FedGovContracts.com

Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: September 21, 2001

SUBJECT: Defense Federal Acquisition Regulation Supplement (DFARS); Profit Policy

SOURCE: Federal Register, September 21, 2001, Vol. 66, No. 184, page 48649

AGENCIES: Department of Defense (DOD)

ACTION: Proposed Rule

SYNOPSIS: DOD is proposing to amend DFARS Subpart 215.4, Contract Pricing, to change DOD profit policy to reduce the emphasis on facilities investment, add general and administrative expense to the cost base used in determining profit objectives, increase emphasis on performance risk, and encourage contractor cost efficiency.

EDITOR'S NOTE: This is the third proposed rule to revise the profit policy in DFARS Subpart 215.4. For more on earlier versions of this proposed rule, see the July 24, 2000, FEDERAL CONTRACTS DISPATCH "Defense Federal Acquisition Regulation Supplement (DFARS); Profit Policy," and the May 22, 2000, FEDERAL CONTRACTS DISPATCH "Defense Federal Acquisition Regulation Supplement (DFARS); Profit Incentives to Produce Innovative New Technologies."

For more on the advanced notice of proposed rulemaking that started the effort to revise DFARS Subpart 215.4, see the February 10, 2000, FEDERAL CONTRACTS DISPATCH "Defense Federal Acquisition Regulation Supplement (DFARS); Profit Policy."

DATES: Comments on the proposed rule must be submitted on or before November 20, 2001.

ADDRESSES: Respondents may submit comments directly on http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm; by e-mail to dfars@acq.osd.mil; to Defense Acquisition Regulations Council, Attn: Sandra Haberlin, OUSD (AT&L) DP (DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; or by fax to 703-602-0350. Cite DFARS Case 2000-D018 when submitting comments.

FOR FURTHER INFORMATION CONTACT: Sandra Haberlin, 703-602-0289.

SUPPLEMENTAL INFORMATION: Section 813 of the National Defense Authorization Act for Fiscal Year 2000 (Public Law 106-65) required 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." To comply with Section 813, DOD published an advance notice of proposed rulemaking on February 10, 2000, posted a preliminary draft of potential changes on the Defense Procurement web site, and held a public meeting on February 23, 2000. The most significant of the potential changes was the addition of a "technology incentive" element in the profit calculations "for acquisitions that include development or production of innovative new technologies." Based on the comments received, DOD published a proposed rule on May 22, 2000, that was, for the most part, the same as the draft changes that were posted on the Internet.

On July 24, 2000, DOD published a proposal to further change its profit policy to reduce and eventually eliminate emphasis on facilities investment, increase emphasis on performance risk, and encourage contractor cost efficiency. This was considered necessary because the basis of the existing DOD profit policy in DFARS 215.404-71, Weighted Guidelines Method, was a report published in 1985 on the Defense Financial and Investment Review (DFAIR), and one of the key DFAIR objectives was to encourage defense contractors to invest in productivity-enhancing facilities. However, since 1985, the defense industry has downsized and consolidated in response to substantial reductions in the defense budget, and the defense industry now has excess capacity and underutilized facilities. Rewarding contractors for investing in facilities was considered counterproductive.

The July 24, 2000, proposal to revise the profit policy in DFARS 215.404-71, Weighted Guidelines Method, would have: (1) reduced the values assigned to facilities capital employed by 50% and eventually eliminated facilities capital employed altogether; (2) added general and administrative expense to the cost base used in determining profit objectives; (3) increased emphasis on performance risk by increasing its values by 1% and decreasing the values for contract type risk by 0.5%; and (4) added a special factor for cost efficiency to encourage contractor cost reduction efforts.

Twelve sources submitted comments on the proposal. Because of the complexity of the issues raised by the comments, DOD held a public meeting on December 12, 2000. After considering all the written and verbal comments, DOD decided to publish another revised proposed rule. The major differences between the July 24, 2000, proposed rule and this revised proposed rule are --

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2001 by Panoptic Enterprises. All Rights Reserved.

Return to the Dispatches Library.

Return to the Main Page.