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

(ii) 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 interest 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 fixed-fee 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 iimited 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 substitutes for pricing negotiations.

A certificate of cost or pricing data (see § 1-3.807-4) shall not be considered a substitute for examination and analysis of the contractor's proposal. Contracting officers shall not rely on profit limiting statutes as remedies for ineffective pricing.

§ 1-3.807-8 Evaluation and pricing of individual contracts.

Each contract shall be priced separately and independently, and no consideration shall be given to losses or profits realized or anticipated in the performance of other contracts. This prohibition neither prevents the negotiation of fixed overhead and other rates applicable to several contracts during annual or other specific periods nor prohibits forward pricing agreements applicable to several contracts. A proposed price reduction under another contract or other contracts shall not be used as an evaluation factor. § 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

ations in cost analysis.

consider

(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 subcon

tract prices and subcontract performance, the contracting officer 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 (i) the degree of competition obtained, (ii) 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; i.e., firm fixed-price or other (see § 13.401), and

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

if

(b) In the review of subcontracting there should be assurance that the contractors obtain competition, 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 fixedprice 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 ensure, and in consenting to cost-plus-fee subcontracts the contracting officer shall ensure, that fees under such subcontracts do not exceed the limits pre

§ 1-3.807-11

Overhead rate considerations.

(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 § 115.203.

(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 FR 10155, July 24, 1964, as amended at 30 FR 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 customarily fol

13-131 0-83--16

lowed 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.

§ 1-3.808 Profit or fee.

§ 1-3.808-1 Scope and applicability. This section

(a) Prescribes policies for establishing the profit or fee portion of the government prenegotiation objective;

(b) Applies to price negotiations, based on cost analysis, of contracts and contract modifications (including modifications to contracts awarded by formal advertising);

(c) Prescribes policies for agencies' development and use of a structured approach for determining the profit or fee prenegotiation objective; and

(d) Specifies (1) situations requiring contracting officers to analyze profit, and (2) considerations for that analysis.

[47 FR 50252, Nov. 5, 1982]

(a) Profit or fee prenegotiation objectives do not necessarily represent net income to contractors. Rather, they represent the potential remuneration contractors may receive for contract performance. This remuneration and the Government's estimate of allowable costs to be incurred in contract performance together equal the Government's total prenegotiation objective. Just as actual costs may vary from estimated costs, the contractor's actual profit may vary from negotiated profit or fee, as a result of such factors as efficiency of performance, incurrence of costs the Government does not recognize as allowable, complexity of work, or contingencies.

(b) It is in the Government's interest to offer contractors opportunities for financial rewards sufficient to (1) stimulate efficient contract performance, (2) attract the best capabilities of qualified large and small business concerns to Government contracts, and (3) maintain a viable industrial base.

(c) Both the Government and contractors should be concerned with profit as a motivator of efficient and effective contract performance. Negotiations aimed merely at reducing prices by reducing profit, without proper recognition of the function of profit, are not in the Government's best interest. Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance. Therefore, agencies shall not (1) establish ceilings on profits or fees, (2) create administrative procedures that could be represented to contractors as de facto ceilings, or (3) otherwise unduly constrain the application of judgment in negotiating fair and reasonable prices (but see § 1-3.808-4(e)). [47 FR 50252, Nov. 5, 1982]

§ 1-3.808-3 Agency responsibilities.

(a) Structured approach. (1) Structured approaches for determining profit or fee prenegotiation objectives provide a discipline for ensuring that all relevant factors are considered (see § 1-3.808-6). The structured approach an agency adopts when required shall allow the tailoring of profit or fee on an individual contract to fit the particular circumstances of that contract. Agencies are encouraged to adopt a weighted-guidelines approach, but may prescribe another structured approach if it incorporates a logic and rationale similar to that of the weighted-guidelines method, an example of which may be found in the Defense Acquisition Regulation (32 CFR 3-808). Instead of independently establishing its own structured approach, an agency may adopt another agency's approach if that approach is consistent with, or is appropriately modified to be consistent with the policies set forth in the various subsections of § 1-3.808. Each agency's approach shall be conceptually sound, practicable to apply, and equitable to both the Government and its suppliers in the market environment from

which the agency draws its supplies and services.

(2) Agencies that have awarded less than $50 million in noncompetitive contracts over $100,000 in any fiscal year after fiscal year 1979, need not adopt a structured approach, but may do so. However, any agency which makes noncompetitive contract awards over $100,000 totaling $50 million or more in any fiscal year after fiscal year 1979

(i) Shall prescribe a structured approach for determining the profit or fee objective in those acquisitions that require cost analysis;

(ii) May prescribe specific exemptions for situations in which mandatory use of a structured approach would be clearly inappropriate; and

(iii) Shall exercise management oversight to ensure that the agency's approach is appropriately structured and applied.

(b) Cost of money as an element of the cost of facilities capital. (1) Cost Accounting Standard (CAS) 414 (Cost of Money as an Element of the Cost of Facilities Capital) provides a means for allocating to individual contracts an imputed cost of facilities capital employed, making it practical for the Government to differentiate among contracts with respect to the level of contractor-furnished facilities to be employed in contract performance. This imputed cost is an allowable cost under contracts subject to the cost principles for commercial organizations (see § 1-15.205-51).

(2) Agencies shall ensure that contractors are not compensated for facilities capital cost of money both as a direct or indirect cost and in profit or fee. Before the allowability of facilities capital cost of money, consideration for it was included in profits and fees. Therefore, profit and fee prenegotiation objectives shall be reduced if necessary to reflect this refinement in cost accounting practices. This reduction may be accomplished by means of offsets; that is, by (i) using a dollarfor-dollar offset in the Government's prenegotiation profit or fee objective, or (ii) incorporating a common offset factor under an agency's structured approach. No offset is necessary when the profit rates applied to the profit

analysis factors under an agency's structured approach already take into account the allowability of facilities capital cost of money.

(3) When a prospective contractor does not propose or identify facilities capital cost of money in a proposal for a contract under which this cost could be allowed, it is presumed that consideration for facilities capital to be employed in contract performance is inIcluded, but not identified, in the contractor's profit or fee objective. Accordingly, the contractor may not later claim this cost as allowable (see §§ 1-3.808-4(c) and 1-15.205(a)(2)(iii)). (4) The policy on offsets set forth in paragraph (b)(2) of this section does not apply to the cost of money as an element of the cost of capital assets under construction (see §§ 1-15.20551(b) and 1-3.1302-6).

[47 FR 50252, Nov. 5, 1982]

§ 1-3.808-4 Contracting officer responsibilities.

(a) When the price negotiation is not based on cost analysis, contracting officers are not required to analyze profit.

(b) When the price negotiation is based on cost analysis, contracting officers in agencies that have a structured approach shall analyze profit, using their agency's structured approach except as specifically exempted under the agency's procedures. When not using a structured approach (because the agency does not have one or because a specific exemption applies), contracting officers shall comply with § 1-3.808-6 in developing profit or fee prenegotiation objectives.

(c) Contracting officers shall use the Government prenegotiation cost objective amounts as the basis for calculating the profit or fee prenegotiation objective. Before applying profit or fee factors, the contracting officer shall exclude any facilities capital cost of money included in the cost objective amounts. If the prospective contractor fails to identify or propose facilities capital cost of money in a proposal for a contract that will be subject to the cost principles for contracts with commercial organizations (see Subpart 115.2), facilities capital cost of money