officer should, after review of the record of the contract negotiation (see § 1-3.811), consider the following:

(1) Certain data such as overhead expenses and production records may not be reasonably available except on normal periodic closing dates. Also, the data on numerous minor material items, each of which by itself would be insignificant, may be reasonably available only as of a cutoff date prior to agreement on price because the volume of transactions would make the use of any later date impracticable. Furthermore, except where a single item is used in substantial quantities, the net effect of any changes to the prices of such minor items would likely be insignificant. Closing or cutoff dates should be included as part of the data submitted with the contractor's proposal and should be updated by the contractor to the latest closing or cutoff dates, preceding agreement on price, for which such data are available. The contracting officer and contractor are encouraged to reach a prior understanding on criteria for establishing closing or cutoff dates, and to the extent possible the understanding should relate to the contractor's formal estimating system. Notwithstanding the foregoing, matters which are significant to contractor management and to Government and any related data within the contractor's organization or the organization of a subcontractor or prospective subcontractor would be expected to be current on the date of agreement on price and therefore will be treated as reasonably available as of that date. Although changes in the labor base or in prices of major material items are generally significant matters, no hard and fast rule can be laid down since what is significant can depend upon such circumstances as the size and nature of the procurement.

(2) In establishing that the defective data caused an increase in the contract price, the contracting officer is not expected to reconstruct the negotiation by speculating as to what would have been the mental attitudes of the negotiating parties if the correct data had been submitted at the time of agreement on price. In the absence of evidence to the contrary, the natural and probable consequence of defective data is an increase in the contract price in the amount of the defect plus the amount of the related burden and profit or fee; therefore, unless there is a clear indication that the

defective data was not used, or was not relied upon, the contract price should be reduced by the aggregate of these amounts.

(3) In determining the amount of an adjustment in the contract price because of defective cost or pricing data, the contracting officer shall consider any understated cost or pricing data submitted in support of price negotiations for the same pricing action (e.g., for the initial pricing of the same contract or for pricing the same change order) up to the amount of the Government's claim for overstated cost or pricing data arising out of the same pricing action. Such offsets, however, need not be in the same cost groupings (e.g., material, labor, or overhead).

(b) If, at any time prior to agreement on price, the contracting officer learns through audit or otherwise that any cost or pricing data submitted is inaccurate, incomplete, or noncurrent, he shall immediately call it to the attention of the contractor whether that defective data tends to increase or decrease the contract price. Thereafter, the contracting officer shall negotiate on the basis of any new data submitted, or on a basis which in his opinion makes satisfactory allowance for the incorrect data as he considers appropriate and shall reflect these facts in his record of negotiation.

(c) After award, if the contracting officer obtains information which leads him to believe that the data furnished may not have been accurate, complete, and current, or if he considers that the data may not have been adequately verified as of the time of negotiation, he should request an audit to evaluate the accuracy, completeness, and currency of such data. In the case of negotiated firm fixed-price contracts, postaward cost performance audits, pursuant to a clause set forth in § 1-3.814-2, shall be limited to the single purpose of determining whether or not defective cost or pricing data was submitted. Such audits shall not be for the purpose of evaluating profit-cost relationships, nor shall any repricing of such contracts be made because the realized profit was greater than was forecast, or because some contingency cited by the contractor in his submission failed to materialize, unless the audit reveals that the cost or pricing data certified by the contractor was, in fact, defective (see § 1-3.812).

(d) Under the Price Reduction for Defective Cost or Pricing Data" clauses in

§ 1-3.814-1, the Government's right to reduce the prime contract price extends to cases where the prime contract price was increased by any significant sums because a subcontractor furnished defective cost or pricing data. In exercising the Government's rights in such cases, the contracting officer will consider the following:

(1) In some instances, the prime contractor may have already reached agreement on price with a subcontractor before the prime contractor and the Government agree on a definitive price. This might occur, for example, if the prime contractor commenced performance under a letter contract or under an unpriced change order. In such cases the subcontractor's cost or pricing data must be submitted with the prime contractor's submission. If any such subcontractor data is subsequently found to be defective, the prime contract is subject to price adjustment in the same manner as would be the case if any other cost or pricing data submitted by the prime contractor proved to be defective.

(2) The Government and the prime contractor will normally agree on the price of a contract prior to final agreement on price between the prime contractor and his subcontractor. In such cases, the prime contract price will be based, in part, on subcontract cost estimates. The prime contractor will be expected to support his subcontract cost estimates with subcontractor cost or pricing data as provided in § 1-3.807-3 (d). The prime contract price will be subject to adjustment on the basis of defective subcontractor cost or pricing data submitted prior to agreement on the prime contract price if:

(i) Such subcontractor data was not accurate, complete, and current as of the date certified in the prime contractor's Certificate of Current Cost or Pricing Data, or in some cases was not accurate as submitted by the subcontractor; and

(11) The prime contract price was increased by a significant sum because of such defective subcontractor data.

Any adjustment in prime contract price due to defective subcontract data of a prospective subcontractor, where the subcontract was not subsequently awarded to the prospective subcontractor, will be limited to the amount (plus applicable overhead and profit markups) by which the actual subcontract price or actual cost to the contractor if not subcontracted, was less than the original

subcontract cost estimate, provided the actual subcontract price was not affected by defective data.

(3) Under cost-reimbursement type and under all fixed-price type contracts except firm fixed-price and fixed-price with escalation, increases in payments to subcontractors due to defective subcontractor cost or pricing data will be the basis for disallowance or nonrecognition of costs under the defective cost or pricing data clauses, because the Government has a continuing and direct financial interst in such payments which is unaffected by the initial agreement on prime contract price. Although the action is taken under those price reduction clauses rather than under Part 1-15 of the Federal Procurement Regulations (41 CFR Part 1-15), as a practical matter the result is the same, i.e., the increased costs will be disallowed under cost type contracts or not considered as actual costs for final pricing of redeterminable or incentive type contracts. The action is taken under the price reduction clauses because, not only will the increased costs be disallowed or not considered as actual costs but also, the fixedfee or target profit included in the initial price may be subject to reduction in accordance with § 1-3.807-5 (d) (1) and (2).

(e) In some cases, as where the defective nature of a subcontractor's data is only disclosed by Government audit, the information necessary to support a reduction in prime contract and subcontract prices may be available only from the Government. To the extent necessary to secure a prime contract price reduction, the contracting officer should make such necessary information available, upon request, to the prime contractor or appropriate subcontractors. However, if the release of such information would compromise security or disclose trade secrets or other confidential business information, it shall be made available only under conditions that will fully protect it from improper disclosure, as may be prescribed by the head of the agency or his authorized designee. Information made available pursuant to this paragraph (e) shall be limited to that used as the basis for the prime contract price reduction.

(f) Inasmuch as price reductions under the "Price Reduction for Defective Cost or Pricing Data" clauses may involve subcontractors as well as the prime contractor, the contracting officer should give the prime contractor an opportunity

to take any action deemed advisable by him, particularly in connection with any subcontracts that may be involved.

[34 FR 2661, Feb. 27, 1969, as amended at 39 FR 1753, Jan. 14, 1974]

§ 1-3.807-6 Refusal to provide cost or pricing data.

If cost or pricing data from the contractor (or offeror) are required to permit adequate analysis of the contractor's proposal in accordance with § 1-3.807-3 and the contractor has refused to provide such data, the contracting officer shall try to persuade the contractor to furnish such data. If the contractor persists in his refusal to provide necessary data, the contracting officer shall withhold making the award or price adjustment and refer the case to higher authority within the agency. Such referral shall include a complete statement of the attempts made to resolve the matter, including (a) steps taken to secure essential cost data, (b) efforts to secure the contractor's cooperation in the establishment of a satisfactory business relationship, (c) any assurances offered, such as agreements to adequately safeguard information furnished, and (d) a statement concerning the practicability of obtaining the supplies or services from another source of supply. § 1-3.807-7 Unacceptable

for pricing negotiations.

substitutes

§ 1-3.807-9 Specified contingencies.

When a contract is to include a provision for an upward adjustment of price upon the happening of a specified contingency (e.g., escalation clauses, Government-furnished property clauses, tax clauses), the contract price should not Include any amount in anticipation of such contingency.

§ 1-3.807-10 Subcontracting considerations in cost analysis.

(a) The amount and quality of subcontracting may be a major factor influencing price. Since a large portion of the procurement dollar is spent by prime contractors in subcontracting for work, raw materials, parts, and components, efficient purchasing practices by a contractor will contribute heavily toward efficient and economical production. While basic responsibility rests with the prime contractor for decisions to make or buy, for selection of subcontractors, and for subcontract prices and subcontract performance, the contracting offcer must have adequate knowledge of those elements and their effect on prime contract prices. Therefore, contractors' "make-or-buy" programs and proposed subcontracts should be reviewed in accordance with Subpart 1-3.9 and the information from such review should be used in negotiating prime contract prices. Even though not specifically required by Subpart 1-3.9, the contracting officer should, where appropriate, elicit from the offeror or contractor information concerning:

(1) His purchasing practices;

(2) The principal components to be subcontracted and the contemplated subcontractors, including (1) the degree of competition obtained, (11) cost or price analyses or price comparisons accomplished, including accurate, complete, and current cost or pricing data, and (iii) the extent of subcontract supervision;

(3) The types of subcontracts: 1.e., firm fixed-price or other (see § 1-3.401). and

(4) The estimated total extent of subcontracting, including procurement of purchased parts and materials.

(b) In the review of subcontracting there should be assurance that the contractors obtain competition. if available. from qualified sources in their award of subcontracts to the extent consistent with the procurement of the required

services or supplies. Contractors shall be required to undertake appropriate price analysis (see § 1-3.807-2(b)) in all significant subcontract transactions, and to undertake cost analysis (see § 1-3.8072(c)) if competition is not available or does not yield reasonable subcontract prices. Where the contracting officer's consent to subcontract is required (see § 1-3.903), price or cost analysis shall be required as a condition to such consent.

(c) Where subcontracts are placed on a price redetermination or fixed-price incentive basis, it is particularly important in negotiating revisions of prime contract prices that there be substantial assurance that there was initial close pricing of subcontracts. Also, contracting officers should be alert to the risk of establishing firm redetermined prime contract prices while a major subcontract is still subject to price redetermination and may eventually be redetermined at a price far lower that that ascribed to it in redetermining the prime contract price, with consequent profits to the contractor far in excess of those contemplated in the prime contract price negotiation. However, in some cases, it may be appropriate to negotiate firm contract prices even though the contractor has not yet established final subcontract prices, if the contracting officer can justify as reasonable the amount included for subcontracting, e.g., where fairly definite cost data on subcontract prices are available. In other cases, where certain subcontracts are subject to redetermination and available cost data on these subcontracts are highly indefinite but other circumstances require prompt negotiation of revised prime contract prices the contract modification which evidences the revised contract prices should provide for adjustment of the total amount paid or to be paid under the contract on account of subsequent redetermination of the specified subcontracts. This may be done by including in the contract modification a provision substantially as follows:

Promptly upon the establishment of firm prices for each of the subcontracts listed below, the Contractor shall submit, in such form and detail as the Contracting Officer may reasonably require, a statement of costs incurred in the performance of such subcontract and the firm price established therefor. Thereupon, notwithstanding any other provisions of this contract as amended by this modification, the Contractor and the

Contracting Officer shall negotiate an equitable adjustment in the total amount paid or to be paid under this contract to reflect such subcontract price revision. The equitable adjustment shall be evidenced by a modification to this contract, signed by the Contractor and the Contracting Officer.

[List subcontracts]

(d) In considering cost-plus-fee subcontracts while negotiating prime contracts where cost analysis is performed, the contracting officer shall make every effort to insure (but in consenting to cost-plus-fee subcontracts, the contracting officer shall insure) that fees under such subcontracts never exceed the limits prescribed by agency procedures in accordance with § 1-3.405-5(c) (2). These limits should not be inserted in the prime contract because such action might tend to inflate fees customarily negotiated at lower rates.

(a) Indirect costs commonly known as overhead are defined and described in § 1-15.203. Criteria for treatment and application of indirect costs to contracts are also set forth in § 1-15.203.

(b) In order to assure a reasonable approximation and allocation of indirect costs on an equitable basis to individual contracts, negotiators shall utilize audited overhead data or negotiated overhead rates, where available, in connection with negotiation of contracts and should not seek preferential overhead rates. However, contracting officers may examine such data or rates to determine whether they include elements of cost which individually are not allocable with respect to the contract under consideration (see Part 1-15). Where a rate is found to include such elements of cost an overhead rate should be established which excludes those costs.

(c) If there is any question with respect to audited overhead data or negotiated overhead rates, or if such are not available, the negotiator should normally avail himself of the audit services of the agency in consonance with § 1-3.809. [29 F.R. 10155, July 24, 1964, as amended at 30 F.R. 9593, July 31, 1965]

§ 1-3.807-12 Sole source items.

When purchases of standard commercial or modified standard commercial items are to be made from sole source suppliers, use of the techniques of price

and cost analysis may not always be possible. In such instances and consistent with the volume of procurement normally consummated with the contractor, the contractor's price lists and discount. or rebate arrangement should be examined and negotiations conducted on the basis of the "best user," "most favored customer," or similar practice customarlly followed by the contractor. Such price negotiations should consider the volume of business anticipated for a fixed period, such as a fiscal year, rather than the size of the individual procurement being negotiated.

A fair and reasonable provision for profit or fee cannot be made by simply applying a certain predetermined percentage to the cost estimate or selling price of a product. Rather, the profit or fee should be first established as a dollar amount, after considering the factors set forth in this § 1-3.808. Therefore, where a fee is involved and it is necessary to determine the percentage relationship between the fee and the estimated cost of the contract in order to comply with administrative and statutory limitations on fees for cost-reimbursement type contracts (see § 1-3.405-5 (c) (2), the percentage shall be determined only after the dollar amount of the fee has been established for negotiation purposes.

§ 1-3.808-2 Factors for determining fee or profit.

The factors set forth in this § 1-3.808-2 should be considered in determining profit or fee in all contracts, whether for supplies or services; for construction work; or for experimental, developmental, or research work; and whether of the fixed-price type or of the costreimbursement type unless otherwise specified in the particular factor. All of the factors should be evaluated in the light of the basic policy set forth in § 1-3.801(a) which provides that supplies and services shall be procured from responsible sources at fair and reasonable prices calculated to result in the lowest overall cost to the Goverr.ment.

(a) Effect of competition. When competition is effective and proposals are on a firm fixed-price basis, the contracting officer normally need not consider in detail the amount of estimated profit included in a price. When effective competition is lacking, and in all

cases where cost analysis is performed in accordance with § 1-3.807-2(c) the estimate for profit, target profit or fee, or the proposed fixed fee should be analyzed in the same manner as all other elements of price, evaluating the factors set forth in this § 1-3.808.

(b) Degree of risk. The degree of risk assumed by the contractor should influence the amount of profit or fee a contractor is entitled to anticipate. For example, where a portion of the risk has been shifted to the Government through cost-reimbursement or price redetermination provisions, unusual contingency provisions, or other risk-reducing measures, the amount of profit or fee should be less than where the contractor assumes all risk.

(c) Nature of work to be performed. A major consideration in the determination of the amount of profit or fee, particularly in connection with experimental, developmental, or research work, is the difficulty or complexity of the work to be performed and any unusual demands of the contract, such as whether the project involves a new approach unrelated to existing equipment or only refinements on existing equipment, whether the caliber or class of engineer involved is that of an "idea-man," or whether the contractor is to be required by the contract to assign to the work unusually skilled talent.

(d) Extent of Government assistance. The Government encourages its contractors to perform their contracts with the minimum of financial, facilities, or other assistance from the Government. Where extraordinary financial, facilities, or other assistance must be furnished to a contractor by the Government, such extraordinary assistance should have a modifying effect in determining what constitutes a fair and reasonable profit or fee.

(e) Extent of the contractor's investment. The extent of a contractor's total investment (i.e., both equity and borrowed capital) in the performance of the contract will be taken into consideration in determining the amount of the fee or profits.

(f) Character of contractor's business. Recognition must be given to the type of business normally carried on by the contractor, the complexity of manufacturing techniques. the rate of capital turnover, and the effect of each individual procurement upon such business. For ex