[Federal Register Volume 64, Number 184 (Thursday, September 23, 1999)]
[Rules and Regulations]
[Pages 51472-51476]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24852]


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NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 1815


NASA Structured Approach for Profit or Fee Objective

AGENCY: National Aeronautics and Space Administration.

ACTION: Final rule.

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SUMMARY: This final rule revises the agency's structured approach for 
developing a profit or fee objective. This rule eliminates the element 
of cost approach currently prescribed for establishing profit and fee 
objectives and focuses on performance risk analysis which requires the 
evaluation of specific technical, management and cost risk factors; 
provides a new method for determining contract type risk and introduces 
a working capital adjustment provision; retains with modification the 
Other Considerations factor contained in the structured approach 
currently prescribed; and establishes a ceiling for facilities capital 
cost of money offset.

EFFECTIVE DATE: September 23, 1999.

FOR FURTHER INFORMATION CONTACT: Donna Fortunat, NASA Headquarters, 
Code HC, Washington, DC 20546, telephone: (202) 358-0426; email: 
[email protected].

SUPPLEMENTARY INFORMATION:

Background

    A proposed rule was published in the Federal Register on June 8, 
1999 (64 FR 30468-30472). Comments were received from one respondent, 
an industry association. All comments were considered in the 
development of this final rule. This final rule includes changes to 
adjust the specified values under Contract Type Risk to preclude a 
situation where the calculated profit objective would be greater for a 
fixed price contract with progress payments than it would for a similar 
contract without government financing. Other Consideration values for 
both Corporate Capital Investment and Unusual Request for GFP are 
adjusted. The facilities capital cost of money offset was changed to 
establish a ceiling of one percent. This final rule also includes 
changes made for clarification purposes.
    FAR 15.404-4(b)(1)(i) requires agencies to use a structured 
approach for determining profit or fee prenegotiation objectives. This 
revision to the NASA structured approach method uses a performance risk 
method for calculating profit and fee objectives instead of the 
currently used cost element approach. The revised approach is expected 
to provide more appropriate emphasis on the nature of the goods and 
services being acquired and on the risks inherent in delivering those 
goods and services and thereby prove to be more effective in motivating 
and rewarding contractor performance. In addition, the revised policy 
provides a common framework for NASA and industry to evaluate potential 
risk and profitability in a way that is relevant to both parties. FAR 
15.404-4(b)(2) permits agencies to use another agency's structured 
approach and the changes in this revised policy represent an Agency 
adaptation of DoD's alternate structured approach.

Impact

Regulatory Flexibility Act

    NASA certifies that this final rule will not 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 small entities receive contracts based on competition and 
are not subject to the structured fee process.

Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the NFS do not impose any recordkeeping or information collection 
requirements, or collections of information from offerors, contractors, 
or members of the public 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 1815

    Government procurement.
Tom Luedtke,
Associate Administrator for Procurement.
    Accordingly, 48 CFR Part 1815 is amended as follows:
    1. The authority citation for 48 CFR Part 1815 continues to read as 
follows:

    Authority: 42 U.S.C. 2473(c)(1).

PART 1815--CONTRACTING BY NEGOTIATION

    2. Sections 1815.404-4, 1815.404-470, and 1815.404-471 are revised 
and sections 1815.404-471-1, 1815.404-471-2, 1815.404-471-3, 1815.404-
471-4, and 1815.404-471-5 are added to read as follows:


1815.404-4   Profit. (NASA supplements paragraphs (b) and (c))

    (b)(1)(i)(a) The NASA structured approach for determining profit or 
fee objectives, described in 1815.404-471 shall be used to determine 
profit or fee objectives in the negotiation of contracts greater than 
or equal to $100,000 that use cost analysis and are:
    (1) Awarded on the basis of other than full and open competition 
(see FAR 6.3);
    (2) Awarded under NASA Research Announcements (NRAs) and 
Announcements of Opportunity (AO's); or
    (3) Awarded under the Small Business Innovative Research (SBIR) or 
the Small Business Technology Transfer Research (STTR) programs.
    (b) The rate calculated for the basic contract may only be used on 
actions under a negotiated contract when the conditions affecting 
profit or fee do not change.
    (c) Although specific agreement on the applied weights or values 
for individual profit or fee factors shall not be attempted, the 
contracting officer may encourage the contractor to--
    (1) Present the details of its proposed profit amounts in the 
structured approach format or similar structured approach; and
    (2) Use the structured approach method in developing profit or fee 
objectives for negotiated subcontracts.

[[Page 51473]]

    (ii) The use of the NASA structured approach for profit or fee is 
not required for:
    (a) Architect-engineer contracts;
    (b) Management contracts for operation and/or maintenance of 
Government facilities;
    (c) Construction contracts;
    (d) Contracts primarily requiring delivery of materials supplied by 
subcontractors;
    (e) Termination settlements; and
    (f) Contracts having unusual pricing situations when the 
procurement officer determines in writing that the structured approach 
is unsuitable.
    (c)(2) Contracting officers shall document the profit or fee 
analysis in the contract file.


1815.404-470   NASA Form 634.

    NASA Form (NF) 634 shall be used in performing the analysis 
necessary to develop profit or fee objectives.


1815.404-471   NASA structured approach for profit or fee objective.


1815.404-471-1   General.

    (a) The structured approach for determining profit or fee 
objectives (NF 634) focuses on three profit factors:
    (1) Performance risk;
    (2) Contract type risk including working capital adjustment; and
    (3) Other Considerations which may be considered by the contracting 
officer to account for special circumstances that are not adequately 
addressed in the performance risk and contract type risk factors.
    (b) The contracting officer assigns values to each profit or fee 
factor; the value multiplied by the base results in the profit/fee 
objective for that factor. Each factor has a normal value and a 
designated range of values. The normal value is representative of 
average conditions on the prospective contract when compared to all 
goods and services acquired by NASA. The designated range provides 
values based on above normal or below normal conditions. In the 
negotiation documentation, the contracting officer need not explain 
assignment of the normal value, but must address conditions that 
justify assignment of other than the normal value.


1815.404-471-2   Performance risk.

    (a) Risk factors. Performance risk addresses the contractor's 
degree of risk in fulfilling the contract requirements. It consists of 
three risk factors:
    (1) Technical--the technical uncertainties of performance;
    (2) Management--the degree of management effort necessary to ensure 
that contract requirements are met; and
    (3) Cost control--the contractor's efforts to reduce and control 
costs.
    (b) Risk factor weighting, values and calculations. A weighting and 
value is assigned to each of the risk factors to determine a profit/fee 
objective.
    (c) Values. The normal value is 6 percent and the designated range 
is 4 percent to 8 percent.
    (d) Evaluation criteria for technical risk factor. (1) In 
determining the appropriate value for the technical risk factor, the 
contracting officer shall review the contract requirements and focus on 
the critical performance elements in the statement of work or 
specifications. Contracting officers shall consider the--
    (i) Technology being applied or developed by the contractor;
    (ii) Technical complexity;
    (iii) Program maturity;
    (iv) Performance specifications and tolerances;
    (v) Delivery schedule; and
    (vi) Extent of a warranty or guarantee.
    (2) Above normal conditions indicating substantial technical risk. 
(i) The contracting officer may assign a higher than normal value in 
those cases where there is a substantial technical risk, such as when--
    (A) The contractor is either developing or applying advanced 
technologies;
    (B) Items are being manufactured using specifications with 
stringent tolerance limits;
    (C) The efforts require highly skilled personnel or require the use 
of state-of-the-art machinery;
    (D) The services or analytical efforts are extremely important to 
the government and must be performed to exacting standards;
    (E) The contractor's independent development and investment has 
reduced the Government's risk or cost;
    (F) The contractor has accepted an accelerated delivery schedule to 
meet the Government's requirements; or
    (G) The contractor has assumed additional risk through warranty 
provisions.
    (ii) The contracting officer may assign a value significantly above 
normal. A maximum value may be assigned when the effort involves--
    (A) Extremely complex, vital efforts to overcome difficult 
technical obstacles that require personnel with exceptional abilities, 
experience, and professional credentials;
    (B) Development or initial production of a new item, particularly 
if performance or quality specifications are tight; or
    (C) A high degree of development or production concurrency.
    (3) Below normal conditions indicating lower than normal technical 
risk. (i) The contracting officer may assign a lower than normal value 
in those cases where the technical risk is low, such as when the--
    (A) Acquisition is for off-the-shelf items;
    (B) Requirements are relatively simple;
    (C) Technology is not complex;
    (D) Efforts do not require highly skilled personnel;
    (E) Efforts are routine; or
    (F) Acquisition is a follow-on effort or a repetitive type 
acquisition.
    (ii) The contracting officer may assign a value significantly below 
normal. A minimum value may be justified when the effort involves--
    (A) Routine services;
    (B) Production of simple items;
    (C) Rote entry or routine integration of Government-furnished 
information; or
    (D) Simple operations with Government-furnished property.
    (e) Evaluation criteria for management risk factor. (1) In 
determining the appropriate value for the management risk factor, the 
contracting officer shall review the contract requirements and focus on 
the critical performance elements in the statement of work or 
specifications. Contracting officers shall--
    (i) Assess the contractor's management and internal control systems 
using contracting office information and reviews made by contract 
administration offices;
    (ii) Assess the management involvement expected on the prospective 
contract action; and
    (iii) Consider the degree of cost mix as an indication of the types 
of resources applied and value added by the contractor.
    (2) Above normal conditions indicating substantial management risk. 
(i) The contracting officer may assign a higher than normal value when 
the management effort is intense, such as when--
    (A) The contractor's value added is both considerable and 
reasonably difficult; or
    (B) The effort involves a high degree of integration and 
coordination.
    (ii) The contracting officer may justify a maximum value when the 
effort--
    (A) Requires large-scale integration of the most complex nature;
    (B) Involves major international activities with significant 
management coordination; or
    (C) Has critically important milestones.
    (3) Below normal conditions indicating lower than normal

[[Page 51474]]

management risk. (i) The contracting officer may assign a lower than 
normal value when the management effort is minimal, such as when--
    (A) The program is mature and many end item deliveries have been 
made;
    (B) The contractor adds minimum value to an item;
    (C) The efforts are routine and require minimal supervision;
    (D) The contractor fails to provide an adequate analysis of 
subcontractor costs; or
    (E) The contractor does not cooperate in the evaluation and 
negotiation of the proposal.
    (ii) The contracting officer may assign a value significantly below 
normal. A minimum value may be assigned when--
    (A) Reviews performed by the field administration offices disclose 
unsatisfactory management and internal control systems (e.g., quality 
assurance, property control, safety, security); or
    (B) The effort requires an unusually low degree of management 
involvement.
    (f) Evaluation criteria for cost control risk factor. (1) In 
determining the appropriate value for the cost control risk factor, the 
contracting officer shall--
    (i) Evaluate the expected reliability of the contractor's cost 
estimates (including the contractor's cost estimating system);
    (ii) Evaluate the contractor's cost reduction initiatives (e.g., 
competition advocacy programs);
    (iii) Assess the adequacy of the contractor's management approach 
to controlling cost and schedule; and
    (iv) Evaluate any other factors that affect the contractor's 
ability to meet the cost targets (e.g., foreign currency exchange rates 
and inflation rates).
    (2) Above normal conditions indicating substantial cost control 
risk. (i) The contracting officer may assign a value higher than normal 
value if the contractor can demonstrate a highly effective cost control 
program, such as when--
    (A) The contractor has an aggressive cost reduction program that 
has demonstrable benefits;
    (B) The contractor uses a high degree of subcontract competition; 
or
    (C) The contractor has a proven record of cost tracking and 
control.
    (3) Below normal conditions indicating lower than normal cost 
control risk. (i) The contracting officer may assign a lower than 
normal value in those cases where the contractor demonstrates minimal 
concern for cost control, such as when--
    (A) The contractor's cost estimating system is marginal;
    (B) The contractor has made minimal effort to initiate cost 
reduction programs;
    (C) The contractor's cost proposal is inadequate; or
    (D) The contractor has a record of cost overruns or the indication 
of unreliable cost estimates and lack of cost control.


1815.404-471-3  Contract type risk and working capital adjustment.

    (a) Risk factors. The contract type risk factor focuses on the 
degree of cost risk accepted by the contractor under varying contract 
types. The working capital adjustment is an adjustment added to the 
profit objective for contract type risk. It applies to fixed-price type 
contracts that provide for progress payments. Though it uses a formula 
approach, it is not intended to be an exact calculation of the cost of 
working capital. Its purpose is to give general recognition to the 
contractor's cost of working capital under varying contract 
circumstances, financing policies, and the economic environment. This 
adjustment is limited to a maximum of 2 percent.
    (b) Risk factor values and calculations. A risk value is assigned 
to calculate the profit or fee objective for contract type. A contract 
length factor is assigned and applied to costs financed when a working 
capital adjustment is appropriate. This calculation is only performed 
when the prospective contract is a fixed-price contract containing 
provisions for progress payments.
    (c) Values: Normal and designated ranges. 

------------------------------------------------------------------------
                                                            Designated
         Contract Type             Note    Normal value       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     .5 to 3.5
 performance-based payments.
Fixed-price, redeterminable...        (3)
Fixed-price-incentive, with           (2)          1     0 to 2
 progress payments.
Cost-plus-incentive-fee.......        (4)          1     0 to 2
Cost-plus-award fee...........        (4)           .75  .5 to 1.5
Cost-plus-fixed fee...........        (4)           .5   0 to 1
Time-and-materials............        (5)           .5   0 to 1
Labor-hour....................        (5)           .5   0 to 1
Firm-fixed-price, level-of-           (5)           .5   0 to 1
 effort, term.
------------------------------------------------------------------------

    (1) ``No financing,'' means that the contract either does not 
provide progress or performance based payments, or provides them only 
on a limited basis. Do not compute a working capital adjustment.
    (2) When progress payments are present, compute a working capital 
adjustment.
    (3) For purposes of assigning profit values, treat a fixed-price 
redeterminable contract as if it were a fixed-price-incentive contract 
with below normal provisions.
    (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. Do not compute 
the working capital adjustment. However, higher than normal values may 
be assigned 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 shall 
consider elements that affect contract type risk such as--
    (i) Length of contract;
    (ii) Adequacy of cost projection data;
    (iii) Economic environment;
    (iv) Nature and extent of subcontracted activity;

[[Page 51475]]

    (v) Protection provided to the contractor under contract provisions 
(e.g., economic price adjustment clauses);
    (vi) The ceilings and share lines contained in the incentive 
provisions; and
    (vii) The rate, frequency, and risk to the contractor of 
performance-based payments, if provided.
    (2) Mandatory. The contracting officer shall assess the extent to 
which costs have been incurred prior to definitization 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 contract type risk. 
Conditions indicating higher than normal contract type risk are--
    (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 that place a high degree of risk on the 
contractor;
    (iv) Performance-based payments totaling less than the maximum 
allowable amount(s) specified at FAR 32.1004(b)(2); or
    (v) 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. Conditions 
indicating lower than normal contract type risk 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, e.g. economic price adjustment provisions; and
    (iv) Incentive provisions that place a low amount of risk on the 
contractor.
    (v) A performance-based payment schedule that is routine with 
minimal risk.
    (e) Costs financed. (1) Costs financed equal the total costs 
multiplied by the percent of costs financed by the contractor.
    (2) Total costs may be reduced as appropriate when--
    (i) The contractor has little cash investment (e.g., subcontractor 
progress payments are liquidated late in the period of performance);
    (ii) Some costs are covered by special funding arrangements, such 
as advance payments;
    (3) The portion financed by the contractor is generally the portion 
not covered by progress payments. (i.e.--for progress payments: 100 
percent minus the customary progress payments rate. 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 business, use the customary progress payment 
rate for large businesses.)
    (f) Contract length factor. (1) This is the period of time that the 
contractor has a working capital investment in the contract. It--
    (i) Is based on the time necessary for the contractor to complete 
the substantive portion of the work;
    (ii) Is not necessarily the period of time between contract award 
and final delivery, as periods of minimal effort should be excluded;
    (iii) Should not include periods of performance contained in option 
provisions when calculating the objective for the base period; and
    (iv) Should not, for multiyear contracts, include periods of 
performance beyond that required to complete the initial year's 
requirements.
    (2) The contracting officer--
    (i) Should use the following to select the contract length factor:

------------------------------------------------------------------------
                                                             Contract
    Period to perform substantive portion (in months)      length factor
------------------------------------------------------------------------
21 or less..............................................             .40
22 to 27................................................             .65
28 to 33................................................             .90
34 to 39................................................            1.15
40 or more..............................................            1.40
------------------------------------------------------------------------

    (ii) Should develop a weighted average contract length when the 
contract has multiple deliveries; and
    (iii) May use sampling techniques provided they produce a 
representative result.
    (3) Example: A prospective contract has a performance period of 40 
months with end items being delivered in the 34th, 36th, 38th and 40th 
months of the contract. The average period is 37 months and the 
contract length factor is 1.15.


1815.404-471-4  Other considerations.

    (a) Other Considerations may be included by the contracting officer 
to account for special circumstances, such as contractor efficiencies 
or unusual acceptance of contractual or program risks that are not 
adequately addressed in the structured approach calculations described 
in 1815.404-471-2 or 1815.404-4713. The total adjustment resulting from 
Other Considerations may be positive or negative but in no case should 
the total adjustment exceed +/-5 percent.
    (b) The contracting officer shall analyze and verify information 
provided by the contractor that demonstrates that the special 
circumstances being recognized under this section--
    (1) Provide substantial benefits to the Government under the 
contract and/or overall program;
    (2) Have not been recognized in the structured approach 
calculations; and
    (3) Represent unusual and innovative actions or acceptance of risk 
by the contractor.
    (c) Examples of special circumstances include, but are not limited 
to the following:
    (1) Consistent demonstration by the contractor of excellent past 
performance within the last three years, with a special emphasis on 
excellence in safety, may merit an upward adjustment of as much as 1 
percent. Similarly, an assessment of poor past performance, especially 
in the area of safety, may merit a downward adjustment of as much -1 
percent. This consideration is especially important when negotiating 
modifications or changes to an ongoing contract.
    (2) Extraordinary steps to achieve the Government's socioeconomic 
goals, environmental goals, and public policy goals established by law 
or regulation that are sufficiently unique or unusual may merit an 
upward adjustment of as much as .5 percent. Similarly, for non-
participation in or violation of Federal programs, the contracting 
officer may adjust the objective by as much as -.5 percent. However, 
this consideration does not apply to the utilization of small 
disadvantaged businesses. Incentives for use of these firms may only be 
structured according to FAR 19.1203 and 19.1204(c).
    (3) Consideration of up to 1 percent should be given when contract 
performance requires the expenditure of significant corporate capital 
resources.
    (4) Unusual requests for use of government facilities and property 
may merit a downward adjustment of as much as--1 percent.
    (5) Cost efficiencies arising from innovative product design, 
process improvements, or integration of a life cycle cost approach for 
the design and development of systems that minimize maintenance and 
operations costs, that have not been recognized in Performance Risk or 
Contract Type Risk, may merit an upward adjustment. This factor is 
intended to recognize and

[[Page 51476]]

reward improvements resulting from better ideas and management that 
will benefit the Government in the contract and/or program.
    (d) Other considerations need not be limited to situations that 
increase profit/fee levels. A negative consideration may be appropriate 
when there is a significant expectation of near-term spin-off benefits 
as a direct result of the contract.


1815.404-471-5  Facilities capital cost of money.

    (a) When facilities capital cost of money is included as an item of 
cost in the contractor's proposal, it shall not be included in the cost 
base for calculating profit/fee. In addition, a reduction in the 
profit/fee objective shall be made in the amount equal to the 
facilities capital cost of money allowed in accordance with FAR 31.205-
10(a)(2) or 1 percent of the cost base, whichever is less.
    (b) CAS 417, cost of money as an element of the cost of capital 
assets under construction, should not appear in contract proposals. 
These costs are included in the initial value of a facility for 
purposes of calculating depreciation under CAS 414.
[FR Doc. 99-24852 Filed 9-22-99; 8:45 am]
BILLING CODE 7510-01-U