The Weighted Guideline Approach Determining Contract Fee per DFAR Part 215.404-70 through 215.404-71-5

DFAR Policy Contracting officers shall use a structured approach for developing a prenegotiation profit or fee objective on any negotiated contract action when certified cost or pricing data is obtained, except for cost-plus- award-fee contracts or contracts with Federally Funded Research and Development Centers. There are three structured approaches The weighted guidelines method; The modified weighted guidelines method; and An alternate structured approach.

DFAR Policy When using a structured approach, the contracting officer— Shall use the weighted guidelines method, except as provided in paragraphs below Shall use the modified weighted guidelines method on contract actions with nonprofit organizations other than FFRDCs. May use an alternate structured approach when The contract action is— At or below the certified cost or pricing data threshold (see FAR 15.403- 4(a)(1)); For architect-engineer or construction work; Primarily for delivery of material from subcontractors; or A termination settlement; or The weighted guidelines method does not produce a reasonable overall profit objective and the head of the contracting activity approves use of the alternate approach in writing.

DD Form 1547, Record of Weighted Guidelines Method Application Provides a numerical approach to calculating fee based on: Performance Risk Contract Type Risk Facilities Capital employed Cost Efficiency Analysis performed by CO who assigns values to various profit factors based on risk or other criteria Normal Value Designated Range of Values

Risk Types Performance Risk assesses the Contractor’s degree of risk Technical Risk – the uncertainty of performing contract requirements or meeting technical objectives Management/Cost Control Risk - The degree of management effort required to ensure technical requirements are met and costs are controlled. Risk is weighted (percentage basis) between Technical and Mgt/Cost Control such that they total 100 percent. Risk is assigned to Technical and Mgt/Cost per specific DFAR guidance Composite “Performance Risk” is then calculated per the weighting factors.

Apportionment of Risk The DFAR does NOT specify a particular range or rules concerning how to apportion between Technical and Mgt/Cost Only guidance is to weight them based on their “contribution to the total performance risk”

Technical Risk Standard Range Technology Incentive Range Nominal value is 5% Designated range is 3% - 7% Used for “.. Most contracts” Technology Incentive Range Nominal value is 9% Designated range is 7% to 11% Restricted use to Development and application of “innovative new technologies” Not permitted if effort restricted to studies and analysis or demonstrations that have a technical report as primary deliverable

Evaluating Technical Risk in the “Normal Range” Review SOW to determine Technology being developed or applied Technical Complexity Program Maturity Performance Specifications or Tolerances Delivery Schedule

Assignment of Values No justification required for assigning the “Normal” (median) value (5%) Justification required for values above or below the median Above normal (5.1 – 5.8) Aggressive delivery schedule Tight production tolerances or performance specifications Extreme importance to Government Highly skilled/experienced personnel and/or state-of-the-art machines/technology Note: Sample values (e.g. 5.1 – 5.8) are for illustrative purposes only

Assignment of Values Significantly above normal (5.9 – 6.5) Extremely complex, vital effort Overcome difficult obstacles Personnel with exceptional abilities / professional credentials Maximum values (6.5 – 7) Development of a new item especially if performance requirements/tolerances are extreme High Degree of development or production concurrency

Assignment of Values Below Normal (4% - 5%) Significantly Below Normal Requirements relatively simple Technology not complex Routine efforts Follow-on effort Program is mature Significantly Below Normal Routine services Simple operations with Government property/equipment

Technology Incentive Range Range from 7% to 11% Introduction of new technology that fundamentally changes the characteristics of an existing product or system resulting in increased technical performance, reliability or reduced costs New products or systems that contain significant technical advances over the product or system they replace Relative value of innovation must be weighed against the acquisition as a whole.

Management/Cost Risk Contractor’s management and internal control system Based on Contracting Office information concerning and reviews made by field contract offices Degree of Management involvement Degree of cost mix Resources applied Value added by contractor Extent of subcontracting What critical tasks are performed by contractor Support of Socio-economic programs Expected reliability of cost estimates Adequacy of Contractor’s management approach to control cost and schedule Other factors Currency exchange rates

Above Normal Rating Above Normal Maximum Considerable and difficult to perform value added High degree of integration Good past performance on technical and socioeconomic programs Appropriate make-buy decisions Proven record of cost tracking and control Maximum Large-scale integration of most complex nature Major international activities with significant management coordination Critically important milestones

Below Normal Rating Below Normal The program is mature and many end item deliveries have been made; The contractor adds minimum value to an item; The efforts are routine and require minimal supervision; The contractor provides poor quality, untimely proposals; The contractor fails to provide an adequate analysis of subcontractor costs; The contractor does not cooperate in the evaluation and negotiation of the proposal. The contractor's cost estimating system is marginal; The contractor has made minimal effort to initiate cost reduction programs; The contractor's cost proposal is inadequate; The contractor has a record of cost overruns or another indication of unreliable cost estimates and lack of cost control; or The contractor has a poor record of past performance.

Significantly Below Normal Rating Reviews performed by the field contract administration offices disclose unsatisfactory management and internal control systems (e.g., quality assurance, property control, safety, security); The effort requires an unusually low degree of management involvement.

Normal Value (Percent) Designated Range (Percent) Contract Type Risk Contract Type Normal Value (Percent) Designated Range (Percent) Firm Fixed Price, No Financing 5.0 4 to 6 Firm Fixed Price with Performance Based Payments 4.0 2.5 to 5.5 Fixed Price with Progress Payments 3.0 2 to 4 Fixed Price Incentive, no financing Fixed Price Incentive with performance based payments 2.0 0.5 to 3.5 Fixed price with redetermination Special Instructions Fixed price incentive with progress payments 1.0 0 to 2 Cost plus incentive fee Cost plus fixed fee 0.5 0 to 1 Time and Materials Labor Hour Fixed Price Level of effort

Other Factors Facilities Capital employed Cost efficiency factor Beyond scope of this presentation See DFAR 215.404-71-4 Can add 10 to 25 percent Cost efficiency factor May add as much as 4 percent Contractor must show Actual cost reductions on previous contracts Process improvements that reduce cost Effective incorporation of commercial items and processes Investment in new facilities if they contribute to better asset utilization or productivity

Crunching the Numbers Download template DD Form 1547 Fill in yellow blocks Objective values for Materials, DL, ODC, G&A and Indirect cost come from cost proposal Blocks 21 and 22 “Assigned Value” comes from risk analysis Block 21 “Assigned Weighting” is somewhat subjective – more later Block 24 is from contract type risk table Blocks 25 to 28 will not be discussed Block 29 “Cost Efficiency Factor” if applicable Block 30 is the “recommended” fee.

Negotiating Tips Establishing your case for a higher fee (or profit) begins with the proposal Go to the qualifications for “above average” and include specific verbiage in your proposal showing how you meet these criteria Make sure you identify the degree of difficulty for managing and coordinating project efforts Include how you will control these activities to ensure on-time delivery etc. Ring your bell Tout your accomplishments with cost control If you have a great record of small business or other socio-economic programs participation – include that in your proposal If the technical or management volumes of the proposal are page limited put this information in the cost volume

Negotiating Tips Help the negotiator come to the same factors as you assigned for the risk categories Know the criteria Discuss and document (hopefully in your proposal) how you meet the criteria for “above average” or higher. Give them plenty of fodder for their negotiation memorandum They will usually be fair but will need to adequately justify their decisions Hard data is the best argument

Negotiating Tips The split between technical risk and management risk must be set appropriately What percent of the effort will be spent in each area Remember “Management Risk” includes technical management so look at Subcontractors Virtual teams Relative amount of attention required to keep program on track and coordinate efforts A 50/50 split is probably not appropriate