NASA Structured Approach for Profit or Fee Objective

Federal RegisterJun 8, 1999

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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: Proposed rule.

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SUMMARY: This proposed NASA FAR Supplement (NFS) revision modifies the

agency's structured approach for developing a profit or fee objective.

This change 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; and retains with modification the Other

Considerations factor contained in the structured approach currently

prescribed. The new form for developing the profit/fee objectives, NASA

Form 634, is provided for information at the end of the proposed rule

as an attachment to the preamble. An electronic version is also

available at http://ec.msfc.nasa.gov/hq/library/NF634-2.xlc.

DATES: Comments should be submitted on or before August 9, 1999.

ADDRESSES: Interested parties should submit written comments to Donna

Fortunat, NASA Headquarters, Office of Procurement, Analysis Division

(Code HC), Washington, DC 20546. Comments may also be submitted by e-

mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Donna Fortunat, NASA Headquarters,

Code HC, Washington, DC 20546, telephone: (202) 358-0426; email:

[email protected].

SUPPLEMENTARY INFORMATION:

Background

FAR 15.404-4(b)(1)(i) requires agencies to use a structured

approach for determining profit or fee prenegotiation objectives. This

proposed 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

An initial Regulatory Flexibility Analysis has not been prepared

because the proposed change 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. 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 CFR Part 1815

Government Procurement

Tom Luedtke,

Acting Associate Administrator for Procurement.

Accordingly, 48 CFR Part 1815 is proposed to be amended as follows:

PART 1815--CONTRACTING BY NEGOTIATION

1. The authority citation for 48 CFR Part 1815 continues to read as

follows:

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

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 be used on all

actions under the contract, provided that conditions affecting profit

or fee do not change.

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.

(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;

(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 investment; and

(3) Other Considerations which may be considered by the contracting

officer to account for special circumstances

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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.

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;

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

(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;

(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;

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

(3) Below normal conditions indicating lower than normal 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;

(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);

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(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 provides fully documented and reliable cost

estimates;

(B) The contractor has an aggressive cost reduction program that

has demonstrable benefits;

(D) 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;

(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 4 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.

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Normal value

Contract type Note (percent) Designated range (percent)

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Firm-fixed-price, no financing.................. (1) 5 4 to 6.

Firm-fixed-price with performance-based payments (6) 4 2.5 to 5.5.

Firm-fixed-price with progress payments......... (2) 4 3 to 5.

Fixed-price-incentive, no financing............. (1) 3 2 to 4.

Fixed-price-incentive, with performance-based (6) 2 .5 to 3.5.

payments.

Fixed-price, redeterminable..................... (3) 0 0.

Fixed-price-incentive, with progress payments... (2) 2 1 to 3.

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-effort, term......... (5) .5 0 to 1.

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(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;

(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

[[Page 30471]]

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;

(iv) Incentive provisions that place a low amount of risk on the

contractor; and

(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); or

(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., 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 to 45.................................................. 1.40

46 to 51.................................................. 1.65

52 to 57.................................................. 1.90

58 to 63.................................................. 2.15

64 to 69.................................................. 2.40

70 to 75.................................................. 2.65

76 or more................................................ 2.90

------------------------------------------------------------------------

(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.

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 socio-economic

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 2 percent should be given when contract

performance requires the expenditure of significant corporate capital

resources. Conversely, unusual requests for use of government

facilities and property may merit a downward adjustment of as much as

-2 percent.

(4) 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 reward improvements resulting from better

ideas and management that will benefit the Government in the contract

and/or program.

(5) A negative consideration may be appropriate when the contractor

is expected to obtain spin-off benefits as a direct result of the

contract, for example, products with commercial application.

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).

(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.

BILLING CODE 7510-01-P

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Attachment: NASA FORM 634

Note: This form will not appear in the CFR, but is provided for

information as an attachment to the preamble.

[GRAPHIC] [TIFF OMITTED] TP08JN99.000

[FR Doc. 99-14452 Filed 6-7-99; 8:45 am]

BILLING CODE 7510-01-C

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