[Federal Register Volume 64, Number 85 (Tuesday, May 4, 1999)]
[Proposed Rules]
[Pages 23814-23816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11184]


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DEPARTMENT OF DEFENSE

48 CFR Part 215

[DFARS Case 99-D001]


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

AGENCY: Department of Defense (DoD).

ACTION: Proposed rule with request for comments.

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SUMMARY: The Director of Defense Procurement is proposing to amend the 
Defense Federal Acquisition Regulation Supplement (DFARS) to modify the 
weighted guidelines method of computing profit objectives by adding 
contracts with performance-based payments to the types of contracts 
that affect a contractor's cost risk.

DATES: Comments on the proposed rule should be submitted in writing to 
the address specified below on or before July 6, 1999, to be considered 
in the formation of the final rule.

ADDRESSES: Interested parties should submit written comments on the 
proposed rule to: Defense Acquisition Regulations Council, Attn: Ms. 
Sandra G. Haberlin, PDUSD(A&T)DP(DAR), IMD 3D139, 3062 Defense 
Pentagon, Washington, DC 20301-3062. Telefax (703) 602-0350. Please 
cite DFARS Case 99-D001.
    E-mail comments submitted over the Internet should be addressed to: 
[email protected].
    Please cite DFARS Case 99-D001 in all correspondence related to 
this issue. E-mail correspondence should cite DFARS Case 99-D001 in the 
subject line.

FOR FURTHER INFORMATION CONTACT:
Ms. Sandra G. Haberlin, (703) 602-0131. Please cite DFARS Case 99-D001.

SUPPLEMENTARY INFORMATION:

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.

[[Page 23815]]

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

[[Page 23816]]

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