[Federal Register: May 22, 2000 (Volume 65, Number 99)]
[Proposed Rules]               
[Page 32066-32069]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



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: Proposed rule with request for comments.


SUMMARY: The Acting Director of Defense Procurement is proposing to 
amend 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.

[[Page 32067]]

DATES: Comments on the proposed rule should be submitted in writing to 
the address shown below on or before July 21, 2000, 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. 
Amy Williams, PDUSD(AT&L) DP(DAR), IMD 3D139, 3062 Defense Pentagon, 
Washington, DC 20301-3062. Telefax (703) 602-0350.
    E-mail comments submitted via the Internet should be addressed to: 
    Please cite DFARS Case 2000-D300 in all correspondence related to 
this proposed rule. E-mail correspondence should cite DFARS Case 2000-
D300 in the subject line.

FOR FURTHER INFORMATION CONTACT: Ms. Amy Williams, (703) 602-0288.


A. Background

    This rule proposes amendments to the profit policy in DFARS Subpart 
215.4 to implement Section 813 of the National Defense Authorization 
Act for Fiscal Year 2000 (Public Law 106-65). DoD published an advance 
notice of proposed rulemaking on February 10, 2000 (65 FR 6574), posted 
a preliminary draft on potential changes on the Defense Procurement 
Internet web site, and held a public meeting on February 23, 2000. 
Representatives from Government and industry participated in the public 
    The proposed 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, based on 
comments received at the public meeting, 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 or fee objective on any 
negotiated contract action when cost or pricing data is obtained.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

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 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. Therefore, an initial 
regulatory flexibility analysis has 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 2000-D300.

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:

    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.

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

    <SUP>1</SUP> 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.
    <SUP>2</SUP> Select a value for each element from the list in 
paragraph (c) of this subsection using the evaluation criteria in 
paragraphs (d) and (e) of this subsection.
    <SUP>3</SUP> Compute the composite as shown in the following 

                                                                     weighting    Assigned value 
Weighted value
                                                                     (percent)       (percent)       (percent)
    Technical...................................................              60             5.0             3.0
    Management/Cost Control.....................................              40             4.0             1.6

[[Page 32068]]

    Composite Value.............................................             100  ..............             4.6

    <SUP>4</SUP> 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.
    <SUP>5</SUP> Multiply (3) by (4).
    (c) Values: Normal and designated ranges.


               Normal value  (percnet)              Designated
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 or production of innovative new 
    (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 are--
    (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 
    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 contracting 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 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, square 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;

[[Page 32069]]

    (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., agressive 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 minimum 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 215.404-702 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. 00-12416 Filed 5-19-00; 8:45 am]