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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: May 22, 2000

FROM: Barry McVay, CPCM

SUBJECT: Defense Federal Acquisition Regulation Supplement (DFARS); Profit Incentives to Produce Innovative New Technologies

SOURCE: Federal Register, May 22, 2000, Vol. 65, No. 99, page 32066

AGENCIES: Department of Defense (DOD)

ACTION: Proposed Rule

SYNOPSIS: DOD is proposing to amend DFARS Subpart 215.4, Contract Pricing, to implement Section 813 of the National Defense Authorization Act for Fiscal Year 2000 (Public Law 106-65), which requires DOD to review its profit guidelines to determine 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."

EDITOR'S NOTE: For more on the advanced notice of proposed rulemaking, see the February 10, 2000, FEDERAL CONTRACTS DISPATCH "Defense Federal Acquisition Regulation Supplement (DFARS); Profit Policy."

DATES: Comments should be submitted on or before July 21, 2000, to be considered in the formation of the final rule.

ADDRESSES: Submit written comments to Defense Acquisition Regulations Council, Attn: Ms. Amy Williams, PDUSD(AT&L) DP(DAR), IMD 3D139, 3062 Defense Pentagon, Washington, DC 20301-3062; fax: 703-602-0350; e-mail: dfars@acq.osd.mil. Cite DFARS Case 2000-D300 in all correspondence related to this proposed rule.

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

SUPPLEMENTAL INFORMATION: To comply with Section 813 of the FY 2000 National Defense Authorization Act, DOD published an advance notice of proposed rulemaking on February 10, 2000, posted a preliminary draft of potential changes on the Defense Procurement Internet web site at http://www.acq.osd.mil/dp/cpf, and held a public meeting on February 23, 2000.

Based on the comments received, DOD has prepared a proposed rule that is, for the most part, the same as the draft changes that were posted on the Internet, except that some minor changes as indicated.

The following are the proposed changes:

• Paragraph (b)(1) of DFARS 215.404-4, Profit, would be revised to state that 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..." Currently, DFARS 215.404-4(b)(1) requires that agencies use a structured approach on "any negotiated contract action that requires cost analysis..." (EDITOR'S NOTE: The draft changes would have required a structured approach on "any sole source negotiated action that requires cost analysis...")
  
  
• In DFARS 215.404-71-2, Performance Risk, the "cost control" contractor risk factor would become part of the "management" contractor risk factor. Paragraph (f), Evaluation Criteria for Cost Control, would be divided and the pieces moved to the appropriate subparagraphs of paragraph (e), Evaluation Criteria for Management (which would be retitled "Evaluation Criteria for Management/Cost Control").
  
  In the table in paragraph (b)(3), the 40% weighting that is currently assigned to the cost control factor would be reassigned as follows: 30% would be reassigned to the technical factor, increasing it from 30% to 60% (with the assigned value of 5%, the weighted value becomes 3.0% (60% x 5%)); and 10% would be reassigned to the the management factor, increasing it from 30% to 40% (with the assigned value of 4.0%, the weighted value becomes 1.6% (40% x 4%)). As a result of these changes, the composite weighted value would increase from 4.5% to 4.6% (3.0% + 1.6%)).
  
  In the table in paragraph (c), which lists the "normal values" and "designated ranges" for the "standard" range ("should apply to most contracts") and the "alternate" range ("for research and development and service contractors when these contractors require relatively low capital investment in buildings and equipment"), values for a new "technology incentive" range would be added ("for the technical factor only...for acquisitions that include development or production of innovative new technologies"). The normal value would be 8%, and the designated range would be 6% to 10%. (EDITOR'S NOTE: The draft rule had specified that technology incentive range would be used "for acquisitions that include extraordinary technological innovation.")
  
  New paragraph (d)(4)(i) would explain that "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."
  
  New paragraph (d)(4)(ii) would state, "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." (EDITOR'S NOTE: Instead of the proposed paragraph (d)(4)(ii), the draft changes would have had the following as paragraph (d)(4)(ii): "The technology incentive range must not be used when the contract is for: (A) routine production; or (B) a mature production program, with only incremental improvements that do not represent a major technological innovation.")
  
  
• To DFARS 215.404-72, Modified Weighted Guidelines Method for Nonprofit Organizations Other Than FFRDCs [Federally Funded Research and Development Centers], would be added a paragraph (b)(1)(iii), which would state, "Do not assign a value from the technology incentive designated range." (EDITOR'S NOTE: This was not included in the draft changes.)

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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