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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: April 26, 2002

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

SOURCE: Federal Register, April 26, 2002, Vol. 67, No. 81, page 20688

AGENCIES: Department of Defense (DOD)

ACTION: Final Rule

SYNOPSIS: DOD is amending DFARS 215.404-71, Weighted Guidelines Method, 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: There have been three proposed rules to revise the profit policy in DFARS Subpart 215.4. For more on these proposed rules, see the September 21, 2001, FEDERAL CONTRACTS DISPATCH "Defense Federal Acquisition Regulation Supplement (DFARS); Profit Policy"; 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."

EFFECTIVE DATE: April 26, 2002.

FOR FURTHER INFORMATION CONTACT: Sandra Haberlin, OUSD(AT&L)DP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; 703-602-0289; fax: 703-602-0350. Cite DFARS Case 2000-D018 when referring to this final rule.

SUPPLEMENTAL INFORMATION: DOD is revising its profit policy as follows:

• To the three factors listed in paragraph (a) of DFARS 215.404-71-1, General, on which the weighted guidelines method focuses (that is, performance risk, contract type risk, and facilities capital employed) is a fourth factor: cost efficiency. To paragraph (b) is added the statement, "The cost efficiency special factor has no normal value. The contracting officer shall exercise sound business judgment in selecting a value when this special factor is used (see [DFARS] 215.404-71-5)." New DFARS 215.404-71-5, Cost Efficiency Factor, states, "to the extent that the contractor can demonstrate cost reduction efforts that benefit the pending contract, the contracting officer may increase the prenegotiation profit objective by an amount not to exceed 4% of total objective cost...to recognize these efforts").
  
  
• To diminish the emphasis on facilities investment, the value assigned to facilities capital employed for equipment is reduced by half, and facilities capital employed for buildings is eliminated (see paragraph (c) of DFARS 215.404-71-4, Facilities Capital Employed). In addition, the "Notes" in paragraph (c), which explain the situations that warrant an exception to the normal values and ranges, are deleted. In their place is the statement, "These are the normal values and ranges. They apply to all situations."
  
  
• To offset these changes to facilities capital and to increase emphasis on performance risk, 1% is added to the "normal values" and "designated ranges" for the "standard" and "technology incentive" ranges in paragraph (c) of DFARS 215.404-71-2, Performance Risk. The "alternate" range, which was used for research and development and service contracts when the contractors required "relatively low capital investment in buildings and equipment when compared to the defense industry overall," is deleted.
  
  
• General and administrative expense is added to the cost base used in determining profit objectives (in DFARS 215.404-71-2(b)(4) and paragraph (b)(2) of DFARS 215.404-71-3, Contract Type Risk and Working Capital Adjustment, the statement that "total contract costs" exclude general and administrative expenses, contractor independent research and development and bid and proposal expenses (IR&D/B&P), and facilities capital cost of money, is revised to state that total contract costs excludes only facilities capital cost of money).

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

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