[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]
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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.
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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]
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