The

should be used. In such a case, the negotiator and the contractor agree upon a target price which is their best estimate of a fair and reasonable price with contingency factors reduced to a minimum. A ceiling price will also be agreed upon which takes into account a reasonable allowance for contingencies. ceiling price should be set at a level which provides reasonable risk assumption by the contractor. The ceiling price usually should not be more than 10 percent above the target price. A ceiling price is subject to adjustment resulting solely from the operation of any contract clause which provides for equitable adjustment or other revision of the contract price because of changes or upon the occurrence of an event or contingency. The negotiator and the contractor will fix the redetermination time at which the price will be adjusted upward toward the ceiling or downward without limit.

(4) In establishing the redetermination time, at least two dates are involved. One is the cut-off date, usually set at the end of a month to permit more ready segregation of costs incurred. The cutoff date may be a specific date or it may be expressed in terms of the end of the month in which: there is delivery of a specified number of percentage of units; or, there has been incurred a specified percentage of the estimated cost or of the total dollar value of the contract. A date must also be established for submission by the contractor of his redetermination price proposal and supporting data. This should be within 30 days after the cut-off date. If redetermination applies to other than the entire contract, the applicable part must be identified and the dates when the new price becomes effective will be fixed. When there are different kinds of items in a contract, it may be desirable to have a separate redetermination for each. More than one redetermination may also be desirable for a long production run of the same item or where preproduction engineering constitutes a substantial part of the contract. Since the contractor has little incentive to keep his costs low prior to redetermination, it should be provided for at the earliest possible time consistent with the availability of sufficient factual data to permit the setting of a firm fixed-price. Except under very unusual circumstances

the redetermination time should not be later than the incurrence of 40% of the estimated contract costs.

(5) Prompt redetermination at the specified time is an essential element of this type of contract. This requires assuring that the contractor submits his redetermination proposal and supporting data on time, obtaining appropriate audit service, and reaching agreement with the contractor on the firm fixedprice. The redetermination process should not be permitted to extend beyond 30 to 45 days after the date set for the contractor's submission of his proposal.

(6) If redetermination is to be included in contracts which provide for progress payments, the Progress Payment clause should reserve to the contracting officer the right to withhold or reduce progress payments and increase the liquidation rate when he believes such action is necessary to avoid overpayment. In connection with partial payments for deliveries made, if any substantial proportion of the contract items are to be delivered prior to redetermination, it may be necessary to provide, in the contract, for withholding or limiting payments to avoid overpayment and the necessity for obtaining refunds.

(e) Contract clause. Because of the variety of ways in which price redetermination may be applied, no standard price redetermination clause is prescribed. The clause to be used must be tailored to the circumstances involved in the particular procurement action. The following subjects should be appropriately covered:

(1) What part of the price, if any, is not subject to redetermination.

(2) Provision for a ceiling on the total amount to be paid under the contract.

(3) Provision of dates for cut-off and submission of redetermination proposal(s); and effective date of redetermination, if required.

(4) Description of way in which redetermination proposal shall be submitted and extent of supporting data, with reservation of right to require additional data.

(5) Provision for prompt redetermination negotiation and withholding of payments if redetermination proposal is not submitted at the required time and in proper detail.

(6) Provision for the maintenance of suitable accounts and records by the contractor and all subcontractors performing on other than a firm fixed-price basis; and for access by the Government, until three years after final payment under the prime contract, to the accounts and records of the contractor, of all firsttier subcontractors, and of all lower-tier subcontractors performing on other than a firm fixed-price basis. (This requirement is supplemental to the mandatory Examinations of Records clause contained in Standard Form 32.)

(7) Provision for certification by the contractor to the currency and accuracy of the cost data submitted in support of his redetermination proposal.

(8) Prohibition of cost-plus-percentage-of-cost subcontracting and provision for advance approval by the contracting officer of cost-plus-fee subcontracts and such other subcontracts as appropriate.

(9) Provision for contract modification to reflect the redetermined prices.

(10) Provision for limitation or withholding of payments and for refund of any overpayments.

(11) Provision that failure to agree on a redetermined price within a specified time (usually 60 days) after the date set for submission of the redetermination proposal shall be handled under the "Disputes" clause of the contract, and that the contracting officer's decision thereon shall constitute redetermination under the contract, subject only to the contractor's right of appeal.

§ 2-3.404 Cost-reimbursement type con

tracts.

§ 2-3.404-3 Cost-plus-fixed-fee contract.

(a) Limitations. In Agency costplus-fixed-fee contracts for architectural or engineering services relating to public works or utility projects, the fee shall not exceed the limitation established by section 304 (b) of the Federal Property and Administrative Services Act of 1949. In other cost-plusfixed-fee contracts, the fee (based on the estimated cost of the contract exclusive of fee, as determined at the time of entering into the contract) shall generally not exceed: 10% in contracts for experimental, developmental or research work; and 7% in all other contracts. Exceptions may be made only if justified by unusual circumstances

and if advance written approval is obtained from the Head of the Bureau or Office in which the contract is to be executed. Under no circumstances may fees exceed the statutory limitations established by section 304 (b) of the Federal Property and Administrative Services Act, which are: 15% for contracts for experimental, developmental, and research work; and 10% for all other contracts except those for architectural and engineering services. In accordance with § 1-3.401 of this title, the limitations contained in this section shall be applied to cost-plus-fixed-fee subcontracts under prime contracts which are on other than a firm fixed-price basis.

(2) Use of letter contracts shall be kept to a minimum. They should be used only in situations where the interests of the Government require that the work be commenced immediately, a binding commitment to the contractor is necessary and negotiation of a definitive contract cannot be completed in sufficient time.

(b) Approval. (1) The use of letter contracts must be approved in advance on a case by case basis by the head of the procuring activity as defined in § 1-1.206 of this title.

(2) Request for approval must state: The necessity and advantage to the Government in issuing the letter contract; why no other type of contract is suitable; name and address of the proposed contractor; duration of proposed letter contract in number of days from date of execution; amount of letter contract and estimated amount of definitive contract showing source and citation of funds with statement that funds are available for the entire requirement; the estimated delivery date or dates and the proposed type of definitive contract.

(c) Limitations. The letter contract shall be superseded by a definitive contract within 90 days after the date of the letter contract. The maximum liability of the Government stated in the letter contract shall not exceed 50 percent of the total estimated cost of the procurement.

(d) Conditions for use. The authority to issue a letter contract is contingent on compliance with the following:

(1) Each letter contract shall incorporate by reference all required standard clauses and such optional standard and special clauses that are determined to be applicable, and shall provide therein that the definitive contract shall contain such provisions.

(2) If the definitive contract is to be a cost type, the total estimated cost of the procurement, plus the maximum fixed fee, if any, shall be set forth in the letter contract with a provision for further negotiations of the cost and fee. The fixed fee stipulated shall not exceed the limitation established by § 2-3.404-3. If the definitive contract is to be on a fixed price basis, the total estimated cost of the procurement shall be set forth in the letter contract as a maximum or not to exceed amount.

(3) All internal copies of the letter contract shall contain a citation of the appropriate funds. The statutory authority for negotiation shall be cited on each copy of the letter contract (see § 2-3.350 (c)).

[26 F.R. 9675, Oct. 13, 1961]

Subpart 2-3.8-Price Negotiation Policies and Techniques

SOURCE: §§ 2-3.802 and 2-3.808-3 appear at 25 F.R. 14030, Dec. 31, 1960.

§ 2-3.802 Preparation for negotiation.

(a) Price breakdowns. Contractors should be required to submit price breakdowns to support their proposals for negotiated contracts and contract modifications. In cases where contracting officers can make a reasonably accurate estimate of the material and labor required, in advance of receipt of the proposal, and the probable value of the contract or modification will not exceed $10,000 this requirement may be waived. If items covered by the contract are standard commercial type and comparison with list or market prices can be easily made, this requirement may also be waived. The contractor's price breakdown should list all of the cost elements considered and, in the case of production contracts, should include as a minimum: direct labor hours, and wage rates and trends, for both engineering and production type labor; engineering and production burden rates based on direct

labor value or, where special circumstances justify, on machine hours; kind and cost of material (raw stock, shelf items, purchase parts, and subcontracted items); overhead rate (general and administrative); and profit. Requests for Proposals should clearly require that if additional cost elements are included in a proposal, they should be separately listed. Contracting officers should require such other support of burden, overhead, and wage rates as appear appropriate. In all cases, the right should be reserved to the contracting officer to request additional supporting data.

§ 2-3.808-3 Cost analysis.

(a) An analysis of the price breakdown submitted by the contractor shall be made whenever the conditions set forth in § 1-3.808-3(a) of this title exist. The extent of the analysis shall be that which, in the judgment of the contracting officer, will assure that the price to the Government, under the type of contract selected will be fair and reasonable. The case file of every negotiated contract shall include a statement by the contracting officer setting forth the basis on which the contract price was considered to be reasonable and a detailed analysis of the contractor's breakdown. If such an analysis is not made, the contracting officer will explain the basis for making an exception.

(b) The following factors should be considered in evaluating specific elements of costs to determine the reasonableness of price. If other elements in specific situations appear proper for analysis, they should also be used. propriate use should be made of available audit and engineering services.

Ap

(1) Direct labor hours. Where the contractor has produced similar or like items in the past, he should be required to relate the present proposal to his experience in the previous item. This should include comparison of direct labor hours for preliminary design, general engineering, production engineering, and production. If quality control is charged as a direct cost, the direct labor hours for this function should also be included. If like or similar items have been produced by another contractor, comparison with the current proposal should also be made. In the absence of being able to make either of the above comparisons, contracting officers should refer the direct labor pro

posal to his own engineering sources for review and recommendation.

(2) Wage rates and trends. Contractors should be required to provide current wage rates by type of direct labor included in the proposal. If the wage rates used exceed current rates, contractors should be required to show the basis for the change in trend.

(3) Burden rates. Contractors should be required to show the basis used in establishing whatever burden rates are included; such basis should relate to recent past experience and the reliability of projections should be supported.

(4) Material. Contractors should provide a listing, including prices and sources, of raw stock, purchase parts, and subcontracted items. The method, if any, for handling of spoilage and scrap should be explained. Where material costs are a significant part of the contract price, review and recommendations by Agency engineering personnel should be obtained.

(5) Tooling and test equipment. Proposals for production contracts should list and price any items of tooling and special test equipment required for performance. Negotiation should be directed toward having the contractor capitalize the cost of these items. Where this is impracticable, the reliability of the pricing should be examined, the disposition of any items paid for or furnished by the Government should be determined, and proper controls should be established.

pro

(6) Pre-production costs. In posed contracts for $100,000 or other involving "first-run" or "pre-production" quantities, separate breakdowns should be provided by the contractor of the start up or pre-production costs, and of the production costs.

(7) General and administrative costs. Contractors will indicate the basis on which general and administrative costs are calculated and distributed. Such presentation should indicate whether such costs are related to the value of direct labor, cost of sales or other.

(8) Other costs. Proposals should clearly establish the basis and necessity, if any, for special costs such as travel, sales commissions, royalties, or manufacturer's excise tax.

AUTHORITY: § 2-9.5000 and § 2-9.5001 issued under secs. 303, 313, 72 Stat. 747, 752; 49 U.S.C. 1344, 1354.

§ 2-9.5000 Scope of subpart.

This Subpart codifies, in FAPR, Federal Aviation Agency Order 56, which sets forth the Agency policy with respect to the retention of rights and recovery of costs in connection with negotiated contracts where research or development is a significant part of the work.

[25 F.R. 14031, Dec. 31, 1960, as amended at 26 F.R. 9675, Oct. 13, 1961]

§ 2-9.5001 Policy.

In negotiating contracts under which the Government pays a part of all of the costs of research or development, it is the policy of the Federal Aviation Agency to retain, for the benefit of the United States, rights to data and patent rights, in reasonable proportion to the contributions of the Agency and the contractor; and to recover the Federal Aviation Agency's contribution toward such research and development through royalties to the Government upon commercial exploitation of the products developed thereby.

[25 F.R. 14031, Dec. 31, 1960]

2-12.602-2 Department of Labor regulations and interpretations. 2-12.650

Delegation of responsibility.

AUTHORITY: §§ 2-12.450 through 2-12.650 issued under secs. 303, 313, 72 Stat. 747, 752; U.S.C. 1344, 1354.

SOURCE: §§ 2-12.450 to 2-12.650 appear at 26 F.R. 11904, Dec. 13, 1961.

Subpart 2-12.4-Labor Standards in Construction Contracts

§ 2-12.450 Scope of subpart.

This subpart deals with the labor, standards for construction contracts as prescribed by the statutes and regulations set forth in this section, and defines the authority and responsibilities of the contracting officer and his representative in the area of labor standards; and provides instructions for assuring labor standards compliance, routine enforcement activities, special investigations, and for reporting violations. § 2-12.451 Statutory requirements. § 2-12.451-1 Davis-Bacon Act (Act of March 3, 1931, as amended, 40 U.S.C. 276a).

All construction contracts in excess of $2,000, executed by FAA, under which laborers or mechanics are employed directly upon the site of the work, are subject to the Davis-Bacon Act which provides for:

(a) Payment of laborers or mechanics not less often than once a week;

(b) Payment of wages in accordance with the prevailing minimum wage rates prescribed by the Secretary of Labor;

(c) Payment of wages without deductions except as authorized by law;

(d) Posting of wage rates and Form SOL-155 at the job site in a prominent place during construction;

§ 2-12.451-3

Eight-hour law (Act of June 19, 1912, as amended, 40 U.S.C. 321-326).

The Eight-hour law provides that all contracts to which the United States is a party, except supply contracts covered by the Walsh-Healey Public Contracts Act and other exclusions set forth in § 2-12.452-2, shall contain a provision making it illegal for the contractor or subcontractor to employ laborers or mechanics, on the work contemplated by the contract, more than 8 hours in one day unless all hours in excess of this limit be compensated at least one and one-half times the basic rate of pay. § 2-12.451-4 Department of Labor regulations.

Pursuant to the foregoing statutes and also the Reorganization Plan No. 14 of 1950 (15 F.R. 3176), the Secretary of Labor has issued two sets of regulations relating to the administration and enforcement of these statutes: (1) Regulations, Part 3, Title 29, Subtitle A, Code of Federal Regulations (Copeland Act); and (2) Regulations, Part 5, Title 29, Subtitle A, Code of Federal Regulations (Davis-Bacon Act). These regulations are contained in the FAA Labor Standards Handbook.

§ 2-12.452 Applicability.

The requirements set forth in § 212.451 are applicable to construction