ate to the particular procurement Therefore, Government surveillance of a contractor's "make-or-buy" program, purchasing system, and proposed subcontracts is required as set forth in this Subpart 1-3.9. Where "make-or-buy" decisions and subcontracting will have a substantial impact on any of the above mentioned factors, the contractor's "make-or-buy" program and subcontracting should, to the extent practicable, be evaluated and agreed on during negotiations.

(b) The subcontracting policies and procedures in this Subpart 1-3.9 should generally be applied to procurement where (1) the item, system, or work is complex, the dollar value is substantial, or competition is restricted, and (2) either (1) cost-reimbursement, price redetermination, or incentive-type contracts are to be used, or (ii) "make-orbuy" decisions are expected to have a substantial impact on negotiations leading to a firm fixed-price contract. § 1-3.902 "Make-or-buy" programs. § 1-3.902-1 Review of program.

(a) A "make-or-buy" program is that part of a contractor's written plan for the development or production of an end item which outlines the major components, assemblies, subassemblies, and parts to be manufactured (including testing, treating, and assembling) in his own facilities, and those which will be obtained elsewhere by subcontract. A "make" item is any item produced, or work performed, by the contractor or his affiliate, subsidiary, or division.

(b) (1) Where the nature of the procurement is such that, in view of the factors referred to in § 1-3.901(b), review of the "make-or-buy" program is appropriate or is otherwise considered essential, the prospective contractor shall be required to submit his proposed "make-orbuy" program, together with sufficient related data, to the contracting officer for evaluation of such factors in (e) of this § 1-3.902-1 as are pertinent.

(2) At the time a request for proposals is issued, the procuring agency shall request potential suppliers to furnish a "make-or-buy" program on all negotiated procurements except as otherwise provided in (3), (4), or (5) of this § 1-3.902-1(b).

(3) A "make-or-buy" program will not be required when a proposed contract has a total estimated value of less than

$1,000,000 unless the contracting officer specifically determines that a "make-orbuy" program is appropriate.

(4) Research and development contracts are exempt from the provisions of this § 1-3.902 unless it can reasonably be anticipated that follow-on quantities of the product will be procured.

(5) A "make-or-buy" program will not be required if the contracting officer determines that none of the factors in § 1-3.901 (b) are applicable.

(c) The contractor will be informed that the program he submits should be confined to important items which, because of their complexity, quantity, cost or requirement for additional Government facilities, normally would require company management review of the "make-or-buy" decision. "Detail parts" or "off-the-shelf" items will not be incorporated in a "make-or-buy" program unless their potential impact on such program or production schedule makes their inclusion necessary. If the design status of the end item being procured is not sufficiently advanced to permit accurate precontract identification of all items that may be subject to "make-orbuy" decisions, the contractor shall be notified that such items must be submitted when identifiable under the terms of the Changes to Make-or-Buy Program clause (see § 1-3.902-3).

(d) The contractor shall be required to submit, with his proposal, a "make-orbuy" program of important items including in addition to information required by § 1-3.902-1(b), (1) a description by which each such item can be readily identified, (2) a recommendation to make or buy the item or defer the decision, (3) when feasible, the names of proposed subcontractors, and (4) the important items to be made by the contractor, including a designation of the plant and division in which the contractor proposes to perform the work. (e) "Make-or-buy" programs shall be evaluated and agreed upon by the contractor and the procuring activity at the earliest practicable time during negotiations. In reviewing the "make-orbuy" program during the negotiations, the effect of the following factors on the interests of the Government shall be considered:

(1) The effect of the contractor's plan to "make-or-buy," as the case may be, on price, quality, delivery, and performance.

(2) Whether the contractor plans to broaden his base of subcontractors through competition

(3) Whether the contractor has properly considered the competence, abilities, experience, and capacities available within other firms.

(4) Whether small business concerns can produce the item or perform the work in question and at what price.

(5) Whether the contractor or major subcontractors propose to do work in plant, the nature of which differs significantly from their normal in-plant operations or for which they are not historically suited.

(6) Whether production of the item or performance of the work will create a requirement, either directly or indirectly, for additional facilities to be furnished by the Government, or the continued use of Government-owned facilities, by the contractor or by subcontractors.

(7) Whether the contractor proposed to ask the Government to furnish additional facilities to do the work in plant for which there is capacity elsewhere which is competitive in quality, delivery, and overall cost, and is acceptable as a source to the contractor.

(8) Whether the item or work has been subcontracted on this or previous contracts.

(9) Other factors, such as the nature of the item, experience with similar items, future requirements, engineering, tooling, starting load costs, market conditions, and the availability of personnel and material.

(f) The procuring agency will review the "make-or-buy" program to determine if all appropriate items are included or if it contains items that should be deleted because of their relatively minor importance. In all considerations relative to a "make-or-buy" program, the procuring agency will obtain the advice and assistance of all appropriate personnel whose knowledge would contribute to the adequacy of the review.

(g) Before agreeing to a "make-orbuy" program (or consenting to any change therein which, in the opinion of the contracting officer, would reduce the anticipated participation of small business), the procuring activity shall invite the advice and counsel of the SBA by permitting SBA representatives (regularly assigned to the activity) to review all pertinent facts and make recommen

dations thereon. Such review by SBA should be concurrent with the review by the procuring activity (or, in the case of changes, the contracting officer). Where urgent circumstances do not permit such a concurrent review, or where SBA fails to respond on a timely basis, the contracting officer shall include an explanatory statement in the contract file and shall transmit a copy to the SBA representative. Where the SBA review results in a disagreement between the procuring activity (or, in the case of changes, the contracting officer) and the SBA representatives regarding a "makeor-buy" program decision, SBA may appeal such decision to the head of the procuring activity, or other appropriate level above the contracting officer in accordance with agency procedures. Decisions by the procuring activity shall be final.

(h) After agreement on the program is reached, the contracting officer shall notify the contractor as to the Government's approval of the program and shall inform the contractor as to any requirement for further review during performance of the contract. For example, if follow-on procurements occur, the procuring activity and the contractor will review the existing "make-or-buy" program to determine whether it should be revised.

[29 FR 10155, July 24, 1964, as amended at 37 FR 23543, Nov. 14, 1972]

§ 1-3.902-2 Approval of programs.

(a) Proposed "make" items shall not be agreed to when the products or services under consideration:

(1) Are not regularly manufactured or provided by the contractor, and are available quality, quantity, delivery. and other essential factors consideredfrom other firms at prices no higher than if the contractor makes or provides the product or service;

(2) Are regularly manufactured or provided by the contractor, and are available-quality, quantity, delivery,

and other essential factors consideredfrom other firms at prices lower than if the contractor makes or provides the product or service; or

Provided, That such items may be agreed to, notwithstanding paragraphs (a) (1) and (2) of this section, if in the opinion of the contracting officer the overall cost of the contract to the Government would be increased if the items were "bought".

(b) Approval of the contractor's purchasing system shall not constitute approval of the "make-or-buy" program. § 1-3.902-3 Contract clause.

The following clause shall be incor-porated in all cost-reimbursement, price redetermination, or incentive type contracts as to which a "make-or-buy" program has been agreed upon:

CHANGES TO MAKE-OR-BUY PROGRAM

The Contractor agrees to perform this contract in accordance with the "make-or-buy" program attached to this contract, except as hereinafter provided. If the Contractor desires to change the "make-or-buy" program, he shall notify the Contracting Officer in writing of the proposed change reasonably in advance and shall submit justification in sufficient detail to permit evaluation of the proposed change. Changes in the place of performance of work on any "make" item in the "make-or-buy" program are subject to this requirement. With respect to items deferred at the time of negotiation of this contract for later addition to the "make-orbuy" program, the Contractor shall notify the Contracting Officer of each proposed addition at the earliest possible time, together with justification in sufficient detail to permit evaluation. The Contractor shall not, without the written consent of the Contracting Officer, make changes or additions to the program. However, in his discretion, the Contracting Officer may ratify in writing any changes or additions. The "make-orbuy" program attached to this contract shall be deemed to be modified in accordance with the written consent or ratification by the Contracting Officer.

[End of Clause]

§ 1-3.902-4 Administration of pro

grain.

(a) On applicable contracts, the cognizant contract administration office will establish a procedure with the contractor to assure timely compliance with the terms of the contract clause. This procedure will include provisions for processing changes to the established "make-or-buy" program and for obtaining "make-or-buy" decisions for items reserved for deferred decisions or unidentified at the time of contract negotiations.

(b) When a "make-or-buy" program is agreed upon with a contractor, or there are changes or additions to a "make-orbuy" program, the consideration given each item on such program will be documented in the contract file. If a contract (including supplemental agreements for new procurement) except one

specifically exempted by § 1-3.902-1(b), does not include the Changes to Makeor-Buy Program clause, the contracting officer will document the contract file with a written statement of facts to sustain and make clear the appropriateness of the determination not to include the clause. Such determination will be based on one of the following: (1) the contract is on a firm fixed-price basis; (2) the contract is not exempt but there are no items which can be identified as requiring a "make-or-buy" program as defined in § 1-3.902-1(a); or (3) a deviation has been approved.

§ 1-3.903 Review and approval of contractor's purchasing system and sub

§ 1-3.903-2 Review and approval of subcontracts.

(a) When the prime contract is not to be placed on a firm fixed-price basis; review of subcontracts prior to placement may be desirable since the ultimate cost to the Government will depend in part on subcontract prices and performance. Contract provisions requiring advance notification to the contracting officer of proposed subcontracts for materials, components, and other purchases may be appropriate both for information as to sources and prices and to provide an opportunity for review and for approval or objection by the contracting officer prior to award of the subcontracts. Careful and thorough evaluation of subcontracts prior to placement is particularly necessary when:

(1) The prime contractor's purchasing system of performance thereunder is considered inadequate;

(2) Subcontracts are for items for which there is no competition or for which the proposed prices appear unreasonable, and the amounts involved are substantial (see § 1-3.807-10(b));

(3) Close working arrangements or business or ownership affiliations exist between the prime and the subcontractor which may preclude the free use of competition or result in higher subcontract prices than would otherwise be obtained;

(4) A subcontract is being proposed at a price less favorable than that which has been given by the subcontractor to the Government, all other factors such as manufacturing period and quantity being comparable; or

(5) A subcontract is to be placed on a fixed-price incentive, time and material, labor-hour, fixed-price redeterminable, or cost-reimbursement basis.

(b) (1) Prime contract provisions relating to subcontracts, including those requiring advance notification, review, or approval thereof. should be consistent with the amount and character of subcontract work and with the overall character and type of the prime contract and the conditions applicable to its use as described in Subpart 1-3.4; and should involve the Government to the minimum extent practicable in the contractor's exercise of management responsibility, but give reasonable assurance that adequate subcontracting opportunities have been afforded to small business and that the Government is receiving the greatest practical return for its expenditure. For example, if the contract is on a firm fixed-price basis except for a clause permitting price escalation resulting from cost increases for certain materials, the prime contract may limit the contractIng officer's right of review of subcontracts to those for materials covered by the escalation clause. In the case of cost-reimbursement type contracts, advance notification, and prior consent or approval of subcontracts should be required. (Section 304 (b) of the Act (41 U.S.C. 254(b)) requires that all such contracts shall provide for advance notification of any subcontract thereunder on a cost-plus-a-fixed-fee basis and of any fixed-price subcontract or purchase order which exceeds in dollar amount either $25,000 or 5 per centum of the total estimated cost of the prime contract.)

(2) Provisions in prime fixed-price contracts relating to subcontract review may, as appropriate, be confined to one major subcontract or to certain classes of subcontracts; may set a floor above which advance approval of proposed subcontracts may be required before placement; or may be tailored to cover unusual or particular circumstances.

(3) In those instances where a contractor's purchasing system, including its small business program has been deemed adequate, review of subcontracts generally may not be necessary. However, contracting officers shall conduct periodic reviews of the application of the system to insure conformance therewith.

(4) In instances where subcontracts have been placed on a cost-reimbursement or time and materials basis, con

tracting officers should be skeptical of approving the repetitive or unduly protracted use of such types of contracts and should follow the principles of § 1-3.803(b).

(c) In cases where the prime contract reserves a right for the contracting offcer to review or approve subcontracts. the prime contract shall also reserve to the Government the right to inspect and audit the books and records of such subcontractors. Whenever such first tier subcontracts are of the cost-reimbursement, fixed-price incentive, or time and material type, a similar right shall be reserved to the Government to inspect and audit the books and records of lower tier subcontractors: Provided, That such a right shall not be reserved contractually at or below the point where a firm fixed-price subcontract intervenes.

Subpart 1-3.10-[Reserved]

Subpart 1-3.11-[Reserved]
Subpart 1-3.12-Cost Accounting
Standards

SOURCE: 39 FR 43058, Dec. 10, 1974, unless otherwise noted.

§ 1-3.1200 Scope of subpart.

This subpart prescribes policies and procedures with respect to the application of regulations and standards of the Cost Accounting Standards Board (see 4 CFR Part 331 et seq.) to negotiated national defense contracts and negotiated nondefense contracts.

Public Law 91-379, 50 U.S.C. App. 2168, as implemented by the regulations of the Cost Accounting Standards Board (see 4 CFR 331 et seq.) requires the development of cost accounting standards to be used in connection with negotiated national defense contracts and disclosure of cost accounting practices to be used in such contracts. Such disclosure of cost accounting practices shall also be used in connection with negotiated nondefense contracts. In addition, cost accounting standards shall be used in negotiated nondefense contracts as the standards become effective and to the same extent that such standards are applicable to defense contracts. If deemed appropriate, however, the application of a particular standard to negotiated nondefense contracts may be limited by a modification or withdrawal of applicability. Such action, if any, will be set forth in § 1-3.1218 entitled Modification or withdrawal of

When used in this subpart, the words and terms defined in 4 CFR Part 331 et seq. shall have the meanings set forth therein (see also § 1-3.1220 (b)). In addition, the words and terms defined in this paragraph shall have the meanings set forth below:

(a) "Net awards" means the obligated value of negotiated national defense prime contracts, awarded in the reporting period, minus cancellations, terminations, and other credit transactions relating thereto.

(b) "Company" includes all divisions, subsidiaries, and affiliates of the contractor under common control.

(c) "Contractor" and "subcontractor" as the words pertain to contract requirements under the clause entitled Cost Accounting Standards (see § 1-3.1204-1) apply to business units, such as a profit center, division, subsidiary, or similar unit of a company, which perform the contract, even in those cases where the contract was entered into on behalf of the overall company rather than the business unit.

[29 FR 10155, July 24, 1964, as amended at 41 FR 47237, Oct. 28, 1976]

§ 1-3.1202-1 Materiality.

Materiality shall be considered in the application of regulations and standards of the Cost Accounting Standards Board. The criteria set forth in this § 1-3.1202-1 shall be used.

(a) In promulgating its rules and regulations, the Board made the following comment:

Materiality. The Board notes that many commentators urged that a concept of materiality be incorporated in the Board's regulations, to the end that minimal insignificant modifications of or failures to use disclosed cost accounting practices would not be subject to price adjustment.

or

The Board agrees that the administration of its rules, regulations, and Cost Accounting Standards should be reasonable and not seek to deal with insignificant amounts of cost. Since this rule of common sense is already practiced by the Government, the Board does not believe that there is any need to attempt to formulate and state an acceptable concept of materiality applicable to all Board rules, regulations and standards, although the Board might consider doing so if subsequent events indicate the necessity therefor. The

Board does recognize that in particular standards a "materiality" statement may be useful, and ir such cases, it will include one. See for example the addition at § 402.50 (e). (of 4 CFR.) (37 FR 4141, February 29, 1972.) In the Cost Accounting Standards Board Statement of Operating Policies, Procedures, and Objectives, the following statement of the Board's objective in regard to materiality was promulgated:

Materiality. The Board believes that the administration of its rules, regulations, and Cost Accounting Standards should be reasonable and not seek to deal with insignificant amounts of cost. Although this rule of common sense is already practiced by the Government, the Board recognizes that, in particular standards, a specific "materiality" statement may be useful; and, in such cases, it will include one.

con

The Board expects that in implementing its promulgations, it is appropriate to sider the following criteria in determining whether a transaction or a decision about an accounting practice is material in the context of any Board issuance:

1. The absolute dollar amount involved. The larger the dollar amount, the more likely it is that a decision involving it will be material.

2. The amount of total contract cost compare with the amount under consideration. The larger the portion of the total contract cost which is represented by the item or the decision under consideration, the more likely it is to be material.

3. The relationship between a cost item and a cost objective. Decisions about direct cost items, especially if the amounts are themselves part of a base for distribution of indirect cost, will normally be more material than like decisions about indirect costs.

4. The impact on Government funding. Decisions about accounting treatment will be more material if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support.

5. The relationship to price. When contract pricing is based upon estimated cost, dec1sions about cost accounting treatment in estimates are more material than comparable decisions about treatment of actual costs. When contract pricing is based on actual costs, decisions about accounting treatment for actual costs are more material than comparable decisions about estimates.

6. The cumulative effect of individually immaterial items. It is appropriate to consider whether individual variances (a) tend to offset one another, or (b) tend to be in the same direction and hence to accumulate into a material amount.

These criteria should be considered together; no one criterion is wholly determinative of immateriality. In particular standards the Board will give consideration to