Defense Federal Acquisition Regulation Supplement; Weighted Guidelines and Performance-Based Payments

A. Background

DFARS 215.404-4, Profit, requires contracting officers to use the weighted guidelines method of developing a prenegotiation profit or fee objective on most negotiated contract actions that require cost analysis. This method focuses on three profit factors: performance risk, contract type risk, and facilities capital employed. Calculations using these profit factors result in values that become part of the part objective. For contract type risk, the calculations include an assessment of the degree of cost risk accepted by the contractor under varying contract types as adjusted by the costs of contractor-provided financing. Currently, DFARS 214.404-71-3, Contract type risk and working capital adjustment, provides only two financing choices for fixed-price and fixed-price-incentive contracts: The contract either will provide progress payments or will offer no financing. The proposed rule adds contracts with performance-based payments as a third choice. The rule proposes to amend DFARS 215.404-71-3 to-- 1. Add firm-fixed-price and fixed-price incentive contracts with performance-based payments to the table of contract types at 215.404- 71-3(c); 2. Add evaluation criteria at 215.404-71-3(d) that contracting officers should consider when determining the value for contract type risk associated with contracts using performance-based payments; and 3. Remove the reference to the flexible progress payments type of financing at 215.404-71-3(e)(3). DoD does not permit the use of flexible progress payments for contracts awarded as a result of solicitations issued on or after November 11, 1993. A final rule, published in the Federal Register on February 23, 1999 (64 FR 8731), removed references to flexible progress payments form DFARS Part 232. The change to 215.404-71-3(e)(3) in this proposed rule does not reflect a policy change but merely removes obsolete language.

B. Regulatory Flexibility Act

The proposed rule 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., because most contracts awarded to small entities have a dollar value less than the simplified acquisition threshold and, therefore, would not use the weighted guidelines method of profit computation. The weighted guidelines method normally is used to compute profit objectives on negotiated contract actions at or above $500,000. An initial regulatory flexibility analysis has, therefore, not been performed. Comments are invited from small businesses and other interested parties. Comments from small entities concerning the affected DFARS subpart also will be considered in accordance with 5 U.S.C. 610. Such comments should be submitted separately and should cite DFARS Case 99-D001 in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the rule does not impose any information collection requirements that 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 215

Government procurement. Michele P. Peterson, Executive Editor, Defense Acquisition Regulations Council.

Therefore, 48 CFR Part 215 is proposed to be amended as follows:

PART 215--CONTRACTING BY NEGOTIATION

1. The authority citation for 48 CFR Part 215 continues to read as follows:

Authority 41 U.S.C. 421 and 48 CFR Chapter 1.

2. Section 215.404-71-3 is amended by revising paragraphs (c), (d), and (e) to read as follows:

215.404-71-3 Contract type risk and working capital adjustment.

* * * * * (c) Values: Normal and designated ranges.

------------------------------------------------------------------------ Normal Contract type Notes value Designated range (percent) (percent) ------------------------------------------------------------------------ Firm-fixed-price, no financing. (1) 5 4 to 6. Firm-fixed-price, with (6) 4 2.5 to 5.5. performance-based payments. Firm-fixed-price, with progress (2) 3 2 to 4. payments. Fixed-price incentive, no (1) 3 2 to 4. financing. Fixed-price incentive, with (6) 2 0.5 to 3.5. performance-based payments. Fixed-price with (3) ................. redetermination provision. Fixed-price incentive, with (2) 1 0 to 2. progress payments. Cost-plus-incentive-fee........ (4) 1 0 to 2. Cost-plus-fixed-fee............ (4) .5 0 to 1. Time-and-materials (including (5) .5 0 to 1. overhaul contracts priced on time-and-materials basis). Labor-hour..................... (5) .5 0 to 1. Firm-fixed-price, level-of- (5) .5 0 to 1. effort. ------------------------------------------------------------------------

(1) ``No financing'' means either that the contract does not provide progress payments or performance-based payments, or that the contract provides them only on a limited basis, such as financing of first articles. Do not compute a working capital adjustment. (2) When progress payments are used, compute a working capital adjustment (Block 26). (3) For the purposes of assigning profit values, treat a fixed- price contract with redetermination provisions as if it were a fixed- price incentive contract with below normal conditions. (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. They shall not receive the working capital adjustment in Block 26. However, they may receive higher than normal values 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 should consider elements that affect contract type risk such as-- (i) Length of contract; (ii) Adequacy of cost data for projections; (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 incentive provisions; (vii) Risks associated with contracts for foreign military sales (FMS) that are not funded by U.S. appropriations; and (viii) When performance-based payments are used-- (A) The frequency of payments; (B) The total amount of payments compared to the maximum allowable amount specified at FAR 32.1004(b)(2); and (C) The risk of the payment schedule to the contractor. (2) Mandatory. The contracting officer shall assess the extent to which costs have been incurred prior to definitization of the contract action 9also see 217.7404-6(a)). The assessment shall include any reduced contractor risk on both the contract before definitization and the remaining portion 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 contractor type risk. Indicators of this-- (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 (e.g., cost and performance incentives) that place a high degree of risk on the contractor; (iv) FMS sales (other than those under DoD cooperative logistics support

arrangements or those made from U.S. Government inventories or stocks) where the contractor can demonstrate that there are substantial risks above those normally present in DoD contracts for similar items; (v) Performance-based payments made less frequently than monthly; (vi) Performance-based payments totaling less than the maximum allowable amount(s) specified at FAR 32.1004(b)(2); or (vii) 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. Indicators of this 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; (iv) Incentive provisions that place a low degree of risk on the contractor; (v) Performance-based payments provided on a monthly basis; (vi) Performance-based payments totaling the maximum allowable amount(s) specified at FAR 32.1004(b)(2); or (vii) A performance-based payment schedule that is routine with minimal risk. (e) Costs financed. (1) Costs financed equal total costs multiplied by the portion (percent) of costs financed by the contractor. (2) Total costs equal Block 20 (i.e., all allowable costs, including general and administrative and independent research and development/bid and proposal, but excluding facilities capital cost of money), reduced as appropriate when-- (i) The contractor has little cash investment (e.g., subcontractor progress payments liquidated late in period of performance); (ii) Some costs are covered by special financing provisions, such as advance payments; or (iii) The contract is multiyear and there are special funding arrangements. (3) The portion financed by the contractor is generally the portion not covered by progress payments, i.e., 100 percent minus the customary progress payment rate (see FAR 32.501). 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 businesses, use the customary progress payment rate for large businesses. * * * * * [FR Doc. 99-11184 Filed 5-3-99; 8:45 am] BILLING CODE 5000-04-M