiation of overhead rates. Each procuring activity of the negotiating agency, as well as other procurement agencies having an interest, should be notified of the pending negotiation, provided (upon request) with a copy of the contractor's overhead rate proposals and pertinent Government data thereon developed for the negotiation, and invited to participate in the negotiation If a procuring activity or agency has been invited to participate. but does not expect to have a representative at the negotiation, it should provide the sponsoring activity with full information pertinent to its interest therein, such as the specific features or special requirements of its contract(s), the applicable cost principles, its recommendations in the matter, and should request the sponsoring activity to represent it with respect to the matters to be negotiated. At the completion of the negotiation, the sponsoring activity shall, as promptly as practicable, prepare and distribute to all interested activities and agencies the negotiation report or summary as outlined in § 1-3.705 (f), including a full report to the procurement activities or agencies which it has represented in the negotiation. All procurement agencies or activities invited to participate (or to be represented) in the negotiations should accept the results thereof unless a contracting officer, with respect to one or more contracts for which he has responsibility, has determined that the acceptance of either (a) the overall results of the negotiations, or (b) one or more negotiated rates, would result in inequitable or improper charges to the affected contract(s). See also § 1-3.702.) To the extent applicable, each procuring activity and agency should thereupon amend or supplement the affected contracts in accordance with the rates and other data set forth in the negotiation report or summary.

§ 1-3.707 Cost-sharing rates and limitation on overhead cost.

(a) Cost-sharing arrangements may be made wherein cost participation by the contractor is evidenced by a contract provision to accept overhead rates which are lower than the anticipated actual overhead rates. In such cases, a negotiated ceiling overhead rate may be applied prospectively.

(b) In other cases, it may be desirable to provide for a ceiling on overhead rates, beyond which the contractor will absorb the costs. For example:

(1) The proposed contractor is a new company or has been recently reorganized and there may be no past or recent record of indirect costs incurred;

(2) The proposed contractor may have a recent record of rapidly increasing overhead rates due, perhaps, to a declining volume of sales without a commensurate decline in indirect expense:

or

(3) The proposed contractor may be seeking to enhance its competitive position in a particular procurement by basing its proposal on overhead rates lower than those which reasonably may be expected to occur during contract performance, thereby causing a cost overrun When any of the foregoing (or comparable) circumstances are apparent with either a proposed prime or subcontractor, reasonable realistic, and equitable ceilings should be negotiated on overhead rates, and specified in the contract.

(c) In the cases cited in paragraphs (a) and (b) of this section, the contract should also provide that the Government will not be obligated to pay any additional amount on account of overhead above the negotiated ceiling rates under that (or any other) contract. In the event overhead rates resulting from an audit of allowable costs are less than the negotiated ceiling rates, the negotiated rates will be reduced in conformity with the lower rates.

Subpart 1-3.8-Price Negotiation
Policies and Techniques

§ 1-3.800 Scope of subpart.

This subpart sets forth the price negotiation policies and techniques applicable to negotiated prime contracts and modifications thereto (including modifications to formally advertised contracts) and to