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– Second level
• Third level
– Fourth level
» Fifth level
Click
to editProfit
Master
Maximizing
bytitle style
Categorizing ContractorAcquired Property
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– Second level
Breakout
Session
• Third
level B04
– Fourth level
Geoffrey A. Lawson,
Esq., LL.M.
» Fifth level
Senior Associate Contracts Specialist
Sikorsky Aircraft Corporation
Date: July 27, 2015
Time: 2:30pm-3:45pm
1
Learning
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Objectives
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• Understanding recent changes to profit calculations on
government contracts
o 2010to
- FAR
15.404-4(c)(3)
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edit
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o 2013 – Appeals of Space Gateway Support Decision
– Second level
• Third
level
• Contractor
Staff
– Accurately propose profit associated
with contractor-acquired
– Fourth level property
» Fifth level
• Government Staff – Accurately award profit associated
with contractor-acquired property
2
Agenda
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• Direction to Contracting Officers
•• Background
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Master
text styles
to FAR
15.404-4(c)(3)
– Second level
• Overview of FAR 15.404-4(c)(3)
• Third level
o
o
o
o
o
Contractor Acquired Property
– Fourth level
Equipment
» Fifth level
Material
Special Tooling
Special Test Equipment
• Contractor Response
• Business Decisions and Weighted Guidelines
3
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FAR 15.404-4(c)(3)
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– Second level
• Direction
Third levelto Contracting Officers
– Fourth level
» Fifth level
4
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Direction
to Contracting
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Officers
FAR 15.404-4(c)(3)
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• “Before
applying
– Second
levelprofit or fee factors,
• Third level
• the contracting
officer shall exclude from the pre– Fourth level
negotiation»cost
objective amounts, the
Fifth level
purchase cost of contractor-acquired property
that is categorized as equipment,
• as defined in FAR 45.101,
• and where such equipment is to be charged
directly to the contract.”
5
FAR 15.404-4(c)(3) published on July 2, 2010
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FAR 15.404-4(c)(3)
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– Second level
• Third level Background
– Fourth level
» Fifth level
6
Click to Register
Federal
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– Second level
• Third level
– Fourth level
» Fifth level
7
Click15.404-4(c)(3)
FAR
to edit MasterBackground
title style
Federal Register Volume 75, Number 127 (2010)
•“When
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to editbuys
Master
text
stylesreal
the contractor
equipment
or acquires
property on a “pass through” basis, i.e., when not part of a
– Second
level
deliverable,
it is the
Government – not the contractor –
who assumes
risk. Moreover, it is generally held that
• Thirdthe
level
upon contract
award, level
contractors are required to furnish
– Fourth
all property necessary to perform Government contracts
» Fifth level
(FAR 45.102) as well as all the necessary resources needed
for contract performance (FAR 9.104-1(f), General
Standards).
Accordingly, it is not appropriate for the Government to
include the cost of contractor acquired property (equipment)
when calculating the Government’s pre-negotiation profit or
fee objective. Including such costs would unduly
compensate the contractor for obtaining equipment it
should already have; and for risks it did not incur.”
8
Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council
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FAR
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Contractor Requirements
•“Contractors
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styles
areedit
ordinarily
requiredtext
to furnish
all property
necessary
to perform
Government contracts.”
– Second
level
•
• Third
FAR 45.102
level
– Fourth level
“To be determined
responsible,
a prospective contractor
» Fifth
level
must…(f) Have the necessary production, construction, and
technical equipment and facilities, or the ability to obtain
them.”
•
FAR 9.104-1
9
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FAR
to edit MasterBackground
title style
Previous Rule - FAR 45.302-3(c) (1998)
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“No profit or fee shall be allowed on the cost of facilities when
– Second
purchased
for thelevel
account of the Government other than a
facilities• contract.
General purpose components of special
Third level
tooling or special test equipment are not facilities.”
– Fourth level
» Fifth level
• Facilities subdivided into real property and plant
equipment and plant equipment further subdivided by DoD
into Industrial Plant Equipment and Other Plant
Equipment.
• Removed in June 2007, FAR Case 2004-025
10
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FAR
to edit MasterBackground
title style
Appeals of Space Gateway Support
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• Beginning in 1998, Space Gateway Support LLC
– Second
level
performed
support
services for NASA. NASA contract
required
SGSlevel
to acquire certain laboratory equipment to
• Third
replace existing equipment. Parties disagreed as to SGS’
– Fourth
levelbased on FAR 45.302-3(c).
right to receive
profit
» Fifth level
11
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FAR
to edit MasterBackground
title style
Appeals of Space Gateway Support
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• Contracting officer letter stated, purpose of this acquisition
– toSecond
level and utilize government funds
is
replace equipment
rather
than the
contractor’s own capital, no risk is
• Third
level
associated…Award fee is not applicable to replace
– Fourth
level
contractor
equipment.
» Fifth level
12
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FAR
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title style
Appeals of Space Gateway Support
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• 2006 – SGS asserts claim for $121,000 against NASA
– Second
levelDisputes Claim Act.
under
the Contract
• 2007• –Third
FAR 45.302-3(c)
deleted.
level
• 2010 – FAR
15.404-4(c)(3)
created.
– Fourth
level
• 2013 – ASBCA
issues
opinion stating that FAR 15.404» Fifth
level
4(c)(3) “continues to bar receipt of profit or fee.”
13
Appeals of Space Gateway Support, LLC, ASBCA No. 55608 (2013).
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FAR
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title style
Appeals of Space Gateway Support
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• Military does not want to discourage contractors from
– Second
using
their ownlevel
funds to acquire equipment.
• Third level
• For over 140 years, government has not supplied
– Fourth
level
contractors
with equipment.
» Fifth level
• Government expects contractors to have “fixed capital”
necessary to perform.
14
Appeals of Space Gateway Support, LLC, ASBCA No. 55608 (2013).
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FAR
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Criticism of Appeals of Space Gateway Support
“151 pages
a recitation
of regulatory
• Click
to comprised
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text
styles history
from the Revolutionary War to the present, focusing on
Government
– Secondprovision
level of facilities to contractors…it was
largely irrelevant…The remaining 76 pages contained the
• Third level
body of the opinion, a large portion of which consisted of a
Fourth
level history... Embedded in this latter
rehash of– the
regulatory
» Fifthwas
level
section, however,
the extremely troubling legal
opinion of this single board member.”
Richard C. Johnson and Richard H. Snyder, Case Note: Space Gateway Support, LLC, 8
Government Contract: Costs, Pricing & Accounting Report 6, 7 (2013).
15
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FAR 15.404-4(c)(3)
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– Second level
Overview of Rule
• Third level
– Fourth level
» Fifth level
16
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Overview
of Rule
Master title style
Contractor-Acquired Property Categorized as Equipment
Contractor-Acquired
Property text styles
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to edit Master
o “Property acquired, fabricated or otherwise provided by a
– Second
level
contractor for
performing a contract and to which the
government has title.”
• Third level
− FAR 45.101.
•
– Fourth level
Equipment » Fifth level
o “A tangible item that is functionally complete for its
intended purpose, durable, nonexpendable, and needed for
the performance of the contract. Equipment is not intended
for sale, and does not ordinarily lose its identity or
become a component part of another article when put into
use. Equipment does not include material, real property,
special test equipment or special tooling.”
− FAR 45.101.
17
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Overview
of Rule
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Contractor Acquired Property Not Categorized as Equipment
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•• Click
o “Property that may be consumed or expended during the
– Second
performancelevel
of a contract, component parts of a higher
assembly, or items that lose their individual identity
• Third level
through incorporation into an end item.”
– Fourth
level
− FAR
45.101.
» Fifth level
•
Special Tooling
o “Jigs, dies, fixtures, molds, patterns, taps, gauges, and all
components of these items including foundations and similar
improvements necessary for installing special tooling, and
which are of such a specialized nature that without
substantial modification or alternation their use is limited to
the development or production of particular supplies or
parts thereof or to the performance of particular services.”
− FAR 2.101.
18
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Overview
of Rule
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Contractor Acquired Property Not Categorized as Equipment
Special Test
Equipment
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to edit
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o “Single or multipurpose test units engineered, designed,
– Second
fabricated, level
or modified to accomplish special purpose
testing in performing a contract. Special test equipment
• Third level
consists of items or assemblies of equipment, including
– Fourth
foundations
andlevel
similar improvements necessary for
installing special
equipment, and standard or general
» Fifth test
level
purpose items or components that are interconnected
and interdependent so as to become a new functional
entity for special testing purposes.”
− FAR 2.101.
o Items are not special test equipment “if, with relatively
minor expense, they can be made suitable for general
purpose.”
− FAR 31.205-40(c).
19
Click to edit
Overview
of Rule
Master title style
Contractor Acquired Property Not Categorized as Equipment
Real Property
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o “Any interest in land, together with the improvements,
– Second
level
structures, and
fixtures located thereon…and appurtenances
thereto, under the control of any federal agency…”
• Third level
− FAR 45.101 which refers to Federal Management
– Fourth level
Regulation
102-71.20.
» Fifth level
20
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FAR 15.404-4(c)(3)
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– Second level
Response
• Third Contractor
level
– Fourth level
» Fifth level
21
Click to editResponse
Contractor
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Categorize contractor-acquired property in proposal or during
negotiations in accordance with the definitions.
• Click to edit Master text styles
•
No profit applied to contractor-acquired property
– Secondas:level
categorized
• Third level
o Equipment
Fourth level
o Real –Property
» Fifth level
• Profit applied to contractor-acquired property
categorized as:
o Material
o Special Test Equipment
o Special Tooling
22
Click to editResponse
Contractor
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Material
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to
edit
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text
styles
Examples of Material: “nuts, bolts, screws,
– Second
level resistors, diodes, capacitors,
washers,
transistors,
integrated
• Thirdcircuits,
level bar stock, sheet metal, paper,
lumber,–propellers,
Fourth levelbatteries, silver, gold, cloth,
gas, oil, hydraulic
fluids, epoxy, paint, radar
» Fifth level
system, aircraft engines, and bullets.”
Douglas N. Goetz, The Classification of Government Property Under the New FAR Part 45
Rewrite, 19 NPMA Property Professional 8, 11 (2007).
23
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Contractor
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Special Tooling
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toofedit
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styles
Example
Special
Tooling:text
“Generic
drill bit in a
holding
fixture
that is irremovable, plated with
– Second
level
titanium and coated with diamond swarf so that its
• Third level
only function is to drill holes into the composite
– Fourth level
wing coating of an F-22 is considered special
» Fifth level
tooling.”
Douglas N. Goetz, The Classification of Government Property Under the New FAR Part 45 Rewrite,
19 NPMA Property Professional 8, 12 (2007).
24
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Contractor
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Special Testing Equipment
Example of
Special
TestMaster
Equipment: “The
contractor
is in the process of
•• Click
to
edit
text
styles
developing the Next Generation tactical aircraft. In order to test the
avionics planned for use on this aircraft the contractor plans to design
and fabricate special test equipment. The only use for this Special Test
Equipment
is to test
the avionics of the Next Generation tactical aircraft.
• Third
level
The tests that are to be performed have never been used before and
– commercial
Fourth level
there are no
equivalents. The contractor designs the test set
that includes general
purpose
» Fifth
level equipment as well as special purpose test
items, and incorporates all of these components into a larger rack
creating a new functional entity.”
– Second level
Douglas N. Goetz, Special Test Equipment: A Counterpoint of Thought Regarding Definition, Policy,
and Allowability, 4 NPMA Property Professional 15 (1998).
25
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FAR 15.404-4(c)(3)
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– Second level
Weighted Guidelines
• Third level
– Fourth level
» Fifth level
26
Click to edit
Direction
to Contracting
Master title style
Officers
FAR 15.404-4(c)(3)
• Click to edit Master text styles
• “Before
applying
– Second
levelprofit or fee factors,
• Third level
• the contracting
officer shall exclude from the pre– Fourth level
negotiation»cost
objective amounts the purchase
Fifth level
cost of contractor-acquired property that is
categorized as equipment,
• as defined in FAR 45.101,
• and where such equipment is to be charged
directly to the contract.”
27
FAR 15.404-4(c)(3) published on July 2, 2010
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Weighted
Guidelines
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Weighted Guidelines Method
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to edit
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styles
o Defense
Department’s
structured
technique
for establishing
– Second
level position on profit.
o DFARS
215.404-71.
• Third level
– Fourth level
Focuses on four
profit
» Fifth
levelfactors
o
o
o
o
Performance Risk
Contract Type Risk
Facilities Capital Employed
Cost Efficiency
28
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Weighted
Guidelines
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• “Facilities Capital Employed” factor focuses on
– Second level
encouraging
and rewarding capital investment
• Third level
in facilities
that benefit Defense Department.
– Fourth level
» Fifth level
29
DFARS 215.404-71-4.
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Weighted
Guidelines
Master title style
DD Form 1547
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RECORD OF WEIGHTED GUIDELINES APPLICATION
– Second level
1. REPORT NO.
DD-A&T(Q)1751
3. SPIIN 4. DATE OF ACTION
2. BASIC PROCUREMENT INSTRUMENT IDENTIFICATION NO.
a. PURCHASING OFFICE
b. FY
• Third level
REPORT CONTROL
SYMBOL
c. TYPE PROC INST CODE
d. PRISN
a. YEAR
b. MONTH
5. CONTRACTING OFFICE CODE
6. NAME OF CONTRACTOR
7. DUNS NUMBER
– Fourth level
8. FEDERAL
SUPPLY
CODE
» Fifth
level
ITEM
COST CATEGORY
OBJECTIVE
MATERIAL
SUBCONTRACTS
DIRECT LABOR
INDIRECT EXPENSES
9. DOD CLAIMANT PROGRAM
10. CONTRACT TYPE CODE
11. TYPE EFFORT
12. USE CODE
OTHER DIRECT CHARGES
SUBTOTAL COSTS (13 thru 17)
GENERAL AND ADMINISTRATIVE
TOTAL COSTS (18 + 19)
30
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Weighted
Guidelines
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DD Form 1547
• Click to edit Master text styles
ITEM
– Second level
CONTRACTOR
RISK FACTORS
TECHNICAL
WEIGHTED GUIDELINES PROFIT FACTORS
ASSIGNED
WEIGHTING
• Third level
MANAGEMENT
ASSIGNED
VALUE
BASE
(Item18)
PROFIT
OBJECTIVE
%
%
– Fourth level
» Fifth level
PERFORMANCE RISK (COMPOSITE)
COST CONTROL
%
CONTRACT TYPE RISK
COSTS FINANCED
LENGTH FACTOR
WORKING CAPITAL
INTEREST RATE
%
CONTRACTOR FACILITIES CAPITAL EMPLOYED
ASSIGNED VALUE
AMOUNT EMPLOYED
LAND
BUILDINGS
EQUIPMENT
TOTAL PROFIT OBJECTIVE
31
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Weighted
Guidelines
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DD Form 1547
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– Second level
NEGOTIATED SUMMARY
PROPOSED
TOTAL COSTS
OBJECTIVE
NEGOTIATED
• Third level
– Fourth level
» Fifth level
FACILITIES CAPITAL COST OF MONEY (DD Form 1861)
PROFIT
TOTAL PRICE (Line 31 + 32 + 33)
MARKUP RATE (Line 32 + 33 divided by 31)
%
%
%
CONTRACTING OFFICER APPROVAL
1. TYPED/PRINTED NAME OF
CONTRACT- ING OFFICER (Last, First,
1. SIGNATURE OF CONTRACTING OFFICER
1. TELEPHONE NO.
Middle Initial)
1. DATE
SUBMITTED
(YYYYMMDD)
OPTIONAL USE
96.
97.
98.
99.
32
Click to edit
Weighted
Guidelines
Master title style
•Evaluation
Click toCriteria:
edit Master text styles
• Usefulness
of the facilities capital to the
– Second level
prospective
contract.
• Third level
– Fourth
level
• Economic
value
of the facilities capital.
» Fifth level
• Contractor’s level of investment.
• Contractual provisions that reduce the
contractor’s risk of investment recovery.
33
DFARS 215.404-71-4(g).
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Conclusion
Profit = Risk
•• Click
edittoMaster
text styles
No profitto
applied
contractor-acquired
property
categorized
– Secondas:level
o Equipment
• Third level
o Real Property
– Fourth level
» Fifth level
• Profit applied to contractor-acquired property
categorized as:
o Material
o Special Test Equipment
o Special Tooling
• More profit if contractor acquires equipment with private
funding.
34
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Contact
Information
Master title style
Geoffrey A. Lawson, Esq., LL.M.
•Sikorsky
Click toAircraft
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text styles
Corporation
– Second level
Geoffrey.Lawson@Sikorsky.com
• Third level
www.Sikorsky.com
– Fourth level
» Fifth level
35