Addition of Coverage to NASA FAR Supplement (NFS) on NASA Shared Savings Clause

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 1843 and 1852

Addition of Coverage to NASA FAR Supplement (NFS) on NASA Shared

Savings Clause

AGENCY: Office of Procurement, National Aeronautics and Space

Administration (NASA).

ACTION: Final rule.

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SUMMARY: Parts 1843 and 1852 are amended to establish the conditions

for use and the administrative procedures for a ``Shared Savings

Clause'' to be used in solicitations and contracts.

EFFECTIVE DATE: December 9, 1996.

ADDRESSES: Mr. James A. Balinskas, Code HC, NASA Headquarters, 300 E

Street SW, Washington, DC 20546-0001.

FOR FURTHER INFORMATION CONTACT:

Mr. James A. Balinskas, NASA Headquarters, Code HC, telephone: (202)

358-0445.

SUPPLEMENTARY INFORMATION:

Background

On October 20, 1995, a proposed rule to amend the NFS to add a

``Shared Savings Clause'' was published in the Federal Register (60 FR

54208). The intent of the clause was to provide an incentive for

contractors to identify and implement significant cost reduction

programs. In return, they would be eligible for a share of realized

savings which resulted from those cost-cutting projects once they were

approved by the contracting officer. Comments were received both from

within NASA and from industry. All comments were reviewed and the rule

was revised to reflect the comments where it was considered warranted.

Many of the revisions were made to clarify definitions, improve

consistency of terms used throughout the contract clause, limit

applicability of the clause to the appropriate classes of contracts,

and better communicate how the provisions of the clause were intended

to operate. In addition, the location of the proposed rule within the

NFS was also changed.

Impact

NASA certifies that this regulation will not have a significant

economic impact on a substantial number of small entities under the

Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This rule does not

impose any recordkeeping requirements subject to the Paperwork

Reduction Act.

List of Subjects in 48 CFR Parts 1843 and 1852

Government procurement.

Tom Luedtke,

Deputy Associate Administrator for Procurement.

Accordingly, 48 CFR 1843 and 1852 are amended as follows:

1. The authority citation for 48 CFR 1843 and 1852 continues to

read as follows:

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

PART 1843--CONTRACT MODIFICATIONS

Subpart 1843.71--[Added]

2. Subpart 1843.71 is added to read as follows:

Subpart 1843.71--Shared Savings

1843.7101 Shared Savings Program.

This subpart establishes and describes the methods for implementing

and administering a Shared Savings Program. This program provides an

incentive for contractors to propose and implement, with NASA approval,

significant cost reduction initiatives. NASA will benefit as the more

efficient business practices that are implemented lead to reduced costs

on current and follow-on contracts. In return, contractors are entitled

to share in cost savings subject to limits established in the contract.

The contracting officer may require the contractor to provide periodic

reporting, or other justification, or to require other steps (e.g.,

cost segregation) to ensure projected cost savings and being realized.

1843.7102 Solicitation provision and contract clause.

The contracting officer shall insert the clause at 1852.243-71,

Shared Savings, in all solicitations and contracts expected to exceed

$1,000,000, except those awarded under FAR part 12, NRA,

[[Page 64824]]

or AO procedures, or those awarded under the SBIR or STTR programs.

PART 1852--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

1852.243-71 [Added]

3. Section 1852.243-71 is added to read as follows:

1852.243-71 Shared Savings.

As prescribed in 1843.7102, insert the following clause:

SHARED SAVINGS

December 1996

(a) The Contractor is entitled, under the provisions of this

clause, to share in cost savings resulting from the implementation

of cost reduction projects which are presented to the Government in

the form of Cost Reduction Proposals (CRP) and approved by the

Contracting Officer. These cost reduction projects may require

changes to the terms, conditions or statement of work of this

contract. Any cost reduction projects must not change the essential

function of any products to be delivered or the essential purpose of

services to be provided under the contract.

(b) Definitions: (1) Cost savings, as contemplated by this

clause, means savings that result from instituting changes to the

covered contract, as identified in an approved Cost Reduction

Proposal.

(2) Cost Reduction Proposal (CRP)--For the purposes of this

clause, a Cost Reduction Proposal means a proposal that recommends

alternatives to the established procedures and/or organizational

support of a contract or group of contracts. These alternatives must

result in a net reduction of contract cost and price to NASA. The

proposal will include technical and cost information sufficient to

enable the Contracting Officer to evaluate the CRP and approve or

disapprove it.

(3) Covered contract--As used in this clause, covered contract

means the contract, including unexercised options but excluding

future contracts, whether contemplated or not, against which the CRP

is submitted.

(4) Contractor implementation costs--As used in this clause,

contractor implementation costs, or ``implementation costs'', shall

mean those costs which the Contractor incurs on covered contracts

specifically in developing, preparing, submitting, and negotiating a

CRP, as well as those costs the Contractor will incur on covered

contracts to make any structural or organizational changes in order

to implement an approved CRP.

(5) Government costs--As used in this clause, the term

government costs means internal costs of NASA, or any other

government agency, which result directly from development and

implementation of the CRP. These may include, but are not limited

to, costs associated with the administration of the contract or with

such contractually related functions such as testing, operations,

maintenance and logistics support. These costs also include costs

associated with other Agency contracts (including changes in

contract price or cost and fee) that may be affected as a result of

the implementation of a CRP. They do not include the normal

administrative costs of reviewing and processing the CRP.

(c) General. The Contractor will develop, prepare and submit

CRPs with supporting information, as detailed in paragraph (e) of

this clause, to the Contracting Officer. The CRP will describe the

proposed cost reduction activity in sufficient detail to enable the

Contracting Officer to evaluate it and to approve or disapprove it.

The Contractor shall share in any net cost savings realized from

approved and implemented CRPs in accordance with the terms of this

clause. The Contractor's actual percentage share of the cost savings

shall be a matter for negotiation with the Contracting Officer, but

shall not, in any event, exceed 50 percent of the total cost savings

recognized by the Contracting Officer. The Contractor may propose

changes in other activities that impact performance on its contract,

including government and other contractor operations, if such

changes will optimize cost savings. A Contractor shall not be

entitled to share, however, in any cost savings that are internal to

the Government, or which result from changes made to any contracts

to which it is not a party even if those changes were proposed as a

part of its CRP. Early communication between the Contractor and the

Government is encouraged. The communication may be in the form of a

concept paper or preliminary proposal. The Government is not

committed to accepting any proposal as a result of these early

discussions.

(d) Computation of cost savings. The cost savings to be shared

between the Government and the Contractor will be computed by the

Contracting Officer by comparing a current estimate to complete

(ETC) for the covered contract, as structured before implementation

of the proposed CRP, to a revised ETC which takes into account the

implementation of that CRP. The cost savings to be shared shall be

reduced by any cost overrun, whether experienced or projected, that

is identified on the covered contract before implementation of the

CRP. Although a CRP may result in cost savings that extend far into

the future, the period in which the Contractor may share in those

savings will be limited to no more than five years. Implementation

costs of the Contractor must be considered and specifically

identified in the revised ETC. The Contracting Officer shall offset

Contractor cost savings by any increased costs (whether implementing

or recurring) to the Government when computing the total cost

savings to be shared. The Contractor shall not be entitled, under

the provisions of this clause, to share in any cost reductions to

the contract that are the result of changes stemming from any action

other than an approved CRP. However, this clause does not limit

recovery of any such reimbursements that are allowed as a result of

other contract provisions.

(e) Supporting Information. As a minimum, the Contractor shall

provide the following supporting information with each CRP:

(1) Identification of the current contract requirements or

established procedures and/or organizational support which are

proposed to be changed.

(2) A description of the difference between the current process

or procedure and the proposed change. This description shall address

how proposed changes will meet NASA requirements and discuss the

advantages and disadvantages of the existing practice and the

proposed changes.

(3) A list of contract requirements which must be revised, if

any, if the CRP is approved, along with proposed revisions. Any

changes to NASA or delegated contract management processes should

also be addressed.

(4) Detailed cost estimates which reflect the implementation

costs of the CRP.

(5) An updated ETC for the covered contract, unchanged, and a

revised ETC for the covered contract which reflects changes

resulting from implementing the CRP. If the CRP proposes changes to

only a limited number of elements of the contract, the ETCs need

only address those portions of the contract that have been impacted.

Each ETC shall depict the level of costs incurred or to be incurred

by year, or to the level of detail required by the Contracting

Officer. If other CRPs have been proposed or approved on a contract

the impact of these CRPs must be addressed in the computation of the

cost savings to ensure that the cost savings identified are

attributable only to the CRP under consideration in the instant

case.

(6) Identification of any other previous submissions of the CRP,

including the dates submitted, the agencies and contracts involved,

and the disposition of those submittals.

(f) Administration.

(1) The Contractor shall submit proposed CRPs to the Contracting

Officer who shall be responsible for the review, evaluation and

approval. Normally, CRPs should not be entertained for the first

year of performance to allow the Contracting Officer to assess

performance against the basic requirements. If a cost reduction

project impacts more than a single contract, the contractor may,

upon concurrence of the Contracting Officer's responsible for the

affected contracts, submit a single CRP which addresses fully the

cost savings projected on all affected contracts that contain this

Shared Savings Clause. In the case of multiple contracts affected,

responsibility for the review and approval of the CRP will be a

matter to be decided by the affected Contracting Officers.

(2) Within 60 days of receipt, the Contracting Officer shall

complete an initial evaluation of any proposed cost reduction plan

to determine its feasibility. Failure of the Contracting Officer to

provide a response within 60 days shall not be construed as approval

of the CRP. The Government shall promptly notify the Contractor of

the results of its initial evaluation and indicate what, if any,

further action will be taken. If the Government determines that the

proposed CRP has merit, it will open discussions with the Contractor

to establish the cost savings to be recognized, the Contractor's

share of the cost savings, and a payment schedule. The Contractor

shall continue to perform in accordance with the terms and

conditions of the existing contract until a contract

[[Page 64825]]

modification is executed by the Contracting Officer. The

modification shall constitute approval of the CRP and shall

incorporate the changes identified by the CRP, adjust the contract

cost and/or price, establish the Contractor's share of cost savings,

and incorporate the agreed to payment schedule.

(3) The Contractor will receive payment by submitting invoices

to the Contracting Officer for approval. The amount and timing of

individual payments will be made in accordance with the schedule to

be established with the Contracting Officer. Notwithstanding the

overall savings recognized by the Contracting Officer as a result of

an approved CRP, payment of any portion of the Contractor's share of

savings shall not be made until NASA begins to realize a net cost

savings on the contract (i.e., implementation, startup and other

increased costs resulting from the change have been offset by

cumulative cost savings). Savings associated with unexercised

options will not be paid unless and until the contract options are

exercised. It shall be the responsibility of the Contractor to

provide such justification as the Contracting Officer deems

necessary to substantiate that cost savings are being achieved.

(4) Any future activity, including a merger or acquisition

undertaken by the Contractor (or to which the Contractor becomes an

involved party), which has the effect of reducing or reversing the

cost savings realized from an approved CRP for which the Contractor

has received payment may be cause for recomputing the net cost

savings associated with any approved CRP. The Government reserves

the right to make an adjustment to the Contractor's share of cost

savings and to receive a refund of moneys paid if necessary. Such

adjustment shall not be made without notifying the Contractor in

advance of the intended action and affording the Contractor an

opportunity for discussion.

(g) Limitations. Contract requirements that are imposed by

statute shall not be targeted for cost reduction exercises. The

Contractor is precluded from receiving reimbursements under both

this clause and other incentive provisions of the contract, if any,

for the same cost reductions.

(h) Disapproval of, or failure to approve, any proposed cost

reduction proposal shall not be considered a dispute subject to

remedies under the Disputes clause.

(i) Cost savings paid to the Contractor in accordance with the

provisions of this clause do not constitute profit or fee within the

limitations imposed by 10 U.S.C. 2306(d) and 41 U.S.C. 254(b).

(End of clause)

[FR Doc. 96-31134 Filed 12-6-96; 8:45 am]

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