in the contract price until the requested adjustment has been verified by the contracting officer, in accordance with the criteria set forth in FAR 15.804-3 and as required by paragraph (c)(4) of the clause.

(b) Price adjustment for nonstandard steel items. The price adjustment clause at 252.216-7001 is authorized for use in fixed price supply contracts when:

(1) The contractor is a steel producer and actually manufactures the standard steel mill item referred to in paragraph (d) of the clause; and

(2) The items being procured are nonstandard steel items made wholly or in part of standard steel mill items. When this clause is included in invitations for bids, Note (8) of the clause is inapplicable and shall be omitted. Invitations for bids or requests for proposals shall instruct bidders or offerors to complete all blanks in accordance with the applicable notes. When the clause is to provide for adjustment based on the contractor's "established price" (see paragraphs (a) and (d) of the clause and Note (8) of the clause), the established price shall be verified in accordance with 215.804-3 prior to contract award. When the clause is to provide for adjustment on another basis (see Note (8) of the clause), that price must be verified. No adjustment under this clause shall be made in the contract price until the requested adjustment has been verified by the contracting officer, in accordance with criteria set forth in FAR 15.804-3 (but see Note (8) of the clause) and as required by paragraph (f) of the clause. The 110% figure in paragraph (e) of the clause shall not be exceeded unless approved by the Chief of the Contracting Office.

216.206 Fixed-ceiling price contracts with retroactive price redetermination.

216.306 Cost-plus-fixed-fee contracts.

(b) Application. In addition to the conditions of FAR 16.301-2 being present, a cost-plus-fixed-fee contract is suitable when:

(1) A cost-reimbursement type of contract is found necessary in accordance with 216.301-2;

(2) The parties agree that the contract should be fee bearing;

(3) The level of effort required is unknown; and where measuring achievements in contract performance does not lend itself to the subjective evaluation required in CPAF contracts.

(c)(S-70) This type of contract normally should not be used in the development of major weapons and equipment, once prerequisite preliminary exploration, studies, and risk reductions have indicated a high degree of probability that the development is achievable and the Government generally has determined its desired performance objectives and schedule of completion. The cost-plus-fixed-fee contract shall not be used for procurements categorized as either Engineering Development or Operational System Development; which have completed the Validation Phase except with the approval of the Head of a Contracting Activity or his designee, it may be used in these categories for individual procurements, ancillary to the development of a major weapon system or equipment, where the purpose of the procurement is clearly to determine or solve specific problems associated with the major weapon system or equipment.

Subpart 216.4—Incentive Contracts

216.402 Application of predetermined, formula-type incentives.

216.402-2 Technical performance incentives.

Increases in profits or fees resulting from the use of incentive provisions are made only because cost, performance, or other contractual goals or standards have been surpassed.

(S-70) Description. A contract with a performance incentive is one which incorporates an incentive to the contractor to surpass stated performance targets by providing for increases to the extent that such targets are not met. Salient features and considerations in the use of this type of contract are as follows:

(1) "Performance," as used in this paragraph refers not only to the performance of the article being procured, but to the performance of the contractor as well. Performance which is the minimum which the Government will accept shall be mandatory under the terms of the Completion form contract and shall warrant only the minimum profit or fee related thereto. Performance which meets the

stated targets will warrant the "target" profit or fee. Performance which surpasses these targets will be rewarded by additional profit or fee. The incentive feature (providing for increases or decreases, as appropriate) is applied to performance targets rather than performance require ments.

(2) The incentive, when applied to the product, should relate to specific performance characteristics, such as range of a missile, speed of an aircraft or ship, thrust of an engine, maneuverability to a vehicle, and fuel economy. However, high overall performance of the end item is the primary objective of such contracts. According. ly, the incentive feature should reflect a balancing of the various characteris tics which together account for overall performance, so that no one character istic will be exaggerated to the detri ment of the end item as a whole. When applied to the performance of the contractor, the incentive should relate to specific performance areas of milestones, such as delivery or test schedules, quality controls, maintenance requirements, and reliability standards.

(3) Since performance tests generally are essential in order to determine the degree of attainment of perform ance targets, the control must be as specific as possible in establishing test criteria, such as conditions of testing precision of instrumentation, and interpretation of test data.

(S-71) Application. Contracts with performance incentives are suitable for use in procurements where it is de sired to provide the contractor with an incentive in the form of financial reward for surpassing stated perform ance targets, counter-balance by & penalty in the form of decreased profit or fee for failure to achieve such targets. Performance incentives are particularly appropriate for inclu sion in contracts for major weapons and equipment, both in development when desired performance objectives are known and the fabrication of prototypes for test and evaluation is re quired, and in production where there is potential for improved performance that would be highly desirable to the Government. Effort always should be

made in these procurement situations to include a performance incentive in the contract. Performance incentives present complex problems in contract administration and should be negotiated and administered by contracting officers with full cooperation of Government engineering and pricing specialists.

216.403 Fixed-price incentive contracts.

(b)(3) Application. Separate incentive provisions may be made applicable to individual line items of a contract, e.g., when dissimilar work is best incentivised by use of separate formulas.

(c) Limitations. In no case should such contracts be used where the sole or principal purpose is to shift substantially all cost responsibility to the Government. Further, in no case shall the firm target profit or formula for final profit and price be established independently.

(c)(S-70) Quarterly limitation on payments statements. The contracting

officer must be satisfied that the contractor's accounting system will furnish reliable financial information for preparing the Quarterly Limitation on Payments Statement required under the clauses at FAR 52.216-16 and 17. In computing overpayments or underpayments, the contracting officer shall use the following formula when (1) actual costs for individual items delivered are not available and (2) the necessary cost data are available from an accounting system which meets the Cost/Schedule Control Systems Crite

ria.

FORMULA FOR Computing OVERPAYMENT/
UNDERPAYMENT

COID=Cost of items delivered
TCID=Target cost of items delivered
ACWP Actual cost of work performed
BCWP Budgeted cost of work performed
BMR=Budgeted management reserve
BTD=Billings to date

TEP Total estimated price of the contract
TP=Target profit on items delivered
IP=Incentive profit on items delivered

216.403-2 Fixed price incentive (successive targets).

(a)(1) This formula does not apply for the life of the contract but simply is used to fix the firm target profit for the contract. To provide an incentive consistent with the circumstances, the formula for fixing the firm target profit should reflect the relative risk involved in establishing an incentive arrangement where cost and pricing information were not sufficient to permit the negotiation of firm targets at the outset.

216.404 Cost-reimbursement

contracts.

incentive

216.404-1 Cost-plus incentive fee contracts.

(b) Application. Where it is highly probable that the development is feasible and the Government generally has determined its desired performance objectives, the cost-plus-incentive-fee contract should be used in conjunction with performance incentives in the development of major systems, and in other development programs where use of the cost and performance incentive approach is considered both desirable and administratively practical. Range of fee and the fee adjustment formula should be negotiated so as to give appropriate weight to basic procurement objectives. For example, in an initial product development contract, it may be

appropriate to negotiate a cost-plus-incentive-fee contract providing for relatively small increases, or decreases in fee tied to the cost incentive feature, balanced by the inclusion of performance incentive provisions providing for significant upward or downward fee adjustment as an incentive for the contractor to meet or surpass negotiated performance targets. Conversely, in subsequent development and test contracts, it may be more appropriate to negotiate an incentive formula where the opportunity to earn additional fee is based primarily on the contractor's success in controlling costs. With regard to the cost incentive provisions of a contract, the minimum and maximum fees, and the fee adjustment formula, should be negotiated so as to provide an incentive which will be effective over variations in costs

throughout the full range of reasonably foreseeable variations from target cost. Whenever this type of contract, with or without the inclusion of performance incentives, is negotiated so as to provide incentive up to a high maximum fee, the contract also shall provide for a low minimum fee, which may even be a "zero" fee or, in rare cases, a "negative" fee.

216.404-2 Cost-plus-award-fee contracts.

(a) Description. The CPAF contract is a cost reimbursement type of contract with special fee provisions. It provides a means of applying incentives in contracts which are not susceptible to definite measurements of performance necessary for structuring incentive contracts. Award fee may be earned in whole or in part. The number of criteria used and the requirements which are represented will differ widely from one contract to another. Therefore, when determining criteria and rating plans the using activity should be flexible and select a plan which will motivate the contractor in a positive way to improve performance. Evaluations are furnished to the contractor to afford him an opportunity to comment on the evaluation findings. The decision that award fee has been earned is based on the reports of performance made by the Government personnel knowledgeable

with respect to the contract require ments.

(b) Application. The CPAF contract is suitable for:

(1)S-70) Level of effort contracts for performance of services where mis sion feasibility is established but meas urement of achievement must be by subjective evaluation rather than ob jective measurement; and

(1)(S-71) Work which would have been placed under another type d contract if the performance objectives could be expressed in advance by defi nite milestones, targets or goals sus ceptible of measuring actual perform

ance.

(b)(S-70) Weighted guidelines. The weighted guidelines method shall no be applied to CPAF contracts with re spect to either the base (fixed) fee or the award fee.

(b)(S-71) Fee. The amount of the base fee shall not exceed three percent of the estimated cost of the contrac exclusive of the fee, and the maximur fee (base fee plus award fee) shall not exceed the limitations stated in FAR 15.903.

(b)(S-72)(i) Evaluation. The contract should provide for evaluation at stated intervals during contract per formance, so that the contractor wil periodically be made aware of the quality of his performance and wi know in which areas improvement i expected. Partial payment of fee wi generally correspond to the evaluation periods. This will make effective the incentive which the award fee car create by inducing the contractor to improve poor performance or to con tinue good performance.

(ii) Consideration may be given to (A) constituting a board to evaluate the contractor's performance and de termine the amount of the award fee or recommend an amount to the contracting officer and, (B) to afford the contractor an opportunity to presen: matters on his own behalf.

(iii) The contract shall set forth those criteria to be used in evaluating the contractor's performance to arrive at the award fee. See examples of such criteria set forth in charts below.

(b)(S-73) Disputes. The contract shall expressly exclude from the oper ation of the Disputes clause any dis

pute over the amount of the award fee.

(c)(S-70) Limitations. The CPAF contract shall not be used as an administrative technique to avoid CPFF contracts when the criteria for CPFF contracts apply, nor shall a CPAF contract be used to avoid the effort of establishing objective targets so as to make feasible the use of a CPIF type contract.

(c)(S-71) The CPAF contract shall not be used contract where the amount, period of performance or the benefits expected are insufficient to warrant the additional administrative effort or cost.

(c)(S-72) The CPAF contract shall not be used for procurements categorized as either Engineering Development or Operational System Development which have undergone contract definition, except that where it may be more advantageous to do so, it may be used in these categories for individual procurements, ancillary to the development of a major weapon system or equipment, where the purpose of the procurement is clearly to determine or solve specific problems associated with the major weapon system or equipment.

(S-70) Other application of the award fee provision. In certain cases, it may be desirable to motivate and

reward a contractor for management performance over and above that which can be objectively measured and incentivised under other forms of government contracts. For example, logistics support, quality, timeliness, cooperation, ingenuity, and cost effectiveness are areas under the control of management which may be susceptible only to subjective measurement and evaluation. In such cases, the "award amount" portion of the fee applicable to the CPAF contract is an ideal method for incorporation of these additional incentives into government contracts; the "base fee" or fixed amount portion would not be applicable in these procurements. When approved by the Chief of the Contracting Office, the "award amount" portion of the CPAF contract may be used in conjunction with other types and kinds of contracts for Government's benefit. An Award Review Board shall be appointed at each appropriate installation or activity. Procedures shall be established for the conduct of the evaluation. Further, the award fee provision shall not be used in conjunction with other types and kinds of contracts when the administrative effort or costs for evaluation exceed the benefits to be derived from the use of this arrangement.

EXAMPLES OF CRITERIA