[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Proposed Rules]
[Pages 27712-27715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13207]
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ENVIRONMENTAL PROTECTION AGENCY
48 CFR Part 1515
[FRL-5827-3]
Acquisition Regulation
AGENCY: Environmental Protection Agency (EPA).
ACTION: Proposed rule.
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SUMMARY: This document proposes to revise the EPA Acquisition
Regulation (EPAAR) on calculation of profit or fee. This action is the
result of an Agency reassessment of its regulatory guidelines for
determination of contractor profit or fee. A significant policy change
will be for the contracting officer not to consider the profit/fee of
any subcontractor in determining the Government's profit/fee objective.
In addition, several changes are proposed to update, to streamline and
to make the guidelines more closely address acquisitions for
professional and technical services.
DATES: Comments should be submitted not later than July 21, 1997.
ADDRESSES: Environmental Protection Agency, Office of Acquisition
Management (3802F), 401 M Street SW., Washington, DC 20460.
FOR FURTHER INFORMATION CONTACT: Larry Wyborski, Telephone: (202) 260-
6482.
SUPPLEMENTARY INFORMATION:
I. 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.
II. 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.
III. 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.
IV. 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.
V. 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 Part 1515
Government procurement.
For the reasons set forth in the preamble, Chapter 15 of Title 48
Code of Federal Regulations 1515 is proposed to be amended as follows:
1. The authority citation for 1515 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
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 staructured system.
Subpart 1515.9--Profit
1515.900 Scope of subpart.
This subpart implements FAR subpart 15.9, 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) Professional/technical 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
[[Page 27713]]
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.
(d) The contracting officer may not consider subcontractor profit/
fee as part of the basis for determining the contractor's 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 15.905-1,
and additional factors authorized by FAR 15.905-2 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 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 below, and the
weighted ranges listed after each factor, shall be used in all
instances where the profit/fee is negotiated.
Contractor's Input to Total Performance
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Weight range (percent)
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Direct material............................ 1 to 4
Professional/technical services............ 8 to 15
Professional/technical overhead............ 6 to 9
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 15.903(c)). 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 appendix B of the FAR (48 CFR
9904.404).
(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 above 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.
(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--
(1) 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
[[Page 27714]]
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 Services. Analysis of the professional/
technical services should include evaluation of the comparative quality
and level of the talents and experience to be employed. In evaluating
professional/technical services 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 professional/
technical 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 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, and general and administrative expenses. A contractor's
accounting system which only reflects one overhead rate on all direct
labor need not be modified to correspond with all of the above
classifications. Where practicable, the contracting officer's
evaluation of such an overhead rate should break out the applicable
sections of the composite rate which could be classified as
professional/ technical overhead and general and administrative
expenses, and follow the appropriate evaluation technique.
(C) The contracting officer need not make a separate profit
evaluation of overhead expenses in connection with each acquisition for
substantially the same product with the same contractor. Once an
analysis of the profit weight to be assigned the overhead pool has been
made, the weight assigned may be used for future acquisitions with the
same contractor, until there is a change in the cost composition of the
overhead pool or in the contract circumstances.
(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
services 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 1515.902(d), the contracting officer
may not consider subcontractor profit/fee as part of the basis for
determining the contractors 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 the degree of cost responsibility the contractor
assumes, the reliability of the cost estimates in relation to the task
assumed, and 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:
[[Page 27715]]
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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.
Dated: May 9, 1997.
Diane M. Balderson,
Acting Director, Office of Acquisition Management.
[FR Doc. 97-13207 Filed 5-20-97; 8:45 am]
BILLING CODE 6560-50-P
