[Federal Register Volume 65, Number 240 (Wednesday, December 13, 2000)]
[Rules and Regulations]
[Pages 77829-77831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31601]



48 CFR Part 215

[DFARS Case 2000-D300]

Defense Federal Acquisition Regulation Supplement; Profit 
Incentives To Produce Innovative New Technologies

AGENCY: Department of Defense (DoD).

ACTION: Final rule.


SUMMARY: The Director Defense Procurement has issued a final rule 
amending the Defense Federal Acquisition Regulation Supplement (DFARS) 
to implement Section 813 of the National Defense Authorization Act for 
Fiscal Year 2000. Section 813 requires DoD to review its profit 
guidelines to consider whether appropriate modifications, such as 
placing increased emphasis on technical risk as a factor for 
determining appropriate profit margins, would provide an increased 
profit incentive for contractors to develop and produce complex and 
innovative new technologies.

EFFECTIVE DATE: December 13, 2000.

FOR FURTHER INFORMATION CONTACT: Ms. Amy Williams, Defense Acquisition 
Regulations Council, OUSD (AT&L) DP(DAR), IMD 3C132, 3062 Defense 
Pentagon, Washington, DC 20301-3062. Telephone (703) 602-0288; 
facsimile (703) 602-0350. Please cite DFARS Case 2000-D300.


A. Background

    This final rule amends DoD profit policy to implement Section 813 
of the National Defense Authorization Act for Fiscal Year 2000 (Public 
Law 106-65). The rule amends the weighted guidelines method of profit 
computation at DFARS 215.404-71 to combine the management and cost 
control elements of the performance risk factor; to establish a new 
``technology incentive'' range for technical risk; and to slightly 
modify some of the cost control standards. In addition, the rule amends 
DFARS 215.404-4(b) to clarify that DoD departments and agencies must 
use a structured approach for developing a prenegotiation profit for 
fee objective on any negotiated contract action when cost or pricing 
data is obtained.
    DoD published a proposed rule at 65 FR 32066 on May 22, 2000. Five 
sources submitted comments on the proposed rule. DoD considered all 
comments in the development of the final rule. The final rule is 
similar to the proposed rule, except for changes at 215.404-71-2(c)(3) 
that: (1) Permit use of the technology incentive range for acquisitions 
that include application of innovative new technologies; and (2) 
specify that the technology incentive range does not apply to efforts 
restricted to studies, analyses, or demonstrations that have a 
technical report as their primary deliverable.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    DoD 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 contracts awarded to small entities are below $500,000, 
are based on adequate price competition, or are for commercial items, 
and do not require submission of cost or pricing data.

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

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


    2. Section 215.404-4 is amended by revising paragraph (b)(1) 
introductory text to read as follows:

215.404-4  Profit.

    (b) * * * (1) Departments and agencies must use a structured 
approach for developing a prenegotiation profit or fee objective on any 
negotiated contract action when cost or pricing data is obtained, 
except for cost-plus-award-fee contracts (see 215.404-74) or contracts 
with Federally Funded Research and Development Centers (FFRDCs) (see 
215.404-75). There are three structured approaches--
* * * * *

    3. Section 215.404-71-2 is revised to read as follows:

215.404-71-2  Performance risk.

    (a) Description. This profit factor addresses the contractor's 
degree of risk in fulfilling the contract requirements. The factor 
consists of two parts:
    (1) Technical--the technical uncertainties of performance.
    (2) Management/cost control--the degree of management effort 
    (i) To ensure that contract requirements are met; and
    (ii) To reduce and control costs.
    (b) Determination. The following extract from the DD Form 1547 is 
annotated to describe the process.

[[Page 77830]]

                                                                Assigned     Assigned   Base  (item     Profit
            Item                 Contractor risk factors       weighting      value         18)       objective
21.........................  Technical......................          (1)          (2)          N/A          N/A
22.........................  Management/Cost Control........          (1)          (2)          N/A          N/A
23.........................  Reserved.......................
24.........................  Performance Risk (Composite)...          N/A          (3)          (4)          (5)

    (1) Assign a weight (percentage) to each element according to its 
input to the total performance risk. The total of the two weights 
equals 100 percent.
    (2) Select a value for each element from the list in paragraph (c) 
of this subsection using the evaluatio criteria in paragraphs (d) and 
(e) of this subsection.
    (3) Compute the composite as shown in the following example:

                             [In percentage]
                                            Assigned  Assigned  Weighted
                                           weighting    value     value
Technical................................         60       5.0       3.0
Management/Cost Control..................         40       4.0       1.6
Composite Value..........................        100  ........       4.6

    (4) Insert the amount from Block 18 of the DD Form 1547. Block 18 
is total contract costs, excluding general and administrative expenses, 
contractor independent research and development and bid and proposal 
expenses, and facilities capital cost of money.
    (5) Multiply (3) by (4).
    (c) Values: Normal and designated ranges.

                             [In percentage]
                                     Normal value     Designated range
Standard...........................            4   2 to 6.
Alternate..........................            6   4 to 8.
Technology Incentive...............            8   6 to 10.

    (1) Standard. The standard designated range should apply to most 
    (2) Alternate. Contracting officers may use the alternate 
designated range for research and development and service contractors 
when these contractors require relatively low capital investment in 
buildings and equipment when compared to the defense industry overall. 
If the alternate designated range is used, do not give any profit for 
facilities capital employed (see 215.404-71-4(c)(3)).
    (3) Technology incentive. For the technical factor only, 
contracting officers may use the technology incentive range for 
acquisitions that include development, production, or application of 
innovative new technologies. The technology incentive range does not 
apply to efforts restricted to studies, analyses, or demonstrations 
that have a technical report as their primary deliverable.
    (d) Evaluation criteria for technical.
    (1) Review the contract requirements and focus on the critical 
performance elements in the statement of work or specifications. 
Factors to consider include--
    (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.
    (i) The contracting officer may assign a higher than normal value 
in those cases where there is a substantial technical risk. Indicators 
    (A) Items are being manufactured using specifications with 
stringent tolerance limits;
    (B) The efforts require highly skilled personnel or require the use 
of state-of-the-art machinery;
    (C) The services and analytical efforts are extremely important to 
the Government and must be performed to exacting standards;
    (D) The contractor's independent development and investment has 
reduced the Government's risk or cost;
    (E) The contractor has accepted an accelerated delivery schedule to 
meet DoD requirements; or
    (F) The contractor has assumed additional risk through warranty 
    (ii) Extremely complex, vital efforts to overcome difficult 
technical obstacles that require personnel with exceptional abilities, 
experience, and professional credentials may justify a value 
significantly above normal.
    (iii) The following may justify a maximum value--
    (A) Development or initial production of a new item, particularly 
if performance or quality specifications are tight; or
    (B) A high degree of development or production concurrency.
    (3) Below normal conditions.
    (i) The contracting officer may assign a lower than normal value in 
those cases where the technical risk is low. Indicators are--
    (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;
    (F) Programs are mature; or
    (G) Acquisition is a follow-on effort or a repetitive type 
    (ii) The contracting officer may assign a value significantly below 
normal for--
    (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.
    (4) Technology incentive range.
    (i) The contracting officer may assign values within the technology 
incentive range when contract performance includes the introduction of 
new, significant technological innovation. Use the technology incentive 
range only for the most innovative contract efforts. Innovation may be 
in the form of--
    (A) Development or application of new technology that fundamentally 
changes the characteristics of an existing product or system and that 
results in increased technical performance, improved reliability, or 
reduced costs; or
    (B) New products or systems that contain significant technological 
advances over the products or systems they are replacing.
    (ii) When selecting a value within the technology incentive range, 
the contracting officer should consider the relative value of the 
proposed innovation to the acquisition as a whole. When the innovation 
represents a minor benefit, the contracting officer should consider 
using values less than the norm. For innovative efforts that will have 
a major positive impact on the product or program, the contracting 
officer may use values above the norm.
    (e) Evaluation criteria for management/cost control.
    (1) The contracting officer should evaluate--
    (i) The contractor's management and internal control systems using 
contracting office information and

[[Page 77831]]

reviews made by field contract administration offices or other DoD 
field offices;
    (ii) The management involvement expected on the prospective 
contract action;
    (iii) The degree of cost mix as an indication of the types of 
resources applied and value added by the contractor;
    (iv) The contractor's support of Federal socioeconomic programs;
    (v) The expected reliability of the contractor's cost estimates 
(including the contractor's cost estimating system);
    (vi) The contractor's cost reduction initiatives (e.g., competition 
advocacy programs, technical insertion programs, obsolete parts control 
programs, dual sourcing, spare parts pricing reform, value 
    (vii) The adequacy of the contractor's management approach to 
controlling cost and schedule; and
    (viii) 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.
    (i) The contracting officer may assign a higher than normal value 
when the management effort is intense. Indicators of this are--
    (A) The contractor's value added is both considerable and 
reasonably difficult;
    (B) The effort involves a high degree of integration or 
    (C) The contractor has a substantial record of active participation 
in Federal socioeconomic programs;
    (D) The contractor provides fully documented and reliable cost 
    (E) The contractor has an aggressive cost reduction program that 
has demonstrable benefits;
    (F) The contractor uses a high degree of subcontract competition 
(e.g., aggressive dual sourcing);
    (G) The contractor has a proven record of cost tracking and 
control; or
    (H) The contractor aggressively seeks process improvements to 
reduce costs.
    (ii) The contracting officer may justify a maximum value when the 
    (A) Requires large scale integration of the most complex nature;
    (B) Involves major international activities with significant 
management coordination (e.g., offsets with foreign vendors); or
    (C) Has critically important milestones.
    (3) Below normal conditions.
    (i) The contracting officer may assign a lower than normal value 
when the management effort is minimal. Indicators of this are--
    (A) The program is mature and many end item deliveries have been 
    (B) the contractor adds minimal value to an item;
    (C) The efforts are routine and require minimal supervision;
    (D) The contractor provides poor quality, untimely proposals;
    (E) The contractor fails to provide an adequate analysis of 
subcontractor costs;
    (F) The contractor does not cooperate in the evaluation and 
negotiation of the proposal;
    (G) The contractor's cost estimating system is marginal;
    (H) The contractor has made minimal effort to initiate cost 
reduction programs;
    (I) The contractor's cost proposal is inadequate; or
    (J) The contractor has a record of cost overruns or another 
indication of unreliable cost estimates and lack of cost control.
    (ii) The following may justify a value significantly below normal--
    (A) Reviews performed by the field contract 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 

    4. Section 215.404-72 is amended by adding paragraph (b)(1)(iii) to 
read as follows:

215.404-72  Modified weighted guidelines method for nonprofit 
organizations other than FFRDCs.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Do not assign a value from the technology incentive 
designated range.
* * * * *
[FR Doc. 00-31601 Filed 12-12-00; 8:45 am]