Acquisition regulations: Agency structured approach for profit or fee objective,

[Federal Register: June 8, 1999 (Volume 64, Number 109)]

[Proposed Rules]

[Page 30468-30472]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr08jn99-37]

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 1815

NASA Structured Approach for Profit or Fee Objective

AGENCY: National Aeronautics and Space Administration.

ACTION: Proposed rule.

SUMMARY: This proposed NASA FAR Supplement (NFS) revision modifies the agency's structured approach for developing a profit or fee objective. This change eliminates the element of cost approach currently prescribed for establishing profit and fee objectives and focuses on performance risk analysis which requires the evaluation of specific technical, management and cost risk factors; provides a new method for determining contract type risk and introduces a working capital adjustment provision; and retains with modification the Other Considerations factor contained in the structured approach currently prescribed. The new form for developing the profit/fee objectives, NASA Form 634, is provided for information at the end of the proposed rule as an attachment to the preamble. An electronic version is also available at http://ec.msfc.nasa.gov/hq/library/NF634-2.xlc.

DATES: Comments should be submitted on or before August 9, 1999.

ADDRESSES: Interested parties should submit written comments to Donna Fortunat, NASA Headquarters, Office of Procurement, Analysis Division (Code HC), Washington, DC 20546. Comments may also be submitted by e- mail to donna.fortunat@hq.nasa.gov.

FOR FURTHER INFORMATION CONTACT: Donna Fortunat, NASA Headquarters, Code HC, Washington, DC 20546, telephone: (202) 358-0426; email: donna.fortunat@hq.nasa.gov.

SUPPLEMENTARY INFORMATION:

Background

FAR 15.404-4(b)(1)(i) requires agencies to use a structured approach for determining profit or fee prenegotiation objectives. This proposed revision to the NASA structured approach method uses a performance risk method for calculating profit and fee objectives instead of the currently used cost element approach. The revised approach is expected to provide more appropriate emphasis on the nature of the goods and services being acquired and on the risks inherent in delivering those goods and services and thereby prove to be more effective in motivating and rewarding contractor performance. In addition, the revised policy provides a common framework for NASA and industry to evaluate potential risk and profitability in a way that is relevant to both parties. FAR 15.404-4(b)(2) permits agencies to use another agency's structured approach and the changes in this revised policy represent an Agency adaptation of DoD's alternate structured approach.

Impact

Regulatory Flexibility Act

An initial Regulatory Flexibility Analysis has not been prepared because the proposed change 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. Most small entities receive contracts based on competition and are not subject to the structured fee process.

Paperwork Reduction Act

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

List of Subjects in CFR Part 1815

Government Procurement

Tom Luedtke, Acting Associate Administrator for Procurement.

Accordingly, 48 CFR Part 1815 is proposed to be amended as follows:

PART 1815--CONTRACTING BY NEGOTIATION

1. The authority citation for 48 CFR Part 1815 continues to read as follows:

   Authority: 42 U.S.C. 2473(c)(1).

2. Sections 1815.404-4, 1815.404-470, and 1815.404-471 are revised and sections 1815.404-471-1, 1815.404-471-2, 1815.404-471-3, 1815.404- 471-4, and 1815.404-471-5 are added to read as follows:

   1815.404-4 Profit. (NASA supplements paragraphs (b) and (c))

   (b)(1)(i)(a) The NASA structured approach for determining profit or fee objectives, described in 1815.404-471 shall be used to determine profit or fee objectives in the negotiation of contracts greater than or equal to $100,000 that use cost analysis and are:

   (1) Awarded on the basis of other than full and open competition (see FAR 6.3);

   (2) Awarded under NASA Research Announcements (NRAs) and Announcements of Opportunity (AO's); or

   (3) Awarded under the Small Business Innovative Research (SBIR) or the Small Business Technology Transfer Research (STTR) programs.

   (b) The rate calculated for the basic contract may be used on all actions under the contract, provided that conditions affecting profit or fee do not change.

   (c) Although specific agreement on the applied weights or values for individual profit or fee factors shall not be attempted, the contracting officer may encourage the contractor to--

   (1) Present the details of its proposed profit amounts in the structured approach format or similar structured approach; and

   (2) Use the structured approach method in developing profit or fee objectives for negotiated subcontracts.

   (ii) The use of the NASA structured approach for profit or fee is not required for:

   (a) Architect-engineer contracts;

   (b) Management contracts for operation and/or maintenance of Government facilities;

   (c) Construction contracts;

   (d) Contracts primarily requiring delivery of materials supplied by subcontractors;

   (e) Termination settlements; and

   (f) Contracts having unusual pricing situations when the procurement officer determines in writing that the structured approach is unsuitable.

   (c)(2) Contracting officers shall document the profit or fee analysis in the contract file.

   1815.404-470 NASA Form 634.

   NASA Form (NF) 634 shall be used in performing the analysis necessary to develop profit or fee objectives.

   1815.404-471 NASA structured approach for profit or fee objective.

   1815.404-471-1 General.

   (a) The structured approach for determining profit or fee objectives (NF 634) focuses on three profit factors:

   (1) Performance risk;

   (2) Contract type risk including working capital investment; and

   (3) Other Considerations which may be considered by the contracting officer to account for special circumstances

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   that are not adequately addressed in the performance risk and contract type risk factors.

   (b) The contracting officer assigns values to each profit or fee factor; the value multiplied by the base results in the profit/fee objective for that factor. Each 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 NASA. The designated range provides values based on above normal or below normal conditions. In the negotiation documentation, the contracting officer need not explain assignment of the normal value, but must address conditions that justify assignment of other than the normal value.

   1815.404-471-2 Performance Risk

   (a) Risk Factors. Performance risk addresses the contractor's degree of risk in fulfilling the contract requirements. It consists of three risk factors:

   (1) Technical--the technical uncertainties of performance;

   (2) Management--the degree of management effort necessary to ensure that contract requirements are met; and

   (3) Cost control--the contractor's efforts to reduce and control costs.

   (b) Risk factor weighting, values and calculations. A weighting and value is assigned to each of the risk factors to determine a profit/fee objective.

   (c) Values. The normal value is 6 percent and the designated range is 4 percent to 8 percent.

   (d) Evaluation criteria for technical risk factor.

   (1) In determining the appropriate value for the technical risk factor, the contracting officer shall review the contract requirements and focus on the critical performance elements in the statement of work or specifications. Contracting officers shall consider the--

   (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 indicating substantial technical risk.

   (i) The contracting officer may assign a higher than normal value in those cases where there is a substantial technical risk, such as when--

   (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 or 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 meet the Government's requirements; or

   (G) The contractor has assumed additional risk through warranty provisions.

   (ii) The contracting officer may assign a value significantly above normal. A maximum value may be assigned when the effort involves--

   (A) Extremely complex, vital efforts to overcome difficult technical obstacles that require personnel with exceptional abilities, experience, and professional credentials;

   (B) Development or initial production of a new item, particularly if performance or quality specifications are tight; or

   (C) A high degree of development or production concurrency.

   (3) Below normal conditions indicating lower than normal technical risk.

   (i) The contracting officer may assign a lower than normal value in those cases where the technical risk is low, such as when the--

   (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; or

   (F) Acquisition is a follow-on effort or a repetitive type acquisition.

   (ii) The contracting officer may assign a value significantly below normal. A minimum value may be justified when the effort involves--

   (A) Routine 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 risk factor.

   (1) In determining the appropriate value for the management risk factor, the contracting officer shall review the contract requirements and focus on the critical performance elements in the statement of work or specifications. Contracting officers shall--

   (i) Assess the contractor's management and internal control systems using contracting office information and reviews made by contract administration offices;

   (ii) Assess the management involvement expected on the prospective contract action; and

   (iii) Consider the degree of cost mix as an indication of the types of resources applied and value added by the contractor.

   (2) Above normal conditions indicating substantial management risk.

   (i) The contracting officer may assign a higher than normal value when the management effort is intense, such as when--

   (A) The contractor's value added is both considerable and reasonably difficult; or

   (B) The effort involves a high degree of integration and coordination.

   (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; or

   (C) Has critically important milestones.

   (3) Below normal conditions indicating lower than normal management risk.

   (i) The contracting officer may assign a lower than normal value when the management effort is minimal, such as when--

   (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 fails to provide an adequate analysis of subcontractor costs; or

   (E) The contractor does not cooperate in the evaluation and negotiation of the proposal.

   (ii) The contracting officer may assign a value significantly below normal. A minimum value may be assigned when--

   (A) Reviews performed by the field 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 risk factor.

   (1) In determining the appropriate value for the cost control risk factor, the contracting officer shall--

   (i) Evaluate the expected reliability of the contractor's cost estimates (including the contractor's cost estimating system);

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   (ii) Evaluate the contractor's cost reduction initiatives (e.g., competition advocacy programs);

   (iii) Assess the adequacy of the contractor's management approach to controlling cost and schedule; and

   (iv) Evaluate 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 indicating substantial cost control risk.

   (i) The contracting officer may assign a value higher than normal value if the contractor can demonstrate a highly effective cost control program, such as when--

   (A) The contractor provides fully documented and reliable cost estimates;

   (B) The contractor has an aggressive cost reduction program that has demonstrable benefits;

   (C) The contractor uses a high degree of subcontract competition; or

   (D) The contractor has a proven record of cost tracking and control.

   (3) Below normal conditions indicating lower than normal cost control risk.

   (i) The contracting officer may assign a lower than normal value in those cases where the contractor demonstrates minimal concern for cost control, such as when--

   (A) The contractor's cost estimating system is marginal;

   (B) The contractor has made minimal effort to initiate cost reduction programs;

   (C) The contractor's cost proposal is inadequate; or

   (D) The contractor has a record of cost overruns or the indication of unreliable cost estimates and lack of cost control.

   1815.404-471-3 Contract type risk and working capital adjustment.

   (a) Risk factors. 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 applies to fixed-price type 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. This adjustment is limited to 4 percent.

   (b) Risk factor values and calculations. A risk value is assigned to calculate the profit or fee objective for contract type. A contract length factor is assigned and applied to costs financed when a working capital adjustment is appropriate. This calculation is only performed when the prospective contract is a fixed-price contract containing provisions for progress payments.

   (c) Values: Normal and designated ranges.

   Normal value Contract type

   Note (percent)

   Designated range (percent)

   Firm-fixed-price, no financing.................. (1)

   5 4 to 6. Firm-fixed-price with performance-based payments (6)

   4 2.5 to 5.5. Firm-fixed-price with progress payments......... (2)

   4 3 to 5. Fixed-price-incentive, no financing............. (1)

   3 2 to 4. Fixed-price-incentive, with performance-based

   (6)

   2 .5 to 3.5. payments. Fixed-price, redeterminable..................... (3)

   0 0. Fixed-price-incentive, with progress payments... (2)

   2 1 to 3. Cost-plus-incentive-fee......................... (4)

   1 0 to 2. Cost-plus-award fee............................. (4)

   .75 .5 to 1.5. Cost-plus-fixed fee............................. (4)

   .5 0 to 1. Time-and-materials.............................. (5)

   .5 0 to 1. Labor-hour...................................... (5)

   .5 0 to 1. Firm-fixed-price, level-of-effort, term......... (5)

   .5 0 to 1.

   (1) ``No financing,'' means that the contract either does not provide progress or performance based payments, or provides them only on a limited basis. Do not compute a working capital adjustment.

   (2) When progress payments are present, compute a working capital adjustment.

   (3) For purposes of assigning profit values, treat a fixed-price redeterminable contract as if it were a fixed-price-incentive contract with below normal provisions.

   (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. Do not compute the working capital adjustment. However, higher than normal values may be assigned within the designated range to the extent that portions of cost are fixed.

   (6) When performance-based payments are used, do not compute a working capital adjustment.

   (d) Evaluation criteria. (1) General. The contracting officer shall consider elements that affect contract type risk such as--

   (i) Length of contract;

   (ii) Adequacy of cost projection data;

   (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 the incentive provisions; and

   (vii) The rate, frequency, and risk to the contractor of performance-based payments, if provided.

   (2) Mandatory. The contracting officer shall assess the extent to which costs have been incurred prior to definitization 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 percent 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. Conditions indicating higher than normal contract type risk 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 that place a high degree of risk on the contractor;

   (iv) Performance-based payments totaling less than the maximum

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   allowable amount(s) specified at FAR 32.1004(b)(2); or

   (v) An aggressive performance-based payment schedule that increases risk.

   (4) Below normal conditions. The contracting officer may assign a lower than normal value when the contract type risk is low. Conditions indicating lower than normal contract type risk 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, e.g. economic price adjustment provisions;

   (iv) Incentive provisions that place a low amount of risk on the contractor; and

   (v) A performance-based payment schedule that is routine with minimal risk.

   (e) Costs financed. (1) Costs financed equal the total costs multiplied by the percent of costs financed by the contractor.

   (2) Total costs may be reduced as appropriate when--

   (i) The contractor has little cash investment (e.g., subcontractor progress payments are liquidated late in the period of performance); or

   (ii) Some costs are covered by special funding arrangements, such as advance payments.

   (3) The portion financed by the contractor is generally the portion not covered by progress payments, i.e., 100 percent minus the customary progress payments rate. (For example, if a contractor receives progress payments at 75 percent, the portion financed by the contractor is 25 percent. On contracts that provide progress payments to small business, 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, as periods of minimal effort should be excluded;

   (iii) Should not include periods of performance contained in option provisions when calculating the objective for the base period; and

   (iv) Should not, for multiyear contracts, include periods of performance beyond that required to complete the initial year's requirements.

   (2) The contracting officer--

   (i) Should use the following to select the contract length factor:

   Contract Period to perform substantive portion (in months)

   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 76 or more................................................

   2.90

   (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.

   (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.

   1815.404-471-4 Other Considerations.

   (a) Other Considerations may be included by the contracting officer to account for special circumstances, such as contractor efficiencies or unusual acceptance of contractual or program risks that are not adequately addressed in the structured approach calculations described in 1815.404-471-2 or 1815.404-4713. The total adjustment resulting from Other Considerations may be positive or negative but in no case should the total adjustment exceed +/-5 percent.

   (b) The contracting officer shall analyze and verify information provided by the contractor that demonstrates that the special circumstances being recognized under this section--

   (1) Provide substantial benefits to the Government under the contract and/or overall program;

   (2) Have not been recognized in the structured approach calculations; and

   (3) Represent unusual and innovative actions or acceptance of risk by the contractor.

   (c) Examples of special circumstances include, but are not limited to the following:

   (1) Consistent demonstration by the contractor of excellent past performance within the last three years, with a special emphasis on excellence in safety, may merit an upward adjustment of as much as 1 percent. Similarly, an assessment of poor past performance, especially in the area of safety, may merit a downward adjustment of as much -1 percent. This consideration is especially important when negotiating modifications or changes to an ongoing contract.

   (2) Extraordinary steps to achieve the Government's socio-economic goals, environmental goals, and public policy goals established by law or regulation that are sufficiently unique or unusual may merit an upward adjustment of as much as .5 percent. Similarly, for non- participation in or violation of Federal programs, the contracting officer may adjust the objective by as much as -.5 percent. However, this consideration does not apply to the utilization of small disadvantaged businesses. Incentives for use of these firms may only be structured according to FAR 19.1203 and 19.1204(c).

   (3) Consideration of up to 2 percent should be given when contract performance requires the expenditure of significant corporate capital resources. Conversely, unusual requests for use of government facilities and property may merit a downward adjustment of as much as -2 percent.

   (4) Cost efficiencies arising from innovative product design, process improvements, or integration of a life cycle cost approach for the design and development of systems that minimize maintenance and operations costs, that have not been recognized in Performance Risk or Contract Type Risk, may merit an upward adjustment. This factor is intended to recognize and reward improvements resulting from better ideas and management that will benefit the Government in the contract and/or program.

   (5) A negative consideration may be appropriate when the contractor is expected to obtain spin-off benefits as a direct result of the contract, for example, products with commercial application.

   1815.404-471-5 Facilities capital cost of money.

   (a) When facilities capital cost of money is included as an item of cost in the contractor's proposal, it shall not be included in the cost base for calculating profit/fee. In addition, a reduction in the profit/fee objective shall be made in the amount equal to the facilities capital cost of money allowed in accordance with FAR 31.205- 10(a)(2).

   (b) CAS 417, cost of money as an element of the cost of capital assets under construction, should not appear in contract proposals. These costs are included in the initial value of a facility for purposes of calculating depreciation under CAS 414.

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   Attachment: NASA FORM 634

   Note: This form will not appear in the CFR, but is provided for information as an attachment to the preamble.

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