1 Ch 1 - Establishing And Mnitring Cntract Type Chapter Intrductin Matching Cntract Type t Cntract Risk Utilizing Fixed-Price Ecnmic Price Adjustment Cntracts Establishing Terms And Cnditins Fr Ecnmic Price Adjustment Making an Ecnmic Price Adjustment Using Cst Indexes Structuring And Applying Incentive Pricing Arrangements Structuring A Cst Incentive Pricing Arrangement Applying a Cst Incentive Pricing Arrangement Structuring and Applying Award-Fee Pricing Arrangements Structuring an Award-Fee Pricing Arrangement Applying an Award-Fee Pricing Arrangement Structuring a Fixed-Price Redeterminable Pricing Arrangement Appendix 1A - Perfrmance Evaluatin Criteria Appendix 1B - Cntractr Perfrmance Evaluatin Reprt 1.0 Chapter Intrductin When used in this chapter, the terms "cntract type" and "type f cntract" refer t the cntract cmpensatin arrangement. The cntract cmpensatin arrangement is the methd f determining the dllars due t the cntractr under the cntract. In this chapter, yu will learn abut the develpment and applicatin f cmmn cmpensatin arrangements: 1.1 Matching Cntract Type T Cntract Risk Pints t Cnsider (FAR ). Cntract type selectin is the principal methd f allcating cst risk between the Gvernment and the cntractr. There is n single cntract type that is right fr every cntracting situatin. Selectin must be made n a case-by-case basis cnsidering
2 cntract risk, incentives fr cntractr perfrmance, and ther factrs such as the adequacy f the cntractr's accunting system. Yur bjective shuld be t select a cntract type that will result in reasnable cntractr risk with the greatest incentive fr efficient and ecnmical cntract perfrmance. Selecting the prper cntract type will make the wrk mre attractive t mre ptential fferrs, thereby increasing cmpetitin. As yu match cntract type t cntract risk, cnsider the fllwing: Identify available cntract types; Cnsider acquisitin methd; Cnsider cmmerciality f the requirement; Cnsider cst risk assciated with the cntract actin; Cnsider apprpriate perfrmance incentives; Cnsider the accunting system adequacy; and Dcument the selectin decisin. Identify Available Cntract Types. The table n the fllwing pages cmpares the mst cmmn cmpensatin arrangements. Mst f thse arrangements fit int tw general categries fixed-price and cst-reimbursement, but labr-hur and time-and-materials cntracts have characteristics f bth: Fixed-Price (FAR Subpart 16.2). Under a fixed-price cntract, the cntractr agrees t deliver the prduct r service required at a price nt in excess f the agreed-t maximum. Fixed-price cntracts shuld be used when the cntract risk is relatively lw, r defined within acceptable limits, and the cntractr and the Gvernment can reasnably agree n a maximum price. Cntract types in this categry include: Firm fixed-price (FFP) Fixed-price ecnmic price adjustment (FPEPA) Fixed-price award-fee (FPAF) Fixed-price incentive firm (FPIF) Fixed-price incentive with successive targets (FPIS) Fixed-price cntract with prspective price redeterminatin (FPRP) Fixed-ceiling-price cntract with retractive price redeterminatin (FPRR)
3 Firm fixed-price level f effrt term cntract (FFPLOE) Cst-Reimbursement (FAR Subpart 16.3). Under a cstreimbursement cntract, the cntractr agrees t prvide its best effrt t cmplete the required cntract effrt. Cst-reimbursement cntracts prvide fr payment f allwable incurred csts, t the extent prescribed in the cntract. These cntracts include an estimate f ttal cst fr the purpse f bligating funds and establishing a ceiling that the cntractr cannt exceed (except at its wn risk) withut the apprval f the cntracting fficer. Cntract types in this categry include: Cst (CR) Cst-sharing (CS) Cst-plus-fixed-fee (CPFF) Cst-plus-award-fee (CPAF) Cst-plus-incentive-fee (CPIF) Labr-Hur and Time-and-Materials (FAR Subpart 16.6). There are tw ther types f cmpensatin arrangements that d nt cmpletely fit the mld f either fixedprice r cst-reimbursement cntracts. Labr-hur and time-and-materials cntracts bth include fixed labr rates but nly estimates f the hurs required t cmplete the cntract. They are generally cnsidered t mst resemble cst-reimbursement cntracts because they: D nt require the cntractr t cmplete the required cntract effrt within an agreed-t maximum price; and Pay the cntractr fr actual hurs wrked,. Firm Fixed- Price (FFP) Principal Nne. Thus, Risk t be the cntractr Mitigated assumes all cst risk. Use When.. The requirement is Cmparisn f Majr Cntract Types Fixed-Price Ecnmic Price Adjustment (FPEPA) Unstable market prices fr labr r material ver the life f the cntract. The market prices at risk are severable Fixed-Price Incentive Firm (FPIF) Mderately uncertain cntract labr r material requirements. A ceiling price can be established Fixed-Price Award-fee (FPAF) Risk that the user will nt be fully satisfied because f judgmental acceptance criteria. Judgmental standards can be fairly Fixed-Price Prspective Redeterminatin (FPRP) Csts f perfrmance after the first year because they cannt be estimated with cnfidence. The Gvernment needs a firm cmmitment frm
4 Elements well-defined. Cntractrs are experienced in meeting it. Market cnditins are stable. Financial risks are therwise insignificant. A firm fixedprice fr each line item r ne r mre grupings f line items. Cntractr Prvide an is Obliged acceptable t: deliverable at the time, place and price specified in the cntract. Cntractr Incentive (ther than maximizing gdwill) 1 Generally realizes an additinal dllar f prfit fr every dllar that csts are and significant. The risk stems frm industrywide cntingencies beynd the cntractr's cntrl. The dllars at risk utweigh the administrative burdens f an FPEPA. A fixed-price, ceiling n upward adjustment, and a frmula fr adjusting the price up r dwn based n: Established prices. Actual labr r material csts. Labr r material indices. Prvide an acceptable deliverable at the time and place specified in the cntract at the adjusted price. Generally realizes an additinal dllar f prfit fr every dllar that csts are that cvers the mst prbable risks inherent in the nature f the wrk. The prpsed prfit sharing frmula wuld mtivate the cntractr t cntrl csts t and meet ther bjectives. A ceiling price Target cst Target prfit Delivery, quality, and/r ther perfrmance targets (ptinal) Prfit sharing frmula Prvide an acceptable deliverable at the time and place specified in the cntract at r belw the ceiling price. Realizes a higher prfit by cmpleting the wrk belw the ceiling applied by an Award-fee panel. The ptential fee is large enugh t bth: Prvide a meaningful incentive. Justify related administrativ e burdens. A firm fixedprice. Standards fr evaluating perfrmance. Prcedures fr calculating a fee based n perfrmance against the standards Perfrm at the time, place, and the price fixed in the cntract. Generally realizes an additinal dllar f prfit fr every dllar that csts the cntractr t deliver the supplies r services during subsequent years. The dllars at risk utweigh the administrative burdens f an FPRP. Fixed-price fr the first perid. Prpsed subsequent perids (at least 12 mnths apart). Timetable fr pricing the next perid(s). Prvide acceptable deliverables at the time and place specified in the cntract at the price established fr each perid. Fr the perid f perfrmance, realizes an additinal dllar f prfit fr every dllar
5 reduced. reduced. price and/r by meeting bjective perfrmance targets. Typical Cmmercial Applicati supplies and n services. Principal Generally NOT Limitatin apprpriate s in FAR fr R&D. Parts 16, 32, 35, and 52 Variants Firm Fixedprice Level f Effrt. Lng-term cntracts fr cmmercial supplies during a perid f high inflatin Must be justified. Prductin f a majr system based n a prttype Must be justified. Must be negtiated. Cntractr must have an adequate accunting system. Cst data must supprt targets. Successive Targets are reduced; earns an additinal fee fr satisfying the perfrmance standards. Perfrmancebased service cntracts. Must be negtiated. that csts are reduced. Lng-term prductin f spare parts fr a majr system. MUST be negtiated. Cntractr must have an adequate accunting system that supprts the pricing perids. Prmpt redeterminatin s. Retractive Redeterminatin 1 Gdwill is the value f the name, reputatin, lcatin, and intangible assets f the firm. Principal Risk t be Mitigated Use When.. Cmparisn f Majr Cntract Types Cst-Plus Incentive- Fee (CPIF) Cst-Plus Award-Fee (CPAF) Cst-Plus Fixed-Fee (CPFF) Cst r Cst- Sharing (C r CS) Time & Materials (T&M) Highly uncertain and speculative labr hurs, labr mix, and/r material requirements (and ther things) necessary t perfrm the cntract. The Gvernment assumes the risks inherent in the cntract -benefiting if the actual cst is lwer than the expected cst-lsing if the wrk cannt be cmpleted within the expected cst f perfrmance. An bjective Objective relatinship incentive can be established between the fee and such measures f targets are nt feasible fr critical aspects f perfrmance. Relating The fee t cntractr perfrmance expects (e.g., t substantial actual cmpensating csts) benefits fr wuld be absrbing N ther type f cntract is suitable (e.g., because csts are
6 Elements Cntractr is Obliged t: Cntractr Incentive (ther than maximizing gdwill) 1 Typical Applicatin perfrmance as actual csts, delivery dates, perfrmance benchmarks, and the like. Target cst Perfrmance targets (ptinal) Judgmental standards can be fairly applied. 1 Ptential fee wuld prvide a meaningful incentive. Target cst Standards fr evaluating perfrmance A minimum, maximum, and A base and target fee maximum fee unwrkable r f marginal utility. part f the csts and/r freging fee r The vendr is a nn-prfit entity Target cst Target cst Fixed fee If CS, an agreement n the Gvernment's share f the cst. N fee A frmula Prcedures fr fr adjusting adjusting fee based n fee, based actual csts n and/r perfrmance perfrmance against the standards Make a gd faith effrt t meet the Gvernment's needs within the estimated cst in the Schedule. Realizes a higher fee by cmpleting the wrk at a lwer cst and/r by meeting ther bjective perfrmance targets. Research and develpment f the prttype fr a majr system. Realizes a higher fee by meeting judgmental perfrmance standards. Large scale research study. Realizes a If CS, shares higher rate in the cst f return f prviding (i.e., fee a deliverable divided by f mutual ttal cst) benefit as ttal cst decreases. Research study t lw t justify an audit f the cntractr's indirect expenses). A ceiling price A per-hur labr rate that als cvers verhead and prfit Prvisins fr reimbursing direct material csts Make a gd faith effrt t meet the Gvernment's needs within the ceiling price. Jint Emergency research with repairs t educatinal heating institutins. plants and aircraft engines. Principal The cntractr must have an adequate accunting Labr rates
7 Limitatins in FAR Parts 16, 32, 35, and 52 Variants system. The Gvernment must exercise surveillance during perfrmance t ensure use f efficient methds and cst cntrls. Must be negtiated. Must be justified. Statutry and regulatry limits n the fees that may be negtiated. Must include the applicable Limitatin f Cst clause at FAR thrugh 23. Cmpletin r Term. must be negtiated. MUST be justified. The Gvernment MUST exercise apprpriate surveillance t ensure efficient perfrmance. Labr Hur (LH) Cnsider Acquisitin Methd (FAR , , and DFARS ). The acquisitin methd selected fr a particular acquisitin may limit the available chice f cntract type: Simplified Acquisitin. When using simplified acquisitin prcedures purchase rders are nrmally firm fixed-price. Yu may use an unpriced rder in certain situatins when it is impssible t btain firm pricing prir t issuing the purchase rder. Whenever yu use an unpriced rder, the rder must include a dllar limit n the Gvernment's bligatin and the cntracting fficer must fllw-up t assure timely pricing. Sealed Bidding. When using sealed bidding prcedures: Yu will nrmally use a firm fixed-price cntract. Yu may use a fixed-price cntract with ecnmic price adjustment if the cntracting fficer determines (in writing) what type f cntract is necessary t prtect the cntractr and the Gvernment against significant fluctuatins in labr r material csts r t prvide fr cntract price adjustments in the event f changes in the cntractr's established prices. Yu must nt use any ther cntract type. Negtiatin. When using the negtiatin prcedures prescribed in FAR Part 15: Yu may use any cntract type r cmbinatin f cntract types that will prmte the best interests f the Gvernment, as lng as yu meet the specific limitatins in FAR Part 16.
8 Yu must nt use any cntract type nt prescribed in the FAR unless authrized by agency regulatin r a FAR deviatin. Cnsider Cmmerciality f the Requirement (FAR ). When acquiring a cmmercial item: Yu nrmally shuld use a firm fixed-price cntract. Yu may use a fixed-price cntract with ecnmic price adjustment if the cntracting fficer determines (in writing) what type f cntract is necessary t prtect the cntractr and the Gvernment against significant fluctuatins in labr r material csts r t prvide fr cntract price adjustments in the event f changes in the cntractr's established prices. Yu must nt use any ther cntract type in acquiring cmmercial items. Cnsider Cst Risk (FAR (a)). Encurage cntractrs t accept reasnable cst risks f cntract perfrmance. Hwever, requiring cntractrs t accept unknwn r uncntrllable cst risk can endanger cntract perfrmance, substantially reduce cmpetitin, and/r substantially increase cntract price. T realistically chse the prper cntract type t meet a specific cntract situatin, yu must cnsider the prper allcatin f cst risk. Cst estimates, whether they are the fferr's prpsed r the Gvernment's recmmended, are pint estimates. In all cntracts invlving frward pricing, the pint estimate is a prjectin f what the estimatr believes is mst likely t happen. Since things rarely happen exactly as predicted, there is usually sme variatin between prjected and actual cst. The greater the ptential variability between the prjected and actual cst, the greater the cst risk.
10 Quantitative analysis techniques can prvide invaluable infrmatin abut the distributin f values arund the mst likely future cst. Fr example, cnsider the cnfidence interval when yur estimate is based n sampling analysis and the predictin interval when yur estimate is based n regressin analysis. Hwever, use this infrmatin wisely. If the variance is large, attempt t determine why the interval is s large and what can be dne t narrw it, befre yu select a cntract type t share the risk.
11 As a minimum, yur appraisal f cst risk shuld cnsider tw areas f particular cncern, cntract perfrmance risk and market risk. Perfrmance Risk. Mst cntract cst risk is related t cntract requirements and the uncertainty surrunding cntract perfrmance. The lwer the uncertainty the lwer the risk. Therefre, yur appraisal f cst risk shuld begin with an appraisal f perfrmance risk. Fr larger mre cmplex cntracts, yu will likely need assistance frm ther members f the Gvernment Acquisitin Team (e.g., representatives frm the requiring activity, engineering staff, cntracting, and prgram/prject management). Areas that yu cnsider shuld include: Stability and clarity f the cntract specificatins r statement f wrk; Type and cmplexity f the item r service being purchased; Availability f histrical pricing data; Prir experience in prviding required supplies r services; Urgency f the requirement; Cntractr technical capability and financial respnsibility; and Extent and nature f prpsed subcntracting. The figure belw depicts what happens as the cntract requirement becmes better defined. COST RISK AND CONTRACT TYPE Cst Risk High Lw Requirement Definitin Vague Well-defined Prductin Stages Cntract Type Cncept Studies & Basic Research Explratry Develpment Test/ Demnstratin Full-scale Develpment Varied CPFF CPIF, FPIF CPIF, FPIF, r FFP Full Prductin FFP, FPIF, r FPEPA Fllw-n Prductin FFP, FPIF, r FPEPA Perfrmance risk shuld be reduced frm a high t a relatively lw level, as the requirement prgresses frm vague t well-defined and experience with the prduct increases. Research and develpment cntracts generally have a rather high perfrmance risk. This is due t
12 the factr f ill-defined requirements that arise frm the necessity t deal beynd, r at least very near, the upper limits f current technlgy (i.e., "the state f the art"). Fllw-n prductin cntracts generally have a relatively lw perfrmance risk. Requirements are well knwn, there is a cst histry t draw n, cntractrs have experience prducing the prduct, etc. As perfrmance risk changes, s shuld cntract type. Nte that cst-reimbursement, time & materials, r labr-hur cntracts are generally assciated with higher-risk requirements and fixed-price cntracts are generally assciated with lwer-risk requirements. Market Risk. Changes in the marketplace will als affect cntract csts. Preferred acquisitin practice calls fr frward pricing f cntract effrts, because frward pricing prvides a baseline which yu and the cntractr can use t measure cst r price perfrmance against cntract effrt. Frward pricing requires the cntracting parties t make assumptins abut future changes in the marketplace. A vlatile market will increase the cst risk invlved in cntract pricing, particularly when the cntract perid will extend several years. What will material and labr cst tw years frm nw? Will material shrtages ccur tw years frm nw? In cases where these unknwn csts are significant, cntract perid risk becmes an imprtant cnsideratin in selectin f cntract type. Fixed-price cntracts with ecnmic price adjustment, fr example, are designed specifically t reduce this risk fr cntractrs. Cnsider Apprpriate Perfrmance Incentives (FAR (b)). Select the cntract type (r cmbinatin f types) that will apprpriately mtivate cntract perfrmance. When the risk invlved is minimal r can be predicted with an acceptable degree f certainty, use a firm fixed-price cntract, because it best utilizes prfit t mtivate efficient cntract perfrmance and cst cntrl.
13 When there is n reasnable basis fr firm pricing, cnsider ther cntract types. Using a firm fixedprice cntract may limit cmpetitin, encurage inflated cntract pricing, and effrts t cntrl csts may actually hamper effective cntract perfrmance. Cnsider Accunting System Adequacy (FAR (h)). Befre agreeing n a cntract type ther than firm fixedprice, yu must ensure that the cntractr's accunting system will permit timely develpment f all necessary cst data in the frm required fr the prpsed cntract type. A careful accunt system review is particularly imprtant when the cntractr's nly experience has been with firm fixed-price cntracts. Dcument the Selectin Decisin (FAR (d)). Assure that the cntract file cntains dcumentatin shwing why the particular cntract type was selected, unless yu are: Making a fixed-price acquisitin using simplified acquisitin prcedures; Using a firm fixed-price cntract fr any requirement ther than majr systems acquisitin r research and develpment; r Awarding the set-aside prtin f a sealed bid partial set-aside fr small business. 1.2 Utilizing Fixed-Price Ecnmic Price Adjustment Cntracts This sectin will examine prcedures fr establishing a fixed-price ecnmic price adjustment cntract (FPEPA) and the prcedures fr making price adjustments using ne type f FPEPA cntract Establishing Terms And Cnditins Fr Ecnmic Price Adjustment Making An Ecnmic Price Adjustment Using Cst Indexes General Characteristics (FAR ). A fixed-price with ecnmic price adjustment (FPEPA) cntract is designed t cpe with the ecnmic uncertainties that threaten lngterm fixed-price arrangements. The ecnmic price
14 adjustment (EPA) prvisins prvide fr bth price increases and decreases t prtect the Gvernment and the cntractr frm the effects f ecnmic changes. Situatins fr Use (FAR ). Yu may use an FPEPA cntract in sealed bidding r negtiatin when bth f the fllwing cnditins exist: There is serius dubt cncerning the stability f market r labr cnditins that will exist during an extended perid f cntract perfrmance. Vlatility f the markets fr labr and material. The mre vlatile the market, the greater the benefits that can be derived frm FPEPA utilizatin. Prjected cntract perid. The lnger the cntract, the greater the cntractr's expsure t an uncertain market. FPEPA cntracts are nrmally nt used fr cntracts that will be cmpleted within six mnths f cntract award. The amunt f cmpetitin expected. If markets are truly vlatile, many firms may be unwilling t submit an ffer withut EPA prtectin. Dllar value f the cntract. The greater the cst risk t the cntractr, the greater the benefits that can be derived frm an FPEPA cntract. In the DD, adjustments based n actual labr r material cst are generally nt used fr cntracts f $50,000 r less (DFARS (c)). Cntingencies that wuld therwise be included in the cntract price can be identified and cvered separately in the cntract. Limitatins n Use (FAR ). Yu must nt use an FPEPA cntract unless yu have determined that it is necessary fr ne f the fllwing reasns. T prtect the cntractr and the Gvernment against significant fluctuatins in labr r material csts. T prvide fr cntract price adjustment in the event f changes in the cntractr's established prices Establishing Terms And Cnditins Fr Ecnmic Price Adjustment
15 Establishing the Base fr Adjustment (FAR ). When establishing a base fr adjustment, ensure that cntingency allwances are nt duplicated by inclusin in bth the base price and the adjustment requested by the cntractr under the EPA prvisin. If yu d nt require cst r pricing data, btain adequate infrmatin t establish the base level frm which adjustment will be made. If necessary, yu may require verificatin f the data submitted. EPA Clauses in Negtiated Cntracts (FAR ). The key prvisin in an FPEPA cntract is the EPA clause. FAR identifies the fur types f ecnmic price adjustment presented in the table belw. In develping an FPEPA cntract, yu can chse frm the FAR EPA clauses, use an agency-prescribed clause, r develp yur wn unique clause fllwing agency guidelines. Fr cmmercial items, cnsider market research and cmmercial practice in clause develpment. When yu are cntracting by negtiatin and an FPEPA cntract is apprpriate: Cnsider And adjustment can When the fllwing requirements adjustment fllw the are met: based n: requirements f: Established Prices fr A fixed-price cntract is cntemplated. Ecnmic Price Adjustment- Standard Supplies Cntract is fr standard supplies with an established catalg r market price. Standard Supplies (FAR ); If the cntract unit price r reflects a net price after applying a trade discunt frm a catalg r list price, yu must dcument bth the catalg r list price and the discunt. An agencyprescribed EPA clause if yu determine that use f the abve prvisin is inapprpriate (e.g., DFARS , Ecnmic Price Adjustment-Basic Steel, Aluminum, Brass, Brnze, r Cpper Mill
16 Established Prices f Semistandard Supplies Actual Cst f Labr r Material A fixed-price cntract is cntemplated. The cntract is fr semistandard supplies with prices that can be reasnably related t the prices f nearly equivalent standard supplies with an established catalg r market price. If the cntract unit price reflects a net price after applying a trade discunt frm a catalg r list price, yu can dcument bth the catalg r list price and the discunt. Befre cntract award, yu must reach agreement in writing with the cntractr n the identity f the standard item related t each line item. Nte: If the supplies are standard, except fr preservatin, packaging, and packing, use the Standard Supplies prvisin, abve. A fixed-price cntract is cntemplated. N majr design engineering r develpment is invlved. One r mre identifiable labr r material cst factrs is subject t change. The cntract Schedule must describe in detail: Types f labr and materials subject t adjustment under the prvisin. Labr rates, including fringe benefits that may be increased r decreased. Quantities f the specified Prducts). Ecnmic Price Adjustment- Semistandard Supplies (FAR ); r An agencyprescribed EPA clause if yu determine that use f the abve prvisin is inapprpriate. Ecnmic Price Adjustment- Labr and Material (FAR ); r An agencyprescribed EPA clause if yu determine that use f the abve prvisin is inapprpriate (e.g., DFARS , Ecnmic Price
17 labr and materials allcable t each unit t be delivered under the cntract. When negtiating adjustments under the cntract, yu must be able t: Cnsider wrk in prcess and materials n hand at the time f changes in labr rates, including fringe benefits. Nt adjust any indirect csts except fringe benefits. Cnsider nly fringe benefits specified in the cntract Schedule. Adjustment- Nnstandard Steel Items). Price/Cst Indexes fr Labr r Material The cntract invlves an extended perfrmance perid with significant csts beynd ne year. Cntract amunt subject t adjustment is substantial. Labr and material prices are t unstable t permit reasnable divisin f risk between the cntractr and the Gvernment withut an EPA clause. EPA clause prepared and apprved fllwing agency prcedures. EPA Prvisins in Sealed Bidding (FAR ). In sealed bidding, yu cannt negtiate the terms f an EPA clause. When yu prepare the invitatin fr bids (IFB), the cntract clause must be established in a way that is cmpatible with the requirements f the sealed bidding prcess. When an IFB cntains an ecnmic price adjustment clause and... N bidder takes exceptin t the clause A bidder increases the maximum percentage f EPA stipulated in the invitatin r limits the Then... Evaluate bids n the basis f the quted prices withut adding the allwable EPA. Reject the bid as nnrespnsive.
18 dwnward EPA prvisins f the IFB A bid deletes the EPA clause A bidder decreases the maximum percentage f EPA stipulated in the invitatin Reject the bid as nnrespnsive because dwnward adjustment is limited by the deletin. Evaluate bids at the base price. If the bidder with the reduced ceiling is in psitin t receive award, the award must reflect the lwer ceiling. When an IFB des nt cntain an ecnmic price adjustment clause, but a bidder prpses ne... With a ceiling that the price will nt exceed Withut a ceiling that the price will nt exceed Then... Evaluate the bid n the basis f the maximum pssible EPA f the quted price. If the bid is eligible fr award, request the bidder t agree t the inclusin in the cntract f an apprved EPA clause subject t the same ceiling. If the bidder will nt agree t an apprved clause, award may be made based n the riginal bid. Reject the bid unless there is a clear basis fr evaluatin. Develping an EPA Clause Based n Cst Indexes (DFARS (d)). When yu develp an EPA clause based n cst indexes fr labr r material, the clause must be prepared and apprved in accrdance with agency prcedures. Assure that the clause: Is nt unnecessarily cmplex. Accurately identifies the index(es) which will be used in making adjustments:
19 Nrmally, yu shuld nt use mre than tw indexes, ne fr labr (direct and indirect) and ne fr material (direct and indirect). The index shuld encmpass a large sample f relevant items while still bearing a lgical relatinship t the type f cntract csts being adjusted. Cmmnly used indexes include the fllwing series published by the U.S. Department f Labr, Bureau f Labr Statistics (BLS): Prducer Price Index fr industrial cmmdities. Emplyment Cst Index fr wages and salaries, benefits, and cmpensatin csts fr aerspace industries. Wages and Incme Series by Standard Industrial Classificatin (SIC). If n single index relates directly t the csts t be adjusted, yu may need t develp a cmpsite index. Clearly identifies a base index perid cmparable t the base cntract perid fr adjustment. Clearly identifies events that will trigger price adjustments. Adjustments shuld be frequent enugh t affrd the cntractr apprpriate ecnmic prtectin withut creating a burdensme administrative effrt. Nrmally, the adjustment perid shuld range frm quarterly t annually. States the percentage f the base price that is subject t adjustment. Nrmally, yu shuld: Nt apply adjustments t the prfit prtin f cntract price. Obtain adequate infrmatin frm the cntractr and ther surces t assure that the baseline is reasnable. Exclude any areas f cst that d nt require adjustment, such as firm fixed-price subcntracts, areas f verhead that shuld remain relatively stable (e.g., depreciatin), labr csts cvered by a unin agreement, and ther csts nt likely t be affected by changes in the ecnmy. Allcate the prtins f cntract price subject t adjustment t specific perids f time (e.g., quarterly) based n the mst prbable pattern f expenditure r cmmitment (expenditure prfile).
20 State that the prtin f cntract price subject t adjustment must nt be mdified except in the event f significant changes in cntract scpe. Reasnably prvides fr ptential ecnmic fluctuatins within the riginal cntract perid, including ptins. D nt prvide fr an adjustment beynd the riginal cntract perid, including ptins. Clearly identifies any limits n adjustment, ceiling n upward adjustments r flr n dwnward adjustments. Nrmally, yu shuld nt include a ceiling r a flr fr adjustment unless the adjustment is based n indexes belw the fur digit level f the BLS indexes identified abve. Clearly identifies any minimum change required t trigger adjustment. Fr example, the cntract culd state that, "N adjustment will be made unless the index indicates a price change f 2 percent r mre frm base perid prices. Hwever, if the index des indicate an increase r decrease f mre than 2 percent, the adjustment will cnsider the full amunt f the change fr the prtin f cntract price indicated in the cntract." Clearly identifies any requirement fr the prime cntractr t extend EPA cverage t subcntractrs t assure a prper allcatin f risk. Clearly states hw EPA adjustments will be cnsidered in applying any cst incentives included in the cntract. Nrmally, a cntract which includes a cst incentive prvisin shuld prvide that any sums paid t the cntractr because f EPA prvisins must be subtracted frm the ttal allwable csts, fr the purpse f establishing the ttal csts t which the prvisin applies. Clearly state hw the pricing f cntract mdificatins will be affected by the EPA prvisins. Nrmally, mdificatins are priced as thugh the EPA prvisin did nt exist Making An Ecnmic Price Adjustment Using Cst Indexes Steps fr Making an Ecnmic Price Adjustment. When yu have develped and awarded an FPEPA cntract based n cst index(es), yu must administer the EPA prvisins as