[Federal Register Volume 59, Number 66 (Wednesday, April 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-8142]


[[Page Unknown]]

[Federal Register: April 6, 1994]


_______________________________________________________________________

Part VIII

Department of Defense

General Services Administration

National Aeronautics and Space Administration
_______________________________________________________________________



48 CFR Part 15, et al.



Federal Acquisition Regulation, et al.; Proposed Rules
DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 15

[FAR Case 92-17]

 

Federal Acquisition Regulation; Overhead Should-cost Reviews

agencies: Department of Defense (DOD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

action: Proposed rule.

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summary: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council are proposing to amend the Federal 
Acquisition Regulation (FAR) to add specific guidance on overhead-
should cost reviews. This regulatory action was not subject to Office 
of Management and Budget review pursuant to Executive Order No. 12866 
dated September 30, 1993.

dates: Comments should be submitted on or before June 6, 1994 to be 
considered in the formulation of a final rule.

addresses: Interested parties should submit written comments to: 
General Services Administration, FAR Secretariat (VRS), 18th & F 
Streets, NW., room 4037, Washington, DC 20405.
    Please cite FAR case 92-17 in all correspondence related to this 
case.

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 FAR case 92-17.

SUPPLEMENTARY INFORMATION:

A. Background

    The General Accounting Office (GAO) report dated October 30, 1991, 
entitled ``Economy and Efficiency Audits Can Help Reduce Overhead 
Costs'', recommends that regulations be revised to provide guidance for 
the use of overhead should-cost reviews.

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 
contracts awarded to small entities normally are not subject to program 
or overhead should-cost reviews. 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 FAR subpart will also be considered in 
accordance with 5 U.S.C. 610. Such comments must be submitted 
separately and should cite 5 U.S.C. 601, et seq. (FAR case 92-17), in 
correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
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: March 30, 1994.
Albert A. Vicchiolla,
Director, Office of Federal Acquisition Policy.

    Therefore, it is proposed that 48 CFR part 15 be 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. The heading of section 15.810 is revised and the text is 
removed, and sections 15.810-1 thru 15.810-3 are added 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 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). 
An overhead should-cost review may be performed independently, or in 
conjunction with a program should-cost review. 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 part 7, 
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; and
    (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. 94-8142 Filed 4-5-94; 8:45 am]
BILLING CODE 6820-34-M