`[Federal Register Volume 62, Number 228 (Wednesday, November 26, 1997)]
[Proposed Rules]
[Pages 63050-63062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31109]


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DEPARTMENT OF DEFENSE

48 CFR Parts 215 and 252

[DFARS Case 97-D018]


Defense Federal Acquisition Regulation Supplement: Contracting by 
Negotiation; Part 215 Rewrite

AGENCY: Department of Defense (DoD).

ACTION: Proposed rule with request for comments.

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SUMMARY: The Director of Defense Procurement is proposing to amend the 
Defense Federal Acquisition Regulation Supplement (DFARS) to revise 
procedures pertaining to contracting by negotiation. These amendments 
conform with amendments made to the Federal Acquisition Regulation 
(FAR) in Federal Acquisition Circular 97-02, which was published in the 
Federal Register on September 30, 1997.

DATES: Comments on the proposed rule should be submitted in writing to 
the address shown below on or before January 26, 1998 to be considered 
in the formulation of the final rule.

ADDRESSES: Interested parties should submit written comments to: 
Defense Acquisition Regulations Council, Attn: Ms. Melissa Rider, PDUSD 
(A&T) DP (DAR), IMD 3D139, 3062 Defense Pentagon, Washington DC 20301-
3062. Telefax number (703) 602-0350.
    E-mail comments submitted over the Internet should be addressed to: 
[email protected]
    Please cite DFARS Case 97-D018 in all correspondence related to 
this issue. E-mail comments should cite DFARS Case 97-D018 in the 
subject line.

FOR FURTHER INFORMATION CONTACT:
Ms. Melissa Rider, (703) 602-0131.

SUPPLEMENTARY INFORMATION: 

A. Background

    This proposed rule revises DFARS part 215 to align it with the 
reorganized format of FAR part 15 (FAR Case 95-029, FAR part 15 
Rewrite) that was published as a final rule in the Federal Register on 
September 30, 1997 (62 FR 51224). In addition to changes related to 
format, the following changes have been made:
     DFARS guidance on the four-step source selection process 
and the alternate source selection process have been removed, as the 
new guidance at FAR 15.101, best value continuum, clearly allows such 
source selection processes.
     DFARS requirements for obtaining approvals before 
requesting second or subsequent best and final offers have been removed 
in view of the new guidance on proposal revisions at FAR 15.307.
     DFARS guidance on cost realism analysis has been revised 
to reflect the new guidance on cost realism analysis at FAR 15.404-
1(d).
     Thresholds for requesting field pricing assistance have 
been added at DFARS 215.404-2. Similar guidance was removed from the 
FAR, but is still considered to be appropriate for DoD activities.
     DFARS guidance on field pricing support has been revised 
to conform with the FAR revisions that eliminated standard content 
requirements for field pricing reports.

B. Regulatory Flexibility Act

    The proposed rule is not expected to have a significant economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because the rule 
primarily consists of conforming DFARS amendments to reflect existing 
FAR guidance on contracting by negotiation. Therefore, an Initial 
Regulatory Flexibility Analysis has not been performed. Comments are 
invited from small businesses and other interested parties. Comments 
from small entities concerning the affected DFARS subparts also will be 
considered in accordance with 5 U.S.C. 610. Such comments should be 
submitted separately and should cite DFARS Case 97-D018 in 
correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
rule does not impose any information collection requirements that 
require approval by the Office of Management and Budget under 44 U.S.C. 
3501, et seq.

List of Subjects in 48 CFR Parts 215 and 252

    Government procurement.

Michele P. Peterson,
Executive Editor, Defense Acquisition Regulations Council.

    Therefore, 48 CFR Parts 215 and 252 are proposed to be amended as 
follows:
    1. The authority citation for 48 CFR parts 215 and 252 continues to 
read as follows:

    Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.

PART 215--CONTRACTING BY NEGOTIATION

    2. Part 215 is revised to read as follows:

PART 215--CONTRACTING BY NEGOTIATION

Sec.
215.000  Scope of part.

Subpart 215.2--Solicitation and Receipt of Proposals and Information

215.204-2  Part I--The Schedule.

Subpart 215.3--Source Selection

215.304  Evaluation factors and significant subfactors.
215.305  Proposal evaluation.

Subpart 215.4--Contract Pricing

215.403  Obtaining cost or pricing data.
215.403-1  Prohibition on obtaining cost or pricing data.
215.403-1-70  Waivers and exemptions.
215.403-5  Instructions for submission of cost or pricing data or 
information other than cost or pricing data.
215.404  Proposal analysis.
215.404-1  Proposal analysis techniques.
215.404-2  Information to support proposal analysis.
215.404-3  Subcontract pricing considerations.
215.404-4  Profit.
215.404-70  DD Form 1547, Record of Weighted Guidelines Method 
Application.
215.404-71  Weighted guidelines method.
215.404-71-1  General.
215.404-71-2  Performance risk.
215.404-71-3  Contract type risk and working capital adjustment.
215.404-71-4  Facilities capital employed.
215.404-72  Modified weighted guidelines method for nonprofit 
organizations.
215.404-73  Alternative structured approaches.
215.404-74  Fee requirements for cost-plus-award-fee contracts.
215.404-75  Reporting profit and fee statistics.
215.406-1  Prenegotiation objectives.
215.406-3  Documenting the negotiation.
215.407-1  Defective cost or pricing data.
215.407-2  Make-or-buy programs.
215.407-3  Forward pricing rate agreements.
215.407-4  Should-cost review.
215.407-4  Estimating systems.

[[Page 63051]]

215.407-5-70  Disclosure, maintenance, and review requirements.
215.408  Solicitation provisions and contract clauses.
215.470  Estimated data prices.


215.000  Scope of part.

    See 225.872 for additional guidance on procedures for purchasing 
from qualifying countries.

Subpart 215.2--Solicitation and Receipt of Proposals and 
Information


215.204-2  Part I--The Schedule.

    (g) When a contract contains both fixed-priced and cost-
reimbursement line items or subline items, the contracting officer 
shall provide, in Section B, Supplies or Services and Prices/Costs, an 
identification of contract type specified for each contract line item 
or subline item to facilitate appropriate payment.

Subpart 215.3--Source Selection


215.304  Evaluation factors and significant subfactors.

    (d)(i) In acquititions that require use of the clause at FAR 
52.219-9, Small, Small Disadvantaged and Women-Owned Small Business 
Subcontracting Plan, the extent of participation of small and small 
disadvantaged businesses in performance of the contract shall be 
addressed in source selection.
    (A) For acquititions other than those based only on cost or price 
competition, the contracting officer shall evaluate the extent which 
offerors identify and commit to small business and to small 
disadvantaged business, historically black college and university, or 
minority institution performance of the contract, whether as a joint 
venture, teaming arrangements, or subcontractors.
    (B) Evaluation factory may include--
    (1) The extent of which such firms are specifically identified in 
proposals;
    (2) The extent to commitment to use such firms (for example, 
enforceable commitments are to be weighted more heavily than non-
enforceable ones);
    (3) The complexity and variety of the work small firms are to 
perform;
    (4) The realism of the proposal;
    (5) When not otherwise required by 215.305(a)(2), past performance 
of the offerors in complying with requirements of the clauses at FAR 
52.219-8, Utilization of Small, Small Disadvantaged and Women-Owned 
Small Business Concerns, and 52.219-9, Small, Small Disadvantaged and 
Women-Owned Small Business Subcontracting Plan; and
    (6) The extent of participation of such firms in terms of the value 
of the total acquisition.
    (C) Proposals addressing the extent of small and small 
disadvantaged business performance may be separate from subcontracting 
plans submitted pursuant to the clause at FAR 52.219-9 and should be 
structured to allow for consideration of offers from small businesses.
    (D) When an evaluation includes the factors in paragraph 
(d)(i)(B)(1) of this section, the small, small disadvantaged, or women-
owned small businesses considered in the evaluation shall be listed in 
any subcontracting plan submitted pursuant to FAR 52.219-9 to 
facilitate compliance with 252.219-7003(g).
    (ii) The costs or savings related to contract administration and 
audit may be considered when the offeror's past performance or 
performance risk is likely to result in significant costs or savings.
    (iii) In competitive acquisition of services--
    (A) Evaluation and award should be based, to the maximum extent 
practicable, on best overall value to the Government in terms of 
quality and other factors.
    (B) The weighting of costs must be commensurate with the nature of 
the services being acquired.
    (1) It may be appropriate to award to an offeror, based on 
technical and quality considerations, at other than the lowest price 
when--
    (i) The effort being contracted for departs from clearly defined 
efforts; or
    (ii) Highly skilled personnel are required.
    (2) It may be appropriate to award to the technically acceptable 
offeror with the lowest price when--
    (i) Services being acquired are of a routine or simple nature;
    (ii) Highly skilled personnel are not required; or
    (iii) The product to be delivered is clearly defined at the outset 
of the acquisition.


215.305  Proposal evaluation.

    (a)(1) Contracting officers shall ensure that the use of 
uncompensated overtime in contracts to acquire services on the basis of 
the number of hours provided (see 237.170) will not degrade the level 
of technical expertise required to fulfill the Government's 
requirements. When acquiring such services, contracting officers shall 
conduct a risk assessment, and evaluate for award on that basis, any 
proposals received that reflect factors such as--
    (A) Unrealistically low labor rates or other costs that may result 
in quality or service shortfalls; and
    (B) Unbalanced distribution of uncompensated overtime among skill 
levels and its use in key technical positions.
    (2) When a past performance evaluation is required by FAR 15.304, 
and the solicitation includes the clause at FAR 52.219-8, Utilization 
of Small, Small Disadvantaged and Women-Owned Small Business Concerns, 
the evaluation factors shall include the past performance of offerors 
in complying with requirements of that clause. When a past performance 
evaluation is required by FAR 15.304, and the solicitation includes the 
clause at FAR 52.219-9, Small, Small Disadvantaged and Women-Owned 
Small Business Subcontracting Plan, the evaluation factors shall 
include the past performance of offerors in complying with requirements 
of that clause.
    (b) Any determination to reject a proposal based on a violation or 
possible violation of Section 27 of the OFPP Act shall be made as 
specified in FAR 3.104.

Subpart 215.4--Contract Pricing


215.403  Obtaining cost or pricing data.


215.403-1  Prohibition on obtaining cost or pricing data.

    (c) Standards for exceptions from cost or pricing data 
requirements.
    (1) Adequate price competition.
    (A) An example of a price ``based on'' adequate price competition 
is a priced option in a contract where adequate price competition 
existed, if the contracting officer has determined that the option 
price is reasonable in accordance with FAR 17.207(d);
    (B) Dual or multiple source programs.
    (1) In dual or multiple source programs, the determination of 
adequate price competition must be made on a case-by-case basis. Even 
when adequate price competition exists, in certain cases it may be 
appropriate to obtain additional information to assist in price 
analysis.
    (2) Adequate price competition normally exists when--
    (i) Prices are solicited across a full range of step quantities, 
normally including a 0-100 percent split, from at least two offerors 
that are individually capable of producing the full quantity; and
    (ii) The reasonableness of all prices awarded is clearly 
established on the basis of price analysis (see FAR 15.404-1(b)).


215.403-1-70  Waivers and exemptions.

    (a) The DoD has exempted the Canadian Commercial Corporation and 
its subcontractors from submission and certification of cost or pricing 
data on all acquisitions.

[[Page 63052]]

    (b) The DoD has waived certain cost or pricing data requirements 
for nonprofit organizations (including educational institutions) on 
cost-reimbursement-no-fee contracts. The contracting officer shall 
require--
    (1) Submission of information other than cost or pricing data to 
the extent necessary to determine price reasonableness and cost 
realism; and
    (2) Cost or pricing data from subcontractors that are not nonprofit 
organizations.


215.403-5  Instructions for submission of cost or pricing data or 
information other than cost or pricing data.

    (b)(1)(A) Contracting officers may develop contract pricing 
proposal supporting schedules for use by offerors in providing 
supporting data for their pricing proposals. Schedules should only 
request data that are necessary and reasonable based on industry, 
company, or commodity practices.
    (B) When the solicitation requires contractor compliance with the 
Contractor Cost Data Reporting (CCDR) System (Army--AMCP 715-8, Navy--
NAV PUB P-5241, and Air Force--AFMCP 800-15), require the contractor to 
submit DD Form 1921 or 1921-1 with its pricing proposal.


215.404  Proposal analysis.


215.404-1  Proposal analysis techniques.

    (d) Cost realism analysis.
    The contracting officer should determine what information other 
than cost or pricing data is necessary for the cost realism analysis 
during acquisition planning and development of the solicitation. Unless 
such information is available from sources other than the offerors (see 
FAR 15.402(a)(2)), the contracting officer will need to request data 
from the offerors. The contracting officer--
    (i) Should request only necessary data; and
    (ii) May not request submission of cost or pricing data.
    (f) Unit prices.
    For spare parts or support equipment, perform an analysis of--
    (i) Those line items where the proposed price exceeds by 25 percent 
or more the lowest price the Government has paid within the most recent 
12-month period;
    (ii) Those line items where a comparison of the item description 
and the proposed price indicates a potential for overpricing;
    (iii) Significant high-dollar-value items. If there are no obvious 
high-dollar-value items, include an analysis of a random sample of 
items; and
    (iv) A random sample of the remaining low-dollar value items. 
Sample size may be determined by subjective judgment, e.g., experience 
with the offeror and the reliability of its estimating and accounting 
systems.


215.404-2  Information to support proposal analysis.

    (a) Field pricing assistance.
    (i) The contracting officer should consider requesting field 
pricing assistance for--
    (A) Fixed-price proposals exceeding the cost or pricing data 
threshold;
    (B) Cost-type proposals exceeding the cost or pricing data 
threshold from offerors with significant estimating system deficiencies 
(see 215.407-5-70 (a)(4) and (c)(2)(i)); or
    (C) Cost-type proposals exceeding $10 million from offerors without 
significant estimating system deficiencies.
    (ii) The contracting officer should not request field pricing 
support for proposed contracts or modifications in an amount less than 
that specified in paragraph (a)(i) of this subsection. An exception may 
be made when a reasonable pricing result cannot be established, because 
of--
    (A) A lack of knowledge of the particular offeror;
    (B) Sensitive conditions (e.g., a change in, or unusual problems 
with, an offeror's internal systems); or
    (C) An inability to evaluate the price reasonableness through price 
analysis or cost analysis of existing data.
    (c) Audit assistance for prime contracts or subcontracts.
    (i) If, in the opinion of the contracting officer or auditor, the 
review of a prime contractor's proposal requires further review of 
subcontractors' cost estimates at the subcontractors' plants (after due 
consideration of reviews performed by the prime contractor), the 
contracting officer should inform the administrative contracting 
officer (ACO) having cognizance of the prime contractor before the 
review is initiated.
    (ii) Notify the appropriate contract administration activities when 
extensive, special, or expedited field pricing assistance will be 
needed to review and evaluate subcontractors' proposal under a major 
weapon system acquisition. Where audit reports are received on 
contracting actions that are subsequently cancelled, notify the 
cognizant auditor in writing.


215.404-3  Subcontract pricing considerations.

    (a)(i) When obtaining field pricing assistance on a prime 
contractor's proposal, the contracting officer should request audit or 
field pricing assistance to analyze and evaluate the proposal of a 
subcontractor at any tier (notwithstanding availability of data or 
analyses performed by the prime contractor) if the contracting officer 
believes that such assistance is necessary to ensure the reasonableness 
of the total proposed price. Such assistance may be appropriate when, 
for example--
    (A) There is a business relationship between the contractor and 
subcontractor not conducive to independence and objectivity;
    (B) The contractor is a sole source supplier and the subcontract 
costs represent a substantial part of the contract cost;
    (C) The contractor has been denied access to the subcontractor's 
records;
    (D) The contracting officer determines that, because of factors 
such as the size of the proposed subcontract price, audit or field 
pricing assistance for a subcontract at any tier is critical to a fully 
detailed analysis of the prime contractor's proposal;
    (E) The contractor or higher-tier subcontractor has been cited for 
having significant estimating system deficiencies in the area of 
subcontract pricing, especially the failure to perform adequate cost 
analyses of proposed subcontract costs or to perform subcontract 
analyses prior to negotiation of the Government; or
    (F) A lower-tier subcontractor has been cited as having significant 
estimating system deficiencies.
    (ii) It may be appropriate for the contracting officer or the ACO 
to provide assistance to a contractor at any tier where the contractor 
has been denied access to a subcontractor's records in carrying out the 
contractor's responsibilities under FAR 15.404-3 to conduct price or 
cost analysis to determine subcontractor price reasonableness. Under 
these circumstances, the contracting officer or the ACO should consider 
whether providing audit or field pricing assistance will serve a valid 
Government interest.
    (iii) When DoD performs the subcontract analysis, DoD shall furnish 
to the prime contractor or higher-tier subcontractor, with the consent 
of the subcontractor reviewed, a summary of the analysis performed in 
determing any unacceptable costs included in the subcontract proposal. 
If the subcontractor withholds consent, DoD shall furnish a range of 
unacceptable costs for each element in such a way as to prevent 
disclosure of subcontractor proprietary data.
    (iv) When possible, the contracting officer should notify the 
appropriate

[[Page 63053]]

contract administration activities in advance when extensive, special, 
or expedited field pricing assistance will be needed to review and 
evaluate subcontractor proposals under a major weapon system 
acquisition.
    (v) Price redeterminable or fixed-price incentive contracts may 
include subcontracts placed on the same basis. When the contracting 
officer wants to reprice the prime contract even though the contractor 
has not yet established final prices for the subcontracts, the 
contracting officer may negotiate a firm contract price--
    (A) If cost or pricing data on the subcontracts show the amounts to 
be reasonable and realistic; or
    (B) If cost or pricing data on the subcontracts are too indefinite 
to determine whether the amounts are reasonable and realistic, but--
    (1) Circumstances require prompt negotiation; and
    (2) A statement substantially as follows is included in the 
repricing modification of the prime contract:
    As soon as the Contractor establishes firm prices for each 
subcontract listed below, the Contractor shall submit (in the format 
and with the level of detail specified by the Contracting Officer) to 
the Contracting Officer the subcontractor's cost incurred in performing 
the subcontract and the final subcontract price. The Contractor and 
Contracting Officer shall negotiate an equitable adjustment in the 
total amount paid or to be paid under this contract to reflect the 
final subcontract price.
    (vi) If the selection of the subcontractor is based on a trade-off 
among cost or price and other non-cost factors rather than lowest 
price, the analysis supporting subcontractor selection should include a 
discussion of the factors considered in the selection (see also FAR 
15.101 and 15.304 and 215.304). If the contractor's analysis is not 
adequate, return it for correction of deficiencies.
    (vii) The contracting officer shall make every effort to ensure 
that fees negotiated by contractors for cost-plus-fixed-fee 
subcontracts do not exceed the fee limitations in FAR 15.404-
4(c)(4)(i).


215.404-4  Profit.

    (b) Policy.
    (1) Departments and agencies shall use a structured approach for 
developing a prenegotiation profit or fee objective (profit objective) 
on any negotiated contract action that requires cost analysis, except 
on cost-plus-award-fee contracts (but see 215.404-74). There are three 
approaches--
    (A) The weighted guidelines method;
    (B) The modified weighted guidelines method; and
    (C) An alternate structured approach.
    (c) Contracting officer responsibilities.
    (1) Also, do not perform a profit analysis when assessing cost 
realism in competitive acquisitions.
    (2) The contracting officer--
    (A) Shall use the weighted guidelines method (see 215.404-71), 
unless--
    (1) The modified weighted guidelines method applies; or
    (2) An alternate approach is justified.
    (B) Shall use the modified weighted guidelines method (see 215.404-
72) on contract actions with nonprofit organizations.
    (C) May use an alternate structured approach (see 215.404-73) 
when--
    (1) The contract action is--
    (i) Under $500,000;
    (ii) For architect-engineer or construction work;
    (iii) Primarily for delivery of material from subcontractors; or
    (iv) A termination settlement; or
    (2) The weighted guidelines method does not produce a reasonable 
overall profit objective and the head of the contracting activity 
approves use of the alternate approach in writing.
    (D) Shall use the weighted guidelines method to establish a basic 
profit rate under a formula-type pricing agreement, and may then use 
the basic rate on all actions under the agreement, provided that 
conditions affecting profit do not change.
    (E) Shall document the profit analysis in the price negotiation 
memorandum.
    (5) Although specific agreement on the applied weights or values 
for individual profit factors shall not be attempted, the contracting 
officer may encourage the contractor to--
    (A) Present the details of its proposed profit amounts in the 
weighted guidelines format or similar structured approach; and
    (B) Use the weighted guidelines method in developing profit 
objectives for negotiated subcontracts.
    (6) The contracting officer must also verify that relevant 
variables have not materially changed (e.g., performance risk, interest 
rates, progress payment rates, distribution of facilities capital).
    (d) Profit-analysis factors.
    (1) Common factors. The common factors are embodied in the DoD 
structured approaches and need not be further considered by the 
contracting officer.


215.404-70   DD Form 1547, Record of Weighted Guidelines Method 
Application.

    (a) The DD Form 1547--
    (1) Provides a vehicle for performing the analysis necessary to 
develop a profit objective;
    (2) Provides a format for summarizing profit amounts subsequently 
negotiated as part of the contract price; and
    (3) Serves as the principal source document for reporting profit 
statistics to DoD's management information system.
    (b) The military departments are responsibilities for establishing 
policies and procedures for feeding the DoD-wide management information 
system on profit and fee statistics (see 215.404-75).
    (c) The contracting officer shall--
    (1) Use and prepare a DD Form 1547 whenever a structured approach 
to profit analysis is required by 215.404-4(b) (see 215.404-71, 
215.404-72, and 215.404-73 for guidance on using the structured 
approaches). Administrative instructions for completing the form are in 
253.215-70.
    (2) Ensure that the DD Form 1547 is accurately completed. The 
contracting officer is responsible for the correction of any errors 
detected by the management system auditing process.


215.404-71  Weighted guidelines method.


215.404-71-1  General.

    (a) The weighted guidelines method focuses on three profit 
factors--
    (1) Performance risk;
    (2) Contract type risk; and
    (3) Facilities capital employed.
    (b) The contracting officer assigns values to each profit factor; 
the value multiplied by the base results in the profit objective for 
that factor. Each profit factor has a normal value and a designated 
range of values. The normal value is representative of average 
conditions on the prospective contract when compared to all goods and 
services acquired by DoD. The designated range provides values based on 
above normal or below normal conditions. In the price negotiation 
memorandum, the contracting officer need not explain assignment of the 
normal value, but should address conditions that justify assignment of 
other than the normal value.


215.404-71-2  Performance risk.

    (a) Description.
    This profit factor addresses the contractor's degree of risk in 
fulfilling the contract requirements. The factor consists of three 
parts--
    (1) Technical--the technical uncertainties of performance.
    (2) Management--the degree of management effort necessary to ensure 
that contract requirements are met.
    (3) Cost control--the contractor's efforts to reduce and control 
costs.
    (b) Determination.

[[Page 63054]]

    The following extract from the DD Form 1547 is annotated to 
describe the process.

----------------------------------------------------------------------------------------------------------------
                                                                Assigned     Assigned    Base (item     Profit  
               Item                 Contractor risk factors    weighting      value         18)       objective 
----------------------------------------------------------------------------------------------------------------
21...............................  Technical................          (1)          (2)          N/A          N/A
22...............................  Management...............          (1)          (2)          N/A          N/A
23...............................  Cost Control.............          (1)          (2)          N/A          N/A
24...............................  Performance Risk                   N/A          (3)          (4)          (5)
                                    Composite.                                                                  
----------------------------------------------------------------------------------------------------------------

    (1) Assign a weight (percentage) to each element according to its 
input to the total performance risk. The total of the three weights 
equals 100%.
    (2) Select a value for each element from the list in paragraph (c) 
of this subsection using the evaluation criteria in paragraphs (d), 
(e), and (f) of this subsection.
    (3) Compute the composite as shown in the following example--

------------------------------------------------------------------------
                                     Assigned     Assigned     Weighted 
                                    weighting      value        value   
                                    (percent)    (percent)    (percent) 
------------------------------------------------------------------------
Technical........................           30          5.0          1.5
Management.......................           30          4.0          1.2
Cost Control.....................           40          4.5          1.8
Composite Value..................          100                       4.5
------------------------------------------------------------------------

    (4) Insert the amount from Block 18 of the DD Form 1547. Block 18 
is total contract costs, excluding general and administrative expenses, 
contractor independent research and development/bid and proposal 
expenses, and facilities capital cost of money.
    (5) Multiply (3) by (4).
    (c) Values: Normal and designated ranges.

------------------------------------------------------------------------
                                          Normal                        
                                          value       Designated range  
                                        (percent)        (percent)      
------------------------------------------------------------------------
Standard..............................         4   2 to 6.              
Alternate.............................         6   4 to 8.              
------------------------------------------------------------------------

    (1) Standard.
    The standard designated range should apply to most contracts.
    (2) Alternate.
    Contracting officers may use the alternate designated range for 
research and development and service contractors when these contractors 
require relatively low capital investment in buildings and equipment 
when compared to the defense industry overall. If the alternate 
designated range is used, do not give any profit for facilities capital 
employed (see 215.404-71-4(c)(3)).
    (d) Evaluation criteria for technical.
    (1) Review the contract requirements and focus on the critical 
performance elements in the statement of work or specifications. 
Factors to consider include--
    (i) Technology being applied or developed by the contractor;
    (ii) Technical complexity;
    (iii) Program maturity;
    (iv) Performance specifications and tolerances;
    (v) Delivery schedule; and
    (vi) Extent of a warranty or guarantee.
    (2) Above normal conditions.
    (i) The contracting officer may assign a higher than normal value 
in those cases where there is a substantial technical risk. Indicators 
are--
    (A) The contractor is either developing or applying advanced 
technologies;
    (B) Items are being manufactured using specifications with 
stringent tolerance limits;
    (C) The efforts require highly skilled personnel or require the use 
of state-of-the-art machinery;
    (D) The services and analytical efforts are extremely important to 
the Government and must be performed to exacting standards;
    (E) The contractor's independent development and investment has 
reduced the Government's risk or cost;
    (F) The contractor has accepted an accelerated delivery schedule to 
need DoD requirements; or
    (G) The contractor has assumed additional risk through warranty 
provisions.
    (ii) Extremely complex, vital efforts to overcome difficult 
technical obstacles that require personnel with exceptional abilities, 
experience, and professional credentials may justify a value 
significantly above normal.
    (iii) The following may justify a maximum value--
    (A) Development or initial production of a new item, particularly 
if performance or quality specifications are tight; or
    (B) A high degree of development or production concurrency.
    (3) Below normal conditions.
    (i) The contracting officer may assign a lower than normal value in 
those cases where the technical risk is low. Indicators are--
    (A) Acquisition is for off-the-shelf items;
    (B) Requirements are relatively simple;
    (C) Technology is not complex;
    (D) Efforts do not require highly skilled personnel;
    (E) Efforts are routine;
    (F) Programs are mature; or
    (G) Acquisition is a follow-on effort or a repetitive type 
acquisition.
    (ii) The contracting officer may assign a value significantly below 
normal for--
    (A) Route services;
    (B) Production of simple items;
    (C) Rote entry or routine integration of Government-furnished 
information; or
    (D) Simple operations with Government-furnished property.
    (e) Evaluation criteria for management.
    (1) The contracting officer should--
    (i) Assess the contractor's management and internal control systems 
using contracting office information and reviews made by field contract 
administration offices or other DoD field offices;
    (ii) Assess the management involvement expected on the prospective 
contract action;
    (iii) Consider the degree of cost mix as an indication of the types 
of resources applied and value added by the contractor; and
    (iv) Consider the contractor's support of Federal socioeconomic 
programs.
    (2) Above normal conditions.
    (i) The contracting officer may assign a higher than normal value 
when the

[[Page 63055]]

management effort is intense. Indicators of this are--
    (A) The contractor's value added is both considerable and 
reasonably difficult;
    (B) The effort involves a high degree of integration or 
coordination; or
    (C) The contractor has a substantial record of active participation 
in Federal socioeconomic programs.
    (ii) The contracting officer may justify a maximum value when the 
effort--
    (A) Requires large scale integration of the most complex nature;
    (B) Involves major international activities with significant 
management coordination (e.g., offsets with foreign vendors); or
    (C) Has critically important milestones.
    (3) Below normal conditions.
    (i) The contracting officer may assign a lower than normal value 
when the management effort is minimal. Indicators of this are--
    (A) The program is mature and many end item deliveries have been 
made;
    (B) The contractor adds minimum value to an item;
    (C) The efforts are routine and require minimal supervision;
    (D) The contractor provides poor quality, untimely proposals;
    (E) The contractor fails to provide an adequate analysis of 
subcontractor costs; or
    (F) The contractor does not cooperate in the evaluation and 
negotiation of the proposal.
    (ii) The following may justify a value significantly below normal--
    (A) Reviews performed by the field contract administration offices 
disclose unsatisfactory management and internal control systems (e.g., 
quality assurance, property control, safety, security); or
    (B) The effort requires an unusually low degree of management 
involvement.
    (f) Evaluation criteria for cost control.
    (1) The contracting officer should evaluate--
    (i) The expected reliability of the contractor's cost estimates 
(including the contractor's cost estimating system);
    (ii) The contractor's cost reduction initiatives (e.g., competition 
advocacy programs, dual sourcing, spare parts pricing reform, value 
engineering);
    (iii) The adequacy of the contractor's management approach to 
controlling cost and schedule; and
    (iv) Any other factors that affect the contractor's ability to meet 
the cost targets, e.g., foreign currency exchange rates and inflation 
rates.
    (2) Above normal conditions.
    The contracting officer may assign a higher than normal value if 
the contractor can demonstrate a highly effective cost control program. 
Indicators of this are--
    (i) The contractor provides fully documented and reliable cost 
estimates;
    (ii) The contractor has an aggressive cost reduction program that 
has demonstrable benefits;
    (iii) The contractor uses a high degree of subcontract competition 
(e.g., aggressive dual sourcing); or
    (iv) The contractor has a proven record of cost tracking and 
control.
    (3) Below normal conditions.
    The contracting officer may assign a lower than normal value if the 
contractor demonstrates minimal concern for cost control. Indicators 
are--
    (i) The contractor's cost estimating system is marginal;
    (ii) The contractor has made minimal effort to initiate cost 
reduction programs;
    (iii) The contractor's cost proposal is inadequate;
    (iv) The contractor has a record of cost overruns or other 
indication of unreliable cost estimates and lack of cost control.


215.404-71-3  Contract type risk and working capital adjustment.

    (a) Description. The contract type risk factor focuses on the 
degree of cost risk accepted by the contractor under varying contract 
types. The working capital adjustment is an adjustment added to the 
profit objective for contract type risk. It only applies to fixed-price 
contracts that provide for progress payments. Though it uses a formula 
approach, it is not intended to be an exact calculation of the cost of 
working capital. Its purpose is to give general recognition to the 
contractor's cost of working capital under varying contract 
circumstances, financing policies, and the economic environment.
    (b) Determination.
    The following extract from the DD 1547 is annotated to explain the 
process.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                Profit  
                Item                     Contractor risk factors                                 Assigned value          Base (item 18)       objective 
--------------------------------------------------------------------------------------------------------------------------------------------------------
25..................................  Contract Type Risk..........                            (1)..................  (2)...................          (3)
                                                                    Cost Financed..........  Length Factor.........  Interest Rate.........             
26..................................  Working Capital (4).........  (5)....................  (6)...................  (7)...................          (8)
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (1) Select a value from the list of contract types in paragraph (c) 
of this subsection using the evaluation criteria in paragraph (d) of 
this subsection.
    (2) Insert the amount from Block 18, i.e., the total allowable 
costs excluding general and administrative expenses, independent 
research and development and bid and proposal expenses, and facilities 
capital cost of money.
    (3) Multiply (1) by (2).
    (4) Only complete this block when the prospective contract is a 
fixed-price contract containing provisions for progress payments.
    (5) Insert the amount computed per paragraph (e) of this 
subsection.
    (6) Insert the appropriate figure from paragraph (f) of this 
subsection.
    (7) Use the interest rate established by the Secretary of the 
Treasury (230.7101-1(a)). Do not use any other interest rate.
    (8) Multiply (5) by (6) by (7). This is the working capital 
adjustment. It shall not exceed 4 percent of the contract costs in 
Block 20.
    (c) Values: Normal and designated ranges.

------------------------------------------------------------------------
                                                             Designated 
         Contract type             Notes     Normal value      range    
                                               (percent)     (percent)  
------------------------------------------------------------------------
Firm fixed-price, no financing          (1)           5    4 to 6.      
Firm fixed-price, with                  (2)           3    2 to 4.      
 financing.                                                             
Fixed-price-incentive, no               (1)           3    2 to 4.      
 financing.                                                             
Fixed-price with                        (3)  ............  .............
 redeterminable provision.                                              
Fixed-price-incentive, with             (2)           1    0 to 2.      
 financing.                                                             

[[Page 63056]]

                                                                        
Cost-plus-incentive-fee.......          (4)           1    0 to 2.      
Cost-plus-fixed-fee...........          (4)            .5  0 to 1.      
Time and material contracts             (5)            .5  0 to 1.      
 (including overhaul contracts                                          
 priced on time and material                                            
 basis).                                                                
Labor-hour contracts..........          (5)            .5  0 to 1.      
Firm fixed-price-level-of-              (5)            .5  0 to 1.      
 effort-term.                                                           
------------------------------------------------------------------------

    (1) ``No financing'' means that the contract either does not 
provide progress payments, or provides them only on a limited basis, 
such as financing of first articles. Do not compute a working capital 
adjustment.
    (2) ``With financing'' means progress payments. When progress 
payments are present, compute a working capital adjustment (Block 26).
    (3) For the purposes of assigning profit values, treat a fixed-
price contract with redeterminable provisions as if it were a fixed-
price-incentive contract with below normal conditions.
    (4) Cost-plus contracts shall not receive the working capital 
adjustment.
    (5) These types of contracts are considered cost-plus-fixed-fee 
contracts for the purposes of assigning profit values. They shall not 
receive the working capital adjustment in Block 26. However, they may 
receive higher than normal values within the designated range to the 
extent that portions of cost are fixed.
    (d) Evaluation criteria--(1) General. The contracting officer 
should consider elements that affect contract type risk such as--
    (i) Length of contract;
    (ii) Adequacy of cost data for projections;
    (iii) Economic environment;
    (iv) Nature and extent of subcontracted activity;
    (v) Protection provided to the contractor under contract provisions 
(e.g., economic price adjustment clauses);
    (vi) The ceilings and share lines contained in incentive 
provisions; and
    (vii) Risks associated with contracts for foreign military sales 
(FMS) that are not funded by U.S. appropriations.
    (2) Mandatory. The contracting officer shall assess the extent to 
which costs have been incurred prior to definitization of the contract 
action (see also 217.7404-6(a)). The assessment shall include any 
reduced contractor risk on both the contract before definitization and 
the remaining portion of the contract. When costs have been incurred 
prior to definitization, generally regard the contract type risk to be 
in the low end of the designated range. If a substantial portion of the 
costs have been incurred prior to definitization, the contracting 
officer may assign a value as low as 0%, regardless of contract type.
    (3) Above normal conditions. The contracting officer may assign a 
higher than normal value when there is substantial contract type risk. 
Indicators of this are--
    (i) Efforts where there is minimal cost history;
    (ii) Long-term contracts without provisions protecting the 
contractor, particularly when there is considerable economic 
uncertainty;
    (iii) Incentive provisions (e.g., cost and performance incentives) 
that place a high degree of risk on the contractor; or
    (iv) FMS sales (other than those under DoD cooperative logistics 
support arrangements or those made from U.S. Government inventories or 
stocks) where the contractor can demonstrate that there are substantial 
risks above those normally present in DoD contracts for similar items.
    (4) Below normal conditions. The contracting officer may assign a 
lower than normal value when the contract type risk is low. Indicators 
of this are--
    (i) Very mature product line with extensive cost history;
    (ii) Relatively short-term contracts;
    (iii) Contractual provisions that substantially reduce the 
contractor's risk; or
    (iv) Incentive provisions that place a low degree of risk on the 
contractor.
    (e) Costs financed. (1) Costs financed equal total costs multiplied 
by the portion (percent) of costs financed by the contractor.
    (2) Total costs equal Block 20 (i.e., all allowable costs, 
including general and administrative and independent research and 
development and bid and proposal, but excluding facilities capital cost 
of money), reduced as appropriate when--
    (i) The contractor has little cash investment (e.g., subcontractor 
progress payments liquidated late in period of performance);
    (ii) Some costs are covered by special financing provisions, such 
as advance payments; or
    (iii) The contract is multiyear and there are special funding 
arrangements.
    (3) The portion financed by the contractor is generally the portion 
not covered by progress payments, i.e., 100% minus the customary 
progress payment rate (FAR 32.501). For example, if a contractor 
receives progress payments at 75%, the portion financed by the 
contractor is 25%. On contracts that provide flexible progress payments 
(252.232-7003) or progress payments to small businesses, use the 
customary progress payment rate for large businesses.
    (f) Contract length factor. (1) This is the period of time that the 
contractor has a working capital investment in the contract. It--
    (i) Is based on the time necessary for the contractor to complete 
the substantive portion of the work;
    (ii) Is not necessarily the period of time between contract award 
and final delivery (or final payment), as periods of minimal effort 
should be excluded;
    (iii) Should not include periods of performance contained in option 
provisions; and
    (iv) Should not, for multiyear contracts, include periods of 
performance beyond that required to complete the initial program year's 
requirements.
    (2) The contracting officer--
    (i) Should use the following table to select the contract length 
factor;
    (ii) Should develop a weighted average contract length when the 
contract has multiple deliveries; and
    (iii) May use sampling techniques, provided they produce a 
representative result.

                                  Table                                 
------------------------------------------------------------------------
                                                               Contract 
           Peirod to perform substantive portion                length  
                                                                factor  
------------------------------------------------------------------------
21 or less.................................................          .40
22 to 27...................................................          .65
28 to 33...................................................          .90
34 to 39...................................................         1.15
40 to 45...................................................         1.40
46 to 51...................................................         1.65
52 to 57...................................................         1.90
58 to 63...................................................         2.15
64 to 69...................................................         2.40
70 to 75...................................................         2.65

[[Page 63057]]

                                                                        
76 or more.................................................         2.90
------------------------------------------------------------------------

    (3) Example: A prospective contract has a performance period of 40 
months with end items being delivered in the 34th, 36th, 38th, and 40th 
months of the contract. The average period is 37 months and the 
contract length factor is 1.15.


215.404-71.4  Facilities capital employed.

    (a) Description. This factor focuses on encouraging and rewarding 
aggressive capital investment in facilities that benefit DoD. It 
recognizes both the facilities capital that the contractor will employ 
in contract performance and the contractor's commitment to improving 
productivity.
    (b) Determination.
    The following extract from the DD Form 1547 has been annotated to 
explain the process.

----------------------------------------------------------------------------------------------------------------
                                           Contractor facilities capital                   Amount       Profit  
                  Item                                employed               Assigned     employed    objective 
----------------------------------------------------------------------------------------------------------------
27......................................  Land...........................          N/A          (2)          N/A
28......................................  Buildings......................          (1)          (2)          (3)
29......................................  Equipment......................          (1)          (2)          (3)
----------------------------------------------------------------------------------------------------------------

    (1) Select a value from the list in paragraph (c) of this 
subsection using the evaluation criteria in paragraph (d) of this 
subsection.
    (2) Use the allocated facilities capital attributable to land, 
buildings, and equipment, as derived in DD Form 1861, ``Contract 
Facilities Capital Cost of Money'' (see 230.7001).
    (i) In addition to the net book value of facilities capital 
employed, consider facilities capital that is part of a formal 
investment plan if the contractor submits reasonable evidence that--
    (A) Achievable benefits to DoD will result from the investment; and
    (B) The benefits of the investment are included in the forward 
pricing structure.
    (ii) If the value of intracompany transfers has been included in 
Block 18 at cost (i.e., excluding general and administrative (G&A) 
expenses and profit), add to the contractor's allocated facilities 
capital, the allocated facilities capital attributable to the buildings 
and equipment of those corporate divisions supplying the intracompany 
transfers. Do not make this addition if the value of intracompany 
transfers has been included in Block 18 at price (i.e., including G&A 
expenses and profit).
    (3) Multiply (1) by (2).
    (c) Values: Normal and designated ranges.

----------------------------------------------------------------------------------------------------------------
                                                                               Normal                           
                  Notes                              Asset type                value         Designated range   
                                                                             (percent)          (percent)       
----------------------------------------------------------------------------------------------------------------
(1).....................................  Land............................            0  N/A                    
(1).....................................  Buildings.......................           15  10 to 20               
(1).....................................  Equipment.......................           35  20 to 50               
(2).....................................  Land............................            0  N/A                    
(2).....................................  Buildings.......................            5  0 to 10                
(2).....................................  Equipment.......................           20  15 to 25               
(3).....................................  Land............................            0  N/A                    
(3).....................................  Buildings.......................            0  0                      
(3).....................................  Equipment.......................            0  0                      
----------------------------------------------------------------------------------------------------------------

    (1) These are the normal values and ranges. They apply to all 
situations except those noted in (2) and (3).
    (2) These alternate values and ranges apply to situations where a 
highly facilitized manufacturing firm will be performing a research and 
development or services contract. They balance the method used to 
allocate facilities capital cost of money, which may produce 
disproportionate allocation of assets to these types of efforts.
    (3) When using a value from the alternate designated range for the 
performance risk factor (215.404-71-2(c)(2)), do not allow profit on 
facilities capital employed.
    (d) Evaluation criteria.
    (1) In evaluating facilities capital employed, the contracting 
officer--
    (i) Should relate the usefulness of the facilities capital to the 
goods or services being acquired under the prospective contract;
    (ii) Should analyze the productivity improvements and other 
anticipated industrial base enhancing benefits resulting from the 
facilities capital investment, including--
    (A) The economic value of the facilities capital, such as physical 
age, undepreciated value, idleness, and expected contribution to future 
defense needs; and
    (B) The contractor's level of investment in defense related 
facilities as compared with the portion of the contractor's total 
business that is derived from DoD;
    (iii) Should consider any contractual provisions that reduce the 
contractor's risk of investment recovery, such as termination 
protection clause, capital investment indemnification, and productivity 
saving rewards; and
    (iv) Shall ensure that increases in facilities capital investments 
are not merely asset revaluations attributable to mergers, stock 
transfers, take-overs, sales of corporate entities, or similar actions.
    (2) Above normal conditions. (i) The contracting officer may assign 
a higher than normal value if the facilities capital investment has 
direct, identifiable, and exceptional benefits. Indicators are--
    (A) New investments in state-of-the-art technology that reduce 
acquisition cost or yield other tangible benefits such as improved 
product quality or accelerated deliveries;
    (B) Investments in new equipment for research and development 
applications; or
    (C) Contractor demonstration that the investments are over and 
above the normal capital investments necessary to

[[Page 63058]]

support anticipated requirements of DoD programs.
    (ii) The contracting officer may assign a value significantly above 
normal when there are direct and measurable benefits in efficiency and 
significantly reduced acquisition costs on the effort being priced. 
Maximum values apply only to those cases where the benefits of the 
facilities capital investment are substantially above normal.
    (3) Below normal conditions. (i) The contracting officer may assign 
a lower than normal value if the facilities capital investment has 
little benefit to DoD. Indicators are--
    (A) Allocations of capital apply predominantly to commercial item 
lines;
    (B) Investments are for such things as furniture and fixtures, home 
or group level administrative offices, corporate aircraft and hangars, 
gymnasiums; or
    (C) Facilities are old or extensively idle.
    (ii) The contracting officer may assign a value significantly below 
normal when a significant portion of defense manufacturing is done in 
an environment characterized by outdated, inefficient, and labor-
intensive capital equipment.


215.404-72  Modified weighted guidelines method for nonprofit 
organizations.

    (a) Definition. As used in this subpart, a nonprofit organization 
is a business entity--
    (1) That operates exclusively for charitable, scientific, or 
educational purposes;
    (2) Whose earnings do not benefit any private shareholder or 
individual;
    (3) Whose activities do not involve influencing legislation or 
political campaigning for any candidate for public office; and
    (4) That is exempted from Federal income taxation under section 501 
of the Internal Revenue Code.
    (b) For nonprofit organizations that are Federally Funded Research 
and Development Centers (FFRDCs), the contracting officer--
    (1) Should consider whether any fee is appropriate. Considerations 
shall include the FFRDC's--
    (i) Proportion of retained earnings (as established under generally 
accepted accounting methods) that relates to DoD contracted effort;
    (ii) Facilities capital acquisition plans;
    (iii) Working capital funding as assessed on operating cycle cash 
needs;
    (iv) Contingency funding; and
    (v) Provision for funding unreimbursed costs deemed ordinary and 
necessary to the FFRDC.
    (2) Shall, when a fee is considered appropriate, compute the fee 
objective using the weighted guidelines method in 215.404-71, with the 
following modifications--
    (i) Modifications to performance risk (Blocks 21-24 of the DD Form 
1547).
    (A) If the contracting officer assigns a value from the standard 
designated range (215.404-71-2(c)), reduce the fee objective by an 
amount equal to 1% of the costs in Block 18 of the DD Form 1547. Show 
the net (reduced) amount on the DD Form 1547.
    (B) If the contracting officer assigns a value from the alternate 
designated range, reduce the fee objective by an amount equal to 2% of 
the costs in Block 18 of the DD Form 1547. Show the net (reduced) 
amount on the DD Form 1547.
    (ii) Modifications to contract type risk (Block 25 of the DD Form 
1547). Use a designated range of -1% to 8% in lieu of the values in 
215.404-71-3. There is no normal value.
    (c) For nonprofit organizations that are entities that have been 
identified by the Secretary of Defense or a Secretary of a Department 
as receiving sustaining support on a cost-plus-fixed-fee basis from a 
particular DoD department or agency, compute a fee objective for 
covered actions using the weighted guidelines method in 215.404-71, 
modified as described in paragraph (b)(2) of this subsection.
    (d) For all other nonprofit organizations, compute a fee objective 
for covered actions using the weighted guidelines method in 215.404-71, 
modified as described in paragraph (b)(2)(i) of this subsection.


215.404-73  Alternative structured approaches.

    (a) The contracting officer may use an alternate structured 
approach under 215.404-4(c).
    (b) The contracting officer may design the structure of the 
alternate, but it shall include--
    (1) Consideration of the three basic components of profit--
performance risk, contract type risk (including working capital), and 
facilities capital employed. However, the contracting officer is not 
required to complete Blocks 21 through 30 of the DD Form 1547.
    (2) Offset for facilities capital cost of money.
    (i) The contracting officer shall reduce the overall prenegotiation 
profit objective by the lesser of 1% of total cost or the amount of 
facilities capital cost of money. The profit amount in the negotiation 
summary of the DD Form 1547 must be net of the offset.
    (ii) This adjustment is needed for the following reason: The values 
of the profit factors used in the weighted guidelines method were 
adjusted to recognize the shift in facilities capital cost of money 
from an element of profit to an element of contract cost (see FAR 
31.205-10) and reductions were made directly to the profit factors for 
performance risk. In order to ensure that this policy is applied to all 
DoD contracts that allow facilities capital cost of money, similar 
adjustments shall be made to contracts that use alternate structured 
approaches.


215.404-74  Fee requirements for cost-plus-award-fee contracts.

    In developing a fee objective for cost-plus-award-fee contracts, 
the contracting officer shall--
    (a) Follow the guidance in FAR 16.404-2 and 216.404-2;
    (b) Not use the weighted guidelines method or alternate structured 
approach;
    (c) Apply the offset policy in 215.404-73(b)(2) for facilities 
capital cost of money, i.e., reduce the base fee by the lesser of 1% of 
total costs or the amount of facilities capital cost of money; and
    (d) Not complete a DD Form 1547.


215.404-75  Reporting profit and fee statistics.

    (a) Contracting officers in contracting offices that participate in 
the management information system for profit and fee statistics shall 
send completed DD Forms 1547 on actions of $500,000 or more, where the 
contracting officer used either the weighted guidelines method, an 
alternate structured approach, or the modified weighted guidelines 
method, to their designated office within 30 days after contract award.
    (b) Participating contracting offices and their designated offices 
are--

[[Page 63059]]



------------------------------------------------------------------------
           Contracting office                   Designated office       
------------------------------------------------------------------------
                                  Army                                  
------------------------------------------------------------------------
All....................................  Army Procurement Research and  
                                          Analysis Office, Attn: SFRD-  
                                          KPR (WGL), Bldg 12500, C Wing,
                                          Ft. Lee, VA 23801-6045.       
------------------------------------------------------------------------
                                  Navy                                  
------------------------------------------------------------------------
*Naval Air Systems Command.............  Commander, Fleet and Industrial
                                          Supply Center, Norfolk,       
                                          Washington Detachment, Code   
                                          402, Washington Navy Yard,    
                                          Washington, DC 20374.         
*Naval Sea Systems Command                                              
*Space and Naval Warfare Systems                                        
 Command                                                                
*Naval Facilities Engineering Command                                   
*Naval Supply Systems Command                                           
*Office of Naval Research                                               
*Headquarters, United States Marine                                     
 Corps                                                                  
*Strategic Systems Programs Office                                      
*Military Sealift Command                                               
*Automatic Data Processing Selection                                    
 Office                                                                 
*Navy Regional Data Automation Center                                   
*Naval Research Laboratory                                              
*Navy Commercial Communications Center                                  
*Naval Aviation Depot Operations Center                                 
    *Includes all subordinate field                                     
     offices                                                            
------------------------------------------------------------------------
                                Air Force                               
------------------------------------------------------------------------
Air Force Materiel Command, (all field   Air Force Materiel Command, 645
 offices).                                CCSG/SCOS, Attn: J010 Clerk,  
                                          2721 Sacramento Street, Wright-
                                          Patterson Air Force Base, OH  
                                          45433.                        
------------------------------------------------------------------------

    (c) When negotiation of a contract action over $500,000 has been 
delegated to another contracting agency (e.g., to an administrative 
contracting officer), that agency shall ensure that a copy of the DD 
Form 1547 is provided to the delegating office for reporting purposes 
within 30 days from negotiation of the contract action.
    (d) Contracting offices outside the United States, its possessions, 
and Puerto Rico are exempt from reporting.
    (e) Designated offices send a quarterly (non-cumulative) report of 
DD Form 1547 data to--

Washington Headquarters Service, Directorate for Information Operations 
and Reports, (WHS/DIOR), 1215 Jefferson Davis Highway, Suite 1204, 
Arlington, VA 22202-4302

    (f) In preparing and sending the quarterly report, designated 
offices--
    (1) Perform the necessary audits to ensure information accuracy;
    (2) Do not enter classified information;
    (3) Transmit the report via computer magnetic tape using the 
procedures, format, and editing process issued by the Director of 
Defense Procurement; and
    (4) Send the reports not later than the 30th day after the close of 
the quarterly reporting periods.
    (g) These reporting requirements have been assigned report control 
symbol: P&L(Q)1751.


215.406-1  Prenegotiation objectives.

    (a) Also consider--
    (i) Data resulting from application of work measurement systems in 
developing prenegotiation objectives; and
    (ii) Field pricing assistance personnel participation in planned 
prenegotiation and negotiation activities.
    (b) Prenegotiation objectives, including objectives related to 
disposition of findings and recommendations contained in preaward and 
postaward contract audit and other advisory reports, shall be 
documented and reviewed in accordance with Departmental procedures.


215.406-3  Documenting the negotiation.

    (a)(7) Include the principal factors related to the disposition of 
findings and recommendations contained in preaward and postaward 
contract audit and other advisory reports.
    (10) The documentation--
    (A) Must address significant deviations from the prenegotiation 
profit objectives;
    (B) Should include the DD Form 1547, Record of Weighted Guidelines 
Application (see 215.404-70), if used, with supporting rationale; and
    (C) Must address the rationale for not using the weighted 
guidelines method when its use would otherwise be required by 215.404-
70.


215.407-1  Defective cost or pricing data.

    (b)(2) Unless there is clear evidence to the contrary, the 
contracting officer may presume the defective data were relied on and 
resulted in a contract price increase equal to the amount of the defect 
plus related overhead and profit or fee. The contracting officer is not 
expected to reconstruct the negotiation by speculating as to what would 
have been considered by the negotiating parties if the nondefective 
data had been known.


215.407-2  Make-or-buy programs.

    (e) Program requirements.--(1) Items and work included. The minimum 
dollar amount is $1 million.


215.407-3  Forward pricing rate agreements.

    (b)(i) Use forward pricing rate agreement (FPRA) rates when such 
rates are available, unless waived on a case-by-case basis by the head 
of the contracting activity.
    (ii) Advise the ACO of each case waived.
    (iii) Contact the ACO for questions on FPRAs or recommended rates.


215.407-4  Should-cost review.

    (b) Program should-cost review. (2) DoD contracting activities 
should consider performing a program should-cost review before award of 
a definitive major systems contract exceeding $100 million.

[[Page 63060]]

    (c) Overhead should-cost review. (1) Contact the DCMC/DLA Overhead 
Center, Fort Belvoir, VA 22060-6221, at (703) 767-3387, for questions 
on overhead should-cost analysis.
    (2)(A) The Defense Contract Management Command/Defense Logistics 
Agency (DCMC/DLA), or the military department responsible for 
performing contract administration functions (e.g., Navy SUPSHIP), 
should consider, based on risk assessment, performing an overhead 
should-cost review of a contractor business unit (as defined in FAR 
31.001) when all of the following conditions exist:
    (1) Projected annual sales to DoD exceed $1 billion;
    (2) Projected DoD versus total business exceeds 30 percent;
    (3) Level of sole-source DoD contracts is high;
    (4) Significant volume of proposal activity is anticipated;
    (5) Production or development of a major weapon system or program 
is anticipated; and
    (6) Contractor cost control/reduction initiatives appear 
inadequate.
    (B) The head of the contracting activity may request an overhead 
should-cost review for a business unit that does not meet the criteria 
in paragraph (b)(1) of this subsection.
    (C) Overhead should-cost reviews are labor intensive. These reviews 
generally involve participation by the contracting, contract 
administration, and contract audit elements. The extent of availability 
of military department, contract administration, and contract audit 
resources to support DCMC/DLA-led teams should be considered when 
determining whether a review will be conducted. Overhead should-cost 
reviews generally shall not be conducted at a contractor business 
segment more frequently than every three years.


215.407-5  Estimating systems.


215.407-5-70  Disclosure, maintenance, and review requirements.

    (a) Definitions.
    (1) ``Adequate estimating system'' means an estimating system 
that--
    (i) Is established, maintained, reliable, and consistently applied; 
and
    (ii) Produces verifiable, supportable, and documented cost 
estimates.
    (2) ``Contractor'' means a business unit as defined in FAR 31.001.
    (3) ``Estimating system'' is as defined in the clause at 252.215-
7002, Cost Estimating System Requirements.
    (4) ``Significant estimating system deficiency'' means a 
shortcoming in the estimating system that is likely to consistently 
result in proposal estimates for total cost or a major cost element(s) 
that do not provide an acceptable basis for negotiation of fair and 
reasonable prices.
    (b) Applicability.
    (1) DoD policy is that all contractors have estimating systems 
that--
    (i) Are adequate;
    (ii) Consistently produce well-supported proposals that are 
acceptable as a basis for negotiation of fair and reasonable prices;
    (iii) Are consistent with and integrated with the contractor's 
related management systems; and
    (iv) Are subject to applicable financial control systems.
    (2) A large business contractor is subject to estimating system 
disclosure, maintenance, and review requirements if--
    (i) In its preceding fiscal year the contractor received DoD prime 
contracts or subcontracts totaling $50 million or more for which cost 
or pricing data were required; or
    (ii) In its preceding fiscal year the contractor received DoD prime 
contracts or subcontracts totaling $10 million or more (but less than 
$50 million) for which cost or pricing data were required and the 
contracting officer, with concurrence or at the request of the 
administrative contracting officer (ACO), determines it to be in the 
best interest of the Government (e.g., significant estimating problems 
are believed to exist or the contractor's sales are predominantly 
Government).
    (c) Responsibilities.
    (1) The contracting officer shall--
    (i) Through use of the clause at 252.215-7002, Cost Estimating 
System Requirements, apply the disclosure, maintenance, and review 
requirements to large business contractors meeting the criteria in 
paragraph (b)(2)(i) of this subsection;
    (ii) Consider whether to apply the disclosure, maintenance, and 
review requirements to large business contractors under paragraph 
(b)(2)(ii) of this subsection; and
    (iii) Not apply the disclosure, maintenance, and review requirement 
to other than large business contractors.
    (2) The cognizant ACO, for contractors subject to paragraph (b)(2) 
of this subsection, shall--
    (i) Determine the adequacy of the disclosure and system; and
    (ii) Pursue correction of any deficiencies.
    (3) The cognizant auditor, on behalf of the ACO, serves as team 
leader in conducting estimating system reviews.
    (4) A contractor subject to estimating system disclosure, 
maintenance, and review requirements shall--
    (i) Maintain an adequate system;
    (ii) Describe its system to the ACO;
    (iii) Provide timely notice of changes in the system; and
    (iv) Correct system deficiencies identified by the ACO.
    (d) Characteristics of an adequate estimating system.
    (1) General. An adequate system should provide for the use of 
appropriate source data, utilize sound estimating techniques and good 
judgment, maintain a consistent approach, and adhere to estimated 
policies and procedures.
    (2) Evaluation. In evaluating the adequacy of a contractor's 
estimating system, the ACO should consider whether the contractor's 
estimating system, for example--
    (i) Establishes clear responsibility for preparation, review, and 
approval of cost estimates;
    (ii) Provides a written description of the organization and duties 
of the personnel responsible for preparing, reviewing, and approving 
cost estimates;
    (iii) Assures that relevant personnel have sufficient training, 
experience, and guidance to perform estimating tasks in accordance with 
the contractor's established procedures;
    (iv) Identifies the sources of data and the estimating methods and 
rationale used in developing cost estimates;
    (v) Provides for appropriate supervision throughout the estimating 
process;
    (vi) Provides for consistent application of estimating techniques;
    (vii) Provides for detection and timely correction of errors;
    (viii) Protects against cost duplication and omissions;
    (ix) Provides for the use of historical experience, including 
historical vendor pricing information, where appropriate;
    (x) Requires use of appropriate analytical methods;
    (xi) Integrates information available from other management 
systems, where appropriate;
    (xii) Requires management review including verification that the 
company's estimating policies, procedures and practices comply with 
this regulation;
    (xiii) Provides for internal review of and accountability for the 
adequacy of the estimating system, including the comparison of 
projected results to actual results and an analysis of any differences;
    (xiv) Provides procedures to update cost estimates in a timely 
manner throughout the negotiation process; and
    (xv) Addresses responsibility for review and analysis of the 
reasonableness of subcontract prices.

[[Page 63061]]

    (3) Indicators of potentially significant estimating deficiencies. 
The following examples indicate conditions that may produce or lead to 
significant estimating deficiencies--
    (i) Failure to ensure that historical experience is available to 
and utilized by cost estimators, where appropriate;
    (ii) Continuing failure to analyze material costs or failure to 
perform subcontractor cost reviews as required;
    (iii) Consistent absence of analytical support for significant 
proposed cost amounts;
    (iv) Excessive reliance on individual personal judgment where 
historical experience of commonly utilized standards are available;
    (v) Recurring significant defective pricing findings within the 
same cost element(s);
    (vi) Failure to integrate relevant parts of other management 
systems (e.g., production control or cost accounting) with the 
estimating system so that the ability to generate reliable cost 
estimates is impaired; and
    (vii) Failure to provide established policies, procedures, and 
practices to persons responsible for preparing and supporting 
estimates.
    (e) Review procedures. Cognizant audit and contract administration 
activities shall--
    (1) Establish and manage regular programs for reviewing selected 
contractors' estimating systems.
    (2) Conduct reviews as a team effort.
    (i) The contract auditor will be the team leader.
    (ii) The team leader will--
    (A) Coordinate with the ACO to ensure that team membership includes 
qualified contract administration technical specialists.
    (B) Advise the ACO and contractor of significant findings during 
the conduct of the review and during the exit conference.
    (C) Prepare a team report.
    (1) The ACO or a representative should--
    (i) Coordinate the contract administration activity's review;
    (ii) Consolidate findings and recommendations; and
    (iii) When appropriate, prepare a comprehensive written report for 
submission to the auditor.
    (2) The contract auditor will attach the ACO's report to the team 
report.
    (3) Tailor reviews to take full advantage of the day-to-day work 
done by both organizations.
    (4) Conduct a review every three years of contractors subject to 
the disclosure requirements. The ACO and auditor may lengthen or 
shorten the three-year period based on their joint risk assessment of 
the contractor's past experience and current vulnerability.
    (f) Disposition of survey team findings.
    (1) Reporting of survey team findings. The auditor will document 
the findings and recommendations of the survey team in a report to the 
ACO. If there are significant estimating deficiencies, the auditor will 
recommend disapproval of all or portions of the estimating system.
    (2) Initial notification to the contractor. The ACO will provide a 
copy of the team report to the contractor and, unless there are no 
deficiencies mentioned in the report, ask the contractor to submit a 
written response in 30 days, or a reasonable extension.
    (i) If the contractor agrees with the report, the contractor has 60 
days from the date of initial notification to correct any identified 
deficiencies or submit a corrective action plan showing milestones and 
actions to eliminate the deficiencies.
    (ii) If the contractor disagrees, the contractor should provide 
rationale in its written response.
    (3) Evaluation of contractor's response. The ACO, in consultation 
with the auditor, will evaluate the contractor's response to determine 
whether--
    (i) The estimating system contains deficiencies that need 
correction;
    (ii) The deficiencies are significant estimating deficiencies that 
would result in disapproval of all or a portion of the contractor's 
estimating system; or
    (iii) The contractor's proposed corrective actions are adequate to 
eliminate the deficiency.
    (4) Notification of ACO determination. The ACO will notify the 
contractor and the auditor of the determination and, if appropriate, of 
the Government's intent to disapprove all or selected portions of the 
system. The notice shall--
    (i) List the cost elements covered;
    (ii) Identify any deficiencies requiring correction; and
    (iii) Require the contractor to correct the deficiencies within 45 
days or submit an action plan showing milestones and actions to 
eliminate the deficiencies.
    (5) Notice of disapproval. If the contractor has neither submitted 
an acceptable corrective action plan nor corrected significant 
deficiencies within 45 days, the ACO shall disapprove all or selected 
portions of the contractor's estimating system. The notice of 
disapproval must--
    (i) Identify the cost elements covered;
    (ii) List the deficiencies that prompted the disapproval; and
    (iii) Be sent to the cognizant auditor, and each contracting and 
contract administration office having substantial business with the 
contractor.
    (6) Monitoring contractor's corrective action. The auditor and ACO 
will monitor the contractor's progress in correcting deficiencies. If 
the contractor fails to make adequate progress, the ACO shall take 
whatever action is necessary to ensure that the contractor corrects the 
deficiencies. Examples of actions the ACO can take are: bringing the 
issue to the attention of higher-level management, reducing or 
suspending progress payments (see FAR 32.503-6), and recommending 
nonaward of potential contracts.
    (7) Withdrawal of estimating system disapproval. The ACO will 
withdraw the disapproval when the ACO determines that the contractor 
has corrected the significant system deficiencies. The ACO will notify 
the contractor, the auditor, and affected contracting and contract 
administration activities of the withdrawal.
    (g) Impact of estimating system deficiencies on specific proposals.
    (1) Field pricing teams will discuss identified estimating system 
deficiencies and their impact in all reports on contractor proposals 
until the deficiencies are resolved.
    (2) The contracting officer responsible for negotiation of a 
proposal generated by an estimating system with an identified 
deficiency shall evaluate whether the deficiency impacts the 
negotiations. If it does not, the contracting officer should proceed 
with negotiations. If it does, the contracting officer should consider 
other alternatives, e.g.--
    (i) Allowing the contractor additional time to correct the 
estimating system deficiency and submit a corrected proposal;
    (ii) Considering another type of contract, e.g., and FPIF instead 
of an FFP;
    (iii) Using additional cost analysis techniques to determine the 
reasonableness of the cost elements affected by the system's 
deficiency;
    (iv) Segregating the questionable areas as a cost reimbursable line 
item;
    (v) Reducing the negotiation objective for profit or fee; or
    (vi) Including a contract (reopener) clause that provides for 
adjustment of the contract amount after award.
    (3) The contracting officer who incorporates a reopener clause into 
the contract is responsible for negotiating price adjustments required 
by the clause. Any reopener clause necessitated by an estimating 
deficiency should--

[[Page 63062]]

    (i) Clearly identify the amounts and items that are in question at 
the time of negotiation;
    (ii) Indicate a specific time or subsequent event by which the 
contractor will submit a supplemental proposal, including cost or 
pricing data, identifying the cost impact adjustment necessitated by 
the deficient estimating system;
    (iii) Provide for the contracting officer to unilaterally adjust 
the contract price if the contractor fails to submit the supplemental 
proposal; and
    (iv) Provide that failure of the Government and the contractor to 
agree to the price adjustment shall be a dispute under the Disputes 
clause.


215.408  Solicitation provisions and contract clauses.

    (1) Use the clause at 252.215-7000, Pricing Adjustments, in 
solicitations and contracts that contain the clause at--
    (i) FAR 52.215-11, Price Reduction for Defective Cost or Pricing 
Data-Modifications;
    (ii) FAR 52.215-12, Subcontractor Cost or Pricing Data; or
    (iii) FAR 52.215-13, Subcontractor Cost or Pricing Data--
Modifications.
    (2) Use the clause at 252.215-7002, Cost Estimating System 
Requirements, in all solicitations and contracts to be awarded on the 
basis of cost or pricing data.


215.470  Estimated data prices.

    (a) The Department of Defense requires estimates of the prices of 
data in order to evaluate the cost to the Government of data items in 
terms of their management, product, or engineering value.
    (b) When data are required to be delivered under a contract, the 
solicitation will include DD Form 1423, Contract Data Requirements 
List. The form and the provision included in the solicitation request 
the offeror to state what portion of the total price is estimated to be 
attributable to the production or development of the listed data for 
the Government (not to the sale of rights in the data). However, 
offerors' estimated prices may not reflect all such costs; and 
different offerors may reflect these costs in a different manner, for 
the following reasons:
    (1) Differences in business practices in competitive situations;
    (2) Differences in accounting systems among offerors;
    (3) Use of factors or rates on some portions of the data;
    (4) Application of common effort to two or more data items; and
    (5) Differences in data preparation methods among offerors.
    (c) Data price estimates should not be used for contract pricing 
purposes without further analysis.
    (d) The contracting officer shall ensure that the contract does not 
include a requirement for data that the contractor has delivered or is 
obligated to deliver to the Government under another contract or 
subcontract, and that the successful offeror identifies any such data 
required by the solicitation. However, where duplicate data are 
desired, the contract price shall include the costs of duplication, but 
not of preparation, of such data.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    3. Section 252.215-7000 is amended by revising the introductory 
text to read as follows:


252.215-7000  Pricing Adjustments.

    As prescribed in 215.408(1), use the following clause:
* * * * *
    4. Section 252.215-7002 is amended by revising the introductory 
text to read as follows:


252.215-7002  Cost Estimating System Requirements.

    As prescribed in 215.408(2), use the following clause:
* * * * *
    5. Section 252.243-7000 is amended by revising the clause date and 
paragraph (c)(1) to read as follows:


252.243-7000  Engineering Change Proposals.

* * * * *
Engineering Change Proposals (XXX 19XX)
* * * * *
    (c) * * *
    (1) A completed contract pricing proposal; and
* * * * *
[FR Doc. 97-31109 Filed 11-25-97; 8:45 am]
BILLING CODE 5000-04-M`