Contracting Officer Podcast Slides Knowledge & Insights From Contracting Officers

What are Weighted Guidelines? Episode 022 What are Weighted Guidelines? Original Air Date: April 12, 2015 Hosts: Kevin Jans & Paul Schauer

Formatting notes Hyperlinks: Blue font indicates hyperlinks – presentation must be in ‘Slide Show’ mode to activate the link Red bold font indicates a point of emphasis Green bold font indicates CO’s personal comment or perspective

Introduction: What does the FAR say about ‘Profit?’ It is part of a contract FAR 15.404-4(a)(3) – Both the Government and contractors should be concerned with profit as a motivator of efficient and effective performance. Negotiations aimed merely at reducing prices by reducing profit, without proper recognition of the function of profit, are not in Government’s interest. Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentage to total estimated costs are not proper motivation for optimum contract performance.

When Do Weighted Guidelines Apply On non-competitive actions over the CCPD limit of $700,000: Includes both sole source contracts and modifications to current contracts FAR 15.404-4(b)(1) requires a “structured approach” to negotiate profit In DoD, Weighted Guidelines is the approach used (per DFARS 215.404-4) FAR 15.404(b)(2) - “Agencies may use another agency’s structured approach.” Other agencies use it too (DoE and NOAA reference it)

What is “a Structured Approach?” “Structured Approach” means using a process with some basic, common elements to negotiate profit FAR 15.404-4(d)(1) – Profit-analysis Factors (required) (i) Contractor Effort. Complexity of the work and resources required for contract performance Provide greater profit opportunity under contracts requiring a high degree of professional and managerial skill, and/or…

What is “a Structured Approach?” Contractors whose skills, facilities, and technical assets will lead to efficient and economical contract performance. (ii) Contract type risk. Compensate contractors for assuming more risk Listen to Episode 009 for contract type risk discussion (iii) Socioeconomic programs: SBs, WOSBs, VOSB, HUBZone, SDVOSB… “Greater profit opportunity should be provided contractors that have displayed unusual initiatives in these programs.”

What is “a Structured Approach?” What does that mean? It says “should”…so you decide! (iv) Capital investments - in efficient and economical performance (v) Cost control and other past accomplishments - Gives contractor credit for a history of cost control) (vi) Independent development: Did Government recover any price reductions or other benefits from something the contractor did not charge for? (2) “Additional” factors as identified by each agency

What are “Weighted Guidelines?” Form DD 1547, “Weighted Guidelines Application” It is the “process” (80/20 rule) that is essentially a formula-laden spreadsheet that gives the CO a ‘negotiation objective’ It is a nifty tool, but like many tools in a thinking profession, it can be massively frustrating to get it to fit the circumstances

“Weighted Guidelines” Baseline Step 1: CO loads the contractor’s costs elements into the spreadsheet: Material, Subcontracts, Labor, Indirects, ODCs, G&A, etc. These are summed for a “Total Costs” Step 2: CO enters the Profit Factors This is a “thinking step” w/in their formulas Balance Technical vs. Management/Cost Control (they total 100%)

“Weighted Guidelines” Baseline Contract type risk factors (judgment within ranges) Examples: FFP = 4.0% - 6,0% FPI with Performance Based Payments = 0.5% - 3.5% CPFF and T&M = 0.0% - 1.0% Facilities Capital Employed (Land, Buildings, Equipment) – see DFARS 215.404-71-4

“Weighted Guidelines” Baseline Cost Efficiency Factor – see DFARS 215.404-71-5 NOTE: A special factor provides incentive for contractors to reduce costs To the extent that the contractor can demonstrate cost reduction efforts that benefit the pending contract, the CO may increase the pre-negotiation profit objective by up to 4% Step 3: Negotiate with Contactor based on the results NOTE: We have a screencast of this for Skyway Community members

When does Weighted Guidelines happen? Acquisition Time Zones (from Podcast Episode 003) Requirements Zone Market Research Zone RFP Zone (proposal zone) Source Selection Zone NOTE: Weighted Guidelines are only used when competition does not exist. They are intended to be a hassle Competition is the gold standard for establishing “fair and reasonable price” In case of emergency, break glass and use Weighted Guidelines

Why Should Government Care? Book answer: FAR 15.404 says so: Need to get a Fair and reasonable price Our answer: How do you know that profit is reasonable? Definition of “fair” with no competition is very difficult Is 10% “fair?” 20% ? 50% ?

Why Should Government Care? In open commercial market, fair is what people will pay so long as they want to buy it. Since a sole source contract is being negotiated: The “want it” decision is already made. You now need to negotiate the deal Weighted Guidelines help – It is not perfect, but what is….? Use the tool to get the deal done

Why Should Industry Care? Book answer: FAR says so Same as the CO – See FAR 15.404-4 and DFARS 215.404-4 Our answer: CO cannot just pick a profit rate and move on: Weighted Guidelines (or similar) require they consider certain factors If you are unfamiliar, check out DFARS 215.404-70/71

Why Should Industry Care? In open commercial market, fair is what people will pay as long as they want to buy it Not here: US Taxpayer gets a vote through the “structured process” Object to these rules? Go sell in the commercial market where people rarely “need” things that are sole source Instead, they “want” these things, and will pay only as much as they want to pay

Summary Weighted Guidelines are a “structured approach” to calculating profit Profit rates cannot be arbitrary CO must determine prices to be fair and reasonable Government must factor profit as a motivation when negotiating

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