[Federal Register Volume 62, Number 218 (Wednesday, November 12, 1997)]
[Rules and Regulations]
[Pages 60664-60667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29593]
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ENVIRONMENTAL PROTECTION AGENCY
48 CFR Parts 1515 and 1552
[FRL-5919-4]
Acquisition Regulation
AGENCY: Environmental Protection Agency (EPA).
ACTION: Final rule.
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SUMMARY: This document revises the EPA Acquisition Regulation (EPAAR)
on calculation of profit or fee. Two unrelated administrative
corrections are also being made.
EFFECTIVE DATE: November 12, 1997.
ADDRESSES: Environmental Protection Agency, Office of Acquisition
Management (3802R), 401 M Street S.W., Washington, DC 20460.
FOR FURTHER INFORMATION CONTACT: Larry Wyborski, Telephone: (202) 564-
4369.
SUPPLEMENTARY INFORMATION:
I. Background Information
The proposed rule was published in the Federal Register (62 FR
27712-27715) on May 21, 1997, providing for a 60-day comment period.
Interested parties were afforded the opportunity to participate in
the making of this rule. The following is a summary of each comment and
the Agency disposition of those comments.
1. Comment: EPA should make it clear that Subpart 1515.970-2(b)(iv)
cannot be interpreted to allow only one profit or fee determination for
both the general contractor and subcontractor levels of an acquisition.
Response: Privity of contract is an established principle in
Government contracting. The Government's contract is with the prime
(general) contractor. Duties such as direction and payment of the
subcontractors are solely the responsibility of the prime contractor.
Therefore, profit or fee determinations are solely based on the prime
contractor's effort.
2. Comment: We are concerned about the soundness of ``structured
approach'' policy. We believe the structured approach prevents the
Government from receiving best value by adding unnecessary expense to
the negotiation process. Further, the structure approach distorts
market value in competitive procurements by substituting private
industry competitive determinations of cost and profit with Government
notions of what the market ``should be.''
Response: As stated in EPAAR 1515.902(a)(3), the structured
approach is a basis for negotiations, not a final determination. Also,
EPAAR 1515.903 is being added by this rule to allow exemption of cost
realism evaluations from required use of a structured approach. Cost
realism is a factor in best value procurements. Furthermore, EPAAR
1515.902(b) specifies numerous other types of contracts and
circumstances where methods other than the structured approach set
forth in EPAAR 1515.970 may be used. For instance, the structured
approach is not required for construction contracts (EPAAR
1515.902(b)(vi)).
3. Comment: We are concerned that Subpart 1515.970-2(b)(2)(iii)(C)
of the proposed rule could be misinterpreted by contracting officers.
Each construction acquisition, regardless of the contract type or
contractor experience, is a unique project which can have significant
distinguishing characteristics. Profit or fee weighted guidelines
should therefore be considered anew for each acquisition.
Response: We agree that the cited provision may be subject to
misinterpretation. It is also unnecessary, since it is not a mandatory
requirement and the contracting officer has a certain amount of
flexibility in making weighted guideline determinations. The provision
at 1515.970-2(b)(2)(iii)(C) will be deleted.
4. Comment: EPA should emphasize to contracting officers that
weighted guidelines are prenegotiation benchmarks, not unchangeable
standards.
Response: See EPAAR 1515.902(a)(3) and the Agency policy at EPAAR
1515.970-1. Both citations provide for a structured approach as a basis
for negotiations, rather than as a final determination.
5. Comment: EPA should review and update its statement in EPAAR
1515.970-2(a)(3), relating to facilities capital cost of money.
Response: Based on a review of approaches taken by other Agencies
on this matter, EPA will reassess EPAAR 1515.970-2, for possible
revision in a future action.
II. Executive Order 12866
This is not a significant regulatory action under Executive Order
12866; therefore, no review is required at the Office of Information
and Regulatory Affairs within OMB.
[[Page 60665]]
III. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because this rule does
not contain information collection requirements for the approval of the
Office of Management and Budget (OMB) under 44 U.S.C. 3501, et seq.
IV. Regulatory Flexibility Act
The EPA certifies that this rule does not exert a significant
economic impact on a substantial number of small entities. There are no
requirements for contractor compliance under the proposed rule.
V. Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) Public
Law 104-4, establishes requirements for Federal agencies to assess
their regulatory actions on State, local, and tribal governments, and
the private sector.
EPA has determined that this rule does not contain a Federal
mandate that may result in expenditures of $100 million or more for
State, local, and tribal governments, in the aggregate, or the private
sector in any one year. Any private sector costs for this action relate
to paperwork requirements and associated expenditures that are far
below the level established for UMRA applicability. Thus, the rule is
not subject to the requirements of sections 202 and 205 of the UMRA.
VI. Regulated Entities
EPA contractors are entities potentially regulated by this action.
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Category Regulated entity
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Industry.............................. EPA Contractors.
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List of Subjects in 48 CFR Parts 1515 and 1552
Environmental protection, Government procurement.
For the reasons set forth in the preamble, Chapter 15 of Title 48
Code of Federal Regulations 1515 and 1552 is amended as follows:
PARTS 1515 AND 1552--[AMENDED]
1. The authority citation for 1515 and 1552 continues to read as
follows:
Authority: Sec. 205(c), 63 Stat. 390 as amended, 40 U.S.C.
486(c).
2. Subpart 1515.9 is revised to read as follows:
Subpart 1515.9--Profit
Table of Contents
1515.900 Scope of subpart.
1515.902 Policy.
1515.903 Cost realism.
1515.905 Profit-analysis factors.
1515.970 EPA structured approach for developing profit or fee
objectives.
1515.970-1 General.
1515.970-2 EPA structured system.
1515.900 Scope of subpart.
This subpart implements FAR subpart 15.4, and prescribes the EPA
structured approach for determining profit or fee prenegotiation
objectives.
1515.902 Policy.
(a) EPA structured approach. The purpose of EPA's structured
approach is:
(1) To provide a standard method of evaluation;
(2) To ensure consideration of all relevant factors;
(3) To provide a basis for documentation and explanation of the
profit or fee negotiation objective;
(4) To allow contractors to earn profits commensurate with the
assumption of risk; and
(5) To reward contractors who undertake more difficult work
requiring higher risks.
(b) Other methods.
(1) Contracting officers may use methods other than those
prescribed in 1515.970 for establishing profit or fee objectives under
the following types of contracts and circumstances:
(i) Architect-engineering contracts;
(ii) Personal service contracts;
(iii) Management contracts, e.g., for maintenance or operation of
Government facilities;
(iv) Termination settlements;
(v) Services under labor-hour and time and material contracts which
provide for payment on an hourly, daily, or monthly basis, and where
the contractor's contribution constitutes the furnishing of personnel.
(vi) Construction contracts; and
(vii) Cost-plus-award-fee contracts.
(2) Generally, it is expected that such methods will:
(i) Provide the contracting officer with a technique that will
ensure consideration of the relative value of the appropriate profit
factors described under ``Profit Factors,'' in 1515.970-2, and
(ii) Serve as a basis for documentation of the profit or fee
objective.
(c) Under unusual circumstances, the CCO may specifically waive the
requirement for the use of the guidelines. Such exceptions shall be
justified in writing, and authorized only in situations where the
guidelines method is unsuitable. In the event that any of the methods
used would result in establishing a fee objective in violation of
limitations established by statute (see FAR 15.404-4(b)(4)(i)), the
maximum fee objective shall be the percentage allowed pursuant to such
limitations. No administrative ceilings on profits or fees shall be
established.
(d) The contracting officer shall not consider any known
subcontractor profit/fee as part of the basis for determining the
contractor profit/fee.
1515.903 Cost realism.
The EPA structured approach is not required when the contracting
officer is evaluating cost realism in a competitive acquisition.
1515.905 Profit-analysis factors.
Profit-analysis factors prescribed in the EPA structured approach
for analyzing profit or fee include those prescribed by FAR 15.404-
4(d)(1), and additional factors authorized by FAR 15.404-4(d)(d) to
foster achievement of program objectives. These profit or fee factors
are prescribed in 1515.970-2.
1515.970 EPA structured approach for developing profit or fee
objectives.
1515.970-1 General.
(a) The Agency's policy is to utilize profit to attract contractors
who possess talents and skills necessary to the accomplishment of the
objectives of the Agency, and to stimulate efficient contract
performance. In negotiating profit/fee, it is necessary that all
relevant factors be considered, and that fair and reasonable amounts be
negotiated which give the contractor a profit objective commensurate
with the nature of the work to be performed, the contractor's input to
the total performance, and the risks assumed by the contractor.
(b) To properly reflect differences among contracts, and to select
an appropriate relative profit/fee in consideration of these
differences, weightings have been developed for application by the
contracting officer to standard measurement bases representative of the
prescribed profit factors cited in FAR 15.905 and (EPAAR) 48 CFR
1515.970-2(a)(1). Each profit factor or subfactor, or its components,
has been assigned weights relative to their value to the contract's
overall effort, and the range of weights to be applied to each profit
factor.
1515.970-2 EPA structured system.
(a)(1) Profit/fee factors. The factors set forth in the following
table, and the weighted ranges listed after each factor, shall be used
in all instances where the profit/fee is negotiated.
[[Page 60666]]
Contractor's Input to Total Performance
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Weight range (percent)
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Direct material............................ 1 to 5.
Professional/technical labor............... 8 to 15.
Professional/technical overhead............ 6 to 9.
General labor.............................. 5 to 9.
General overhead........................... 4 to 7.
Subcontractors............................. 1 to 4.
Other direct costs......................... 1 to 3.
General and administrative expenses........ 5 to 8.
Contractor's assumption of contract cost 0 to 6.
risk.
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(2) The contracting officer shall first measure the ``Contractor's
Input to Total Performance'' by the assignment of a profit percentage
within the designated weight ranges to each element of contract cost.
Such costs are multiplied by the specific percentages to arrive at a
specific dollar profit or fee.
(3) The amount calculated for facilities capital cost of money
(FCCM) shall not be included as part of the cost base for computation
of profit or fee (see FAR 15.404-4(c)(3)). The profit or fee objective
shall be reduced by an amount equal to the amount of facilities capital
cost of money allowed. A complete discussion of the determination of
facilities capital cost of money and its application and administration
is set forth in FAR 31.205-10, and the Appendix to the FAR (see 48 CFR
9904.414).
(4) After computing a total dollar profit or fee for the
Contractor's Input to Total Performance, the contracting officer shall
calculate the specific profit dollars assigned for cost risk and
performance. This is accomplished by multiplying the total Government
cost objective, exclusive of any FCCM, by the specific weight assigned
to cost risk and performance. The contracting officer shall then
determine the profit or fee objective by adding the total profit
dollars for the Contractor's Input to Total Performance to the specific
dollar profits assigned to cost risk and performance. The contracting
officer shall use EPA Form 1900-2 to facilitate the calculation of the
profit or fee objective.
(5) The weight factors discussed in this subsection are designed
for arriving at profit or fee objectives for other than nonprofit and
not-for-profit organizations. Nonprofit and not-for-profit
organizations are addressed as follows:
(i) Nonprofit and not-for-profit organizations are defined as those
business entities organized and operated:
(A) Exclusively for charitable, scientific, or educational
purposes;
(B) Where no part of the net earnings inure to the benefit of any
private shareholder or individual;
(C) Where no substantial part of the activities is for propaganda
or otherwise attempting to influence legislation or participating in
any political campaign on behalf of any candidate for public office;
and
(D) Which are exempt from Federal income taxation under Section 51
of the Internal Revenue Code (Title 26, United States Code).
(ii) For contracts with nonprofit and not-for-profit organizations
where fees are involved, a special factor of -3 percent shall be
assigned in all cases.
(b) Assignment of values to specific factors--
(l) General. In making a judgment on the value of each factor, the
contracting officer should be governed by the definition, description,
and purpose of the factors, together with considerations for evaluation
set forth in this paragraph.
(2) Contractor's input to total performance. This factor is a
measure of how much the contractor is expected to contribute to the
overall effort necessary to meet the contract performance requirements
in an efficient manner. This factor, which is separate from the
contractor's responsibility for contract performance, takes into
account what resources are necessary, and the creativity and ingenuity
needed for the contractor to perform the statement of work
successfully. This is a recognition that within a given performance
output, or within a given sales dollar figure, necessary efforts on the
part of individual contractors can vary widely in both value, quantity,
and quality, and that the profit or fee objective should reflect the
extent and nature of the contractor's contribution to total
performance. Greater profit opportunity should be provided under
contracts requiring a high degree of professional and managerial skill
and to prospective contractors whose skills, facilities, and technical
assets can be expected to lead to efficient and economical contract
performance. The evaluation of this factor requires an analysis of the
cost content of the proposed contract as follows:
(i) Direct material (purchased parts and other material). (A)
Analysis of these cost items shall include an evaluation of the
managerial and technical effort necessary to obtain the required
material. This evaluation shall include consideration of the number of
orders and suppliers, and whether established sources are available or
new sources must be developed. The contracting officer shall also
determine whether the contractor will, for example, obtain the
materials by routine orders or readily available supplies (particularly
those of substantial value in relation to the total contract costs), or
by detailed subcontracts for which the prime contractor will be
required to develop complex specifications involving creative design.
(B) Consideration should be given to the managerial and technical
efforts necessary for the prime contractor to administer subcontracts,
and to select subcontractors, including efforts to break out
subcontracts from sole sources, through the introduction of
competition.
(C) Recognized costs proposed as direct material costs such as
scrap charges shall be treated as material for profit evaluation.
(D) If intracompany transfers are accepted at price, in accordance
with FAR 31.205-26(e), they should be excluded from the profit or fee
computation. Other intracompany transfers shall be evaluated by
individual components of cost, i.e., material, labor, and overhead.
(E) Normally, the lowest weight for direct material is 2 percent. A
weighting of less than 2 percent would be appropriate only in unusual
circumstances when there is a minimal contribution by the contractor in
relation to the total cost of the material.
(ii) Professional/technical and general labor. Analysis of labor
should include evaluation of the comparative quality and level of the
talents and experience to be employed. In evaluating labor for the
purpose of assigning profit dollars, consideration should be given to
the amount of notable scientific talent or unusual or scarce talent
needed, in contrast to journeyman effort or supporting personnel. The
diversity, or lack thereof, of scientific and engineering specialties
required for contract performance, and the corresponding need for
supervision and coordination, should also be evaluated.
(iii) Overhead and general and administrative expenses. (A) Where
practicable, analysis of these overhead items of cost should include
the evaluation of the individual elements of these expenses, and how
much they contribute to contract performance. This analysis should
include a determination of the amount of labor within these overhead
pools, and how this labor would be treated if it were considered as
direct labor under the contract. The allocable labor elements should be
given
[[Page 60667]]
the same profit consideration as if they were direct labor. The other
elements of indirect cost pools should be evaluated to determine
whether they are routine expenses such as utilities, depreciation, and
maintenance, and therefore given less profit consideration.
(B) The contractor's accounting system need not break down its
overhead expenses within the classification of professional/technical
overhead, general overhead and general and administrative expenses.
(iv) Subcontractors. (A) Subcontract costs should be analyzed from
the standpoint of the talents and skills of the subcontractors. The
analysis should consider if the contractor normally should be expected
to have people with comparable expertise employed as full-time staff,
or if the contract requires skills not normally available in an
employer-employee relationship. Where the contractor is using
subcontractors to perform labor which would normally be expected to be
done in-house, the rating factor should generally be at or near 1
percent. Where exceptional expertise is retained, or the contractor is
participating in the mentor-protege program, the assigned weight should
be nearer to the high end of the range.
(B) In accordance with (EPAAR) 48 CFR 1515.902(d), whenever the
subcontractor profit/fee is known to the contracting officer, that
profit/fee shall not be considered as part of the basis for determining
the contractor profit/fee.
(v) Other direct costs. Items of costs, such as travel and
subsistence, should generally be assigned a rating of 1 to 3 percent.
The analysis of these costs should be similar to the analysis of direct
material.
(3) Contractor's assumption of contract cost risk. (i) The risk of
contract costs should be shifted to the fullest extent practicable to
contractors, and the Government should assign a rating that reflects
the degree of risk assumption. Evaluation of this risk requires a
determination of
(A) The degree of cost responsibility the contractor assumes,
(B) The reliability of the cost estimates in relation to the task
assumed, and
(C) The chance of the contractor's success or failure. This factor
is specifically limited to the risk of contract costs. Thus, such risks
of losing potential profits in other fields are not within the scope of
this factor.
(ii) The first determination of the degree of cost responsibility
assumed by the contractor is related to the sharing of total risk of
contract cost by the Government and the contractor, depending on
selection of contract type. The extremes are a cost-plus-fixed-fee
contract requiring only that the contractor use its best efforts to
perform a task, and a firm-fixed-price contract for a complex item. A
cost-plus-fixed-fee contract would reflect a minimum assumption of cost
responsibility by the contractor, whereas a firm-fixed-price contract
would reflect a complete assumption of cost responsibility by the
contractor. Therefore, in the first step of determining the value given
for the contractor's assumption of contract cost risk, a low rating
would be assigned to a proposed cost-plus-fixed-fee best efforts
contract, and a higher rating would be assigned to a firm-fixed-price
contract.
(iii) The second determination is that of the reliability of the
cost estimates. Sound price negotiation requires well-defined contract
objectives and reliable cost estimates. An excessive cost estimate
reduces the possibility that the cost of performance will exceed the
contract price, thereby reducing the contractor's assumption of
contract cost risk.
(iv) The third determination is that of the difficulty of the
contractor's task. The contractor's task may be difficult or easy,
regardless of the type of contract.
(v) Contractors are likely to assume greater cost risks only if the
contracting officer objectively analyzes the risk incident to the
proposed contract, and is willing to compensate contractors for it.
Generally, a cost-plus-fixed-fee contract would not justify a reward
for risk in excess of 1 percent, nor would a firm-fixed-price contract
normally justify a reward of less than 4 percent. Where proper contract
type selection has been made, the reward for risk by contract type
would usually fall into the following percentage ranges:
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Type of contract Percentage ranges
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Cost-plus-fixed-fee........................ 0 to 1.
Prospective price determination............ 4 to 5.
Firm-fixed-price........................... 4 to 6.
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(A) These ranges may not be appropriate for all acquisitions. The
contracting officer might determine that a basis exists for high
confidence in the reasonableness of the estimate, and that little
opportunity exists for cost reduction without extraordinary efforts.
The contractor's willingness to accept ceilings on their burden rates
should be considered as a risk factor for cost-plus-fixed-fee
contracts.
(B) In making a contract cost risk evaluation in an acquisition
that involves definitization of a letter contract, consideration should
be given to the effect on total contract cost risk as a result of
partial performance under a letter contract. Under some circumstances,
the total amount of cost risk may have been effectively reduced by the
existence of a letter contract. Under other circumstances, it may be
apparent that the contractor's cost risk remained substantially as
great as though a letter contract had not been used. Where a contractor
has begun work under an anticipatory cost letter, the risk assumed is
greater than normal. To be equitable, the determination of a profit
weight for application to the total of all recognized costs, both those
incurred and those yet to be expended, must be made with consideration
to all relevant circumstances, not just to the portion of costs
incurred or percentage of work completed prior to definitization.
1552.217-73 [Amended]
3. Section 1552.217-73 is amended by revising the clause heading as
follows:
1552.217-73 Option for Increased Quantity--Cost Type Contract (JUN
1997)
1552.217-74 [Amended]
4. Section 1552.217-74 is amended by revising the clause heading as
follows:
1552.217-74 Option for Increased Quantity--Cost Plus Award Fee
Contract (JUN 1997)
Dated: October 27, 1997
John C. Gherardini,
Acting Director, Office of Acquisition Management.
[FR Doc. 97-29593 Filed 11-10-97; 8:45 am]
BILLING CODE 6560-50-P
