```
[Federal Register Volume 61, Number 18 (Friday, January 26, 1996)]
[Rules and Regulations]
[Pages 2635-2636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-1022]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 15

[FAC 90-37; FAR Case 92-017; Item VIII]
RIN 9000-AF79

Federal Acquisition Regulation; Overhead Should-Cost Reviews

AGENCIES: Department of Defense (DOD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council have agreed to amend the Federal 
Acquisition Regulation (FAR) to add guidance on overhead should-cost 
reviews. This regulatory action was not subject to Office of Management 
and Budget review under Executive Order 12866, dated September 30, 
1993.

EFFECTIVE DATE: March 26, 1996.

FOR FURTHER INFORMATION CONTACT:
Mr. Jeremy Olson at (202) 501-3221 in reference to this FAR case. For 
general information, contact the FAR Secretariat, Room 4037, GS 
Building, Washington, DC 20405, (202) 501-4755. Please cite FAC 90-37, 
FAR case 92-017.

SUPPLEMENTARY INFORMATION: 

A. Background

    An amendment to FAR 15.810 was published in the Federal Register at 
59 FR 16388, April 6, 1994, as a proposed rule with a request for 
comments. Six responses were received. The Councils' analysis of those 
comments did not result in any revisions to the proposed rule 
previously published.

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not have a significant economic impact on a substantial 
number of small entities under the Regulatory Flexibility Act, 5 U.S.C. 
601, et seq., because contracts awarded to small entities rarely are 
subject to program or overhead should-cost reviews.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose recordkeeping or information collection 
requirements, or collections of information from offerors, contractors, 
or members of the public which require the approval of the Office of 
Management and Budget under 44 U.S.C. 3501, et seq.

List of Subjects in 48 CFR Part 15

    Government procurement.

    Dated: January 11, 1996.
Edward C. Loeb,
Acting Director, Office of Federal Acquisition Policy.

    Therefore, 48 CFR Part 15 is amended as set forth below:

PART 15--CONTRACTING BY NEGOTIATION

    1. The authority citation for 48 CFR Part 15 continues to read as 
follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

    2. Section 15.810 is revised to read as follows:

15.810  Should-cost review.

15.810-1  General.

    (a) Should-cost reviews are a specialized form of cost analysis. 
Should-cost reviews differ from traditional evaluation methods. During 
traditional reviews, local contract audit 

[[Page 2636]]

and contract administration personnel primarily base their evaluation 
of forecasted costs on an analysis of historical costs and trends. In 
contrast, should-cost reviews do not assume that a contractor's 
historical costs reflect efficient and economical operation. Instead, 
these reviews evaluate the economy and efficiency of the contractor's 
existing work force, methods, materials, facilities, operating systems, 
and management. These reviews are accomplished by a multi-functional 
team of Government contracting, contract administration, pricing, 
audit, and engineering representatives. The objective of should-cost 
reviews is to promote both short and long-range improvements in the 
contractor's economy and efficiency in order to reduce the cost of 
performance of Government contracts. In addition, by providing 
rationale for any recommendations and quantifying their impact on cost, 
the Government will be better able to develop realistic objectives for 
negotiation.
    (b) There are two types of should-cost reviews--program should-cost 
review (see 15.810-2) and overhead should-cost review (see 15.810-3). 
These should-cost reviews may be performed together or independently. 
The scope of a should-cost review can range from a large-scale review 
examining the contractor's entire operation (including plant-wide 
overhead and selected major subcontractors) to a small-scale tailored 
review examining specific portions of a contractor's operation.

15.810-2  Program should-cost review.

    (a) Program should-cost review is used to evaluate significant 
elements of direct costs, such as material and labor, and associated 
indirect costs, usually incurred in the production of major systems. 
When a program should-cost review is conducted relative to a contractor 
proposal, a separate audit report on the proposal is required.
    (b) A program should-cost review should be considered, particularly 
in the case of a major system acquisition (see part 34), when--
    (1) Some initial production has already taken place;
    (2) The contract will be awarded on a sole-source basis;
    (3) There are future year production requirements for substantial 
quantities of like items;
    (4) The items being acquired have a history of increasing costs;
    (5) The work is sufficiently defined to permit an effective 
analysis and major changes are unlikely;
    (6) Sufficient time is available to plan and conduct the should-
cost review adequately; and
    (7) Personnel with the required skills are available or can be 
assigned for the duration of the should-cost review.
    (c) The contracting officer should decide which elements of the 
contractor's operation have the greatest potential for cost savings and 
assign the available personnel resources accordingly. While the 
particular elements to be analyzed are a function of the contract work 
task, elements such as manufacturing, pricing and accounting, 
management and organization, and subcontract and vendor management are 
normally reviewed in a should-cost review.
    (d) In acquisitions for which a program should-cost review is 
conducted, a separate program should-cost review team report, prepared 
in accordance with agency procedures, is required. Field pricing 
reports are required only to the extent that they contribute to the 
combined team position. The contracting officer shall consider the 
findings and recommendations contained in the program should-cost 
review team report when negotiating the contract price. After 
completing the negotiation, the contracting officer shall provide the 
administrative contracting officer (ACO) a report of any identified 
uneconomical or inefficient practices, together with a report of 
correction or disposition agreements reached with the contractor. The 
contracting officer shall establish a follow-up plan to monitor the 
correction of the uneconomical or inefficient practices.
    (e) When a program should-cost review is planned, the contracting 
officer should state this fact in the acquisition plan (see subpart 
7.1) and in the solicitation.

15.810-3  Overhead should-cost review.

    (a) An overhead should-cost review is used to evaluate indirect 
costs, such as fringe benefits, shipping and receiving, facilities and 
equipment, depreciation, plant maintenance and security, taxes, and 
general and administrative activities. It is normally used to evaluate 
and negotiate a forward pricing rate agreement (FPRA) with the 
contractor. When an overhead should-cost review is conducted, a 
separate audit report is required.
    (b) The following factors should be considered when selecting 
contractor sites for overhead should-cost reviews:
    (1) Dollar amount of Government business.
    (2) Level of Government participation.
    (3) Level of noncompetitive Government contracts.
    (4) Volume of proposal activity.
    (5) Major system or program.
    (6) Mergers, acquisitions, takeovers.
    (7) Other conditions, e.g., changes in accounting systems, 
management, or business activity.
    (c) The objective of the overhead should-cost review is to evaluate 
significant indirect cost elements in-depth, identify inefficient and 
uneconomical practices, and recommend corrective action. If it is 
conducted in conjunction with a program should-cost review, a separate 
overhead should-cost review report is not required. However, the 
findings and recommendations of the overhead should-cost team, or any 
separate overhead should-cost review report, shall be provided to the 
ACO. The ACO should use this information to form the basis for the 
Government position in negotiating a FPRA with the contractor. The ACO 
shall establish a follow-up plan to monitor the correction of the 
uneconomical or inefficient practices.

[FR Doc. 96-1022 Filed 1-25-96; 8:45 am]
BILLING CODE 6820-EP-M
```