[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                
------------------------------------------------------------------------
                                                Weight range (percent)  
------------------------------------------------------------------------
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.                                                                  
------------------------------------------------------------------------

    (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:

------------------------------------------------------------------------
              Type of contract                    Percentage ranges     
------------------------------------------------------------------------
Cost-plus-fixed-fee........................  0 to 1.                    
Prospective price determination............  4 to 5.                    
Firm-fixed-price...........................  4 to 6.                    
------------------------------------------------------------------------

    (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