Desk Reference
VII. Negotiation
- Negotiation means contracting through the use of either competitive or other-than-competitive proposals and discussions. Any contract awarded without using sealed bidding procedures is a negotiated contract.
- A list of clauses that may appear in SBIR contracts is provided. This list: (1) identifies the clause by number and title; (2) provides the effective date of the clause when last reviewed; (3) explains briefly what the clause contains; (4) lists the paragraph in the FAR or DFARS which requires the clause; (5) provides information as to when the clause is required; and (6) states whether, or under what circumstances, the clause must flow down to prime subcontracts. This list should not be used as an authority base, but may be used as an aid in understanding and deciding whether further reading of the clause is necessary.
- How negotiations differ in the SBIR arena
- The Phase I award may be the first government contract a company receives. Selection for a Phase I award is a strong indication that the firm has knowledge and is well qualified in the technical field, but it does not assure that the firm has knowledge of government contract administration. SBIR Phase I proposals are selected for award based primarily upon technical merit and innovation. The contracting officer should consider the potential inexperience of the SBIR contractor throughout negotiations. The goal is to award the contract at a price that is fair and reasonable, not the lowest price attainable.
- It is important that the contracting officer call attention to important clauses and other terms in the contract. Many FAR and DFARS clauses are included only by reference. When it appears that a contractor lacks understanding, the proper action is to proactively provide assistance. It is not sufficient for a contracting officer to simply tell contractors that all they have to do is "read the contract." Most experienced contracting officers will admit that reading and understanding everything in every clause of the contract is very difficult; it is nearly impossible for an SBIR contractor with little or no previous experience with government contracts. The list of contract clauses, found in paragraph B. above, could be provided to new contractors at time of negotiation or award. A review of the clause list should help the contractor understand why clauses are included in a proposed contract and reduce or eliminate the necessity for any discussion of contract clauses during negotiation. It should also be noted that FAR Clause 52.252-2 is required when clauses are incorporated by reference. This clause states: "This contract incorporates one or more clauses by reference, with the same force and effect as if they were given in full text. Upon request, the contracting officer will make their full text available. Also, the full text of a clause may be accessed electronically at this/these address(es)."
- It may be appropriate to modify the proposed statement of work. For example, a proposed task may not be of benefit to the government, or the work in certain tasks may need to be reduced. In such cases, the parties must agree upon precise changes to the statement of work and resultant changes in cost.
- It may be appropriate to allow for additional labor costs during negotiations. It is not unusual for an SBIR proposal to include equipment costs which are not allowable as direct costs. A common problem occurs when a contractor includes a unit of equipment in his or her cost proposal that will be classified as an indirect cost and thus is not allowable as a direct charge to the contract. For example, a new contractor may include the cost of electronic equipment that would be used in performing various contracts and expect that the cost would be allowed as a direct charge to the specific contract. As SBIR contracts have a monetary limit, any disallowed cost would cause the price to be significantly below the amount allowed in the solicitation. The contractor will often want to replace the cost of equipment with more labor. When considering whether to allow this, the contracting officer and the technical monitor should consider whether the additional hours would benefit the program and inquire as to whether those additional hours would have been expended by the contractor in any case. Many times a contractor will have proposed less hours than he or she intended to perform due to the dollar limit contained in the solicitation.
- Federal, State, and Local Taxes may be required when purchasing Special Testing Equipment or components even though the Government takes title to the equipment immediately upon delivery. If there is a question as to whether these taxes are properly assessed, the contractor should request instructions from the Contracting Officer in accordance with FAR 31.205-41.
- Profit and Fee
- For DoD contracts, the profit/fee calculation is usually based on the record of weighted guidelines method as discussed at DFARS SubPart 215.404-71-1. DD Form 1547 provides the format for performing the analysis. The form is available at: http://www.dior.whs.mil/forms/dd1547.pdf. Instructions for processing the DD Form 1547 are at DFARS 253.215-70.
- The weighted guidelines method focuses on four profit factors:
- DFARS 215.404-71-2 addresses performance risk, which includes technical and management/cost control.
- DFARS 215.404-71-3 addresses contract type risk, which focuses on the degree of cost risk accepted by the contractor under varying contract types.
- DFARS 215.404-71-4 addresses facilities capital employed, which focuses on encouraging and rewarding capital investment in facilities that benefit DoD.
- DFARS 215.404-71-5 addresses the cost efficiency factor. This special factor provides an incentive for contractors to reduce costs by demonstrating cost reduction efforts that benefit the pending contract.
- For DoD contracts, the profit/fee calculation is usually based on the record of weighted guidelines method as discussed at DFARS SubPart 215.404-71-1. DD Form 1547 provides the format for performing the analysis. The form is available at: http://www.dior.whs.mil/forms/dd1547.pdf
- Cost Sharing by the Contractor
- Cost participation could serve the mutual interest of the participating agencies and certain SBIR performers by helping to assure the efficient use of available resources. Cost sharing, however, shall not normally be encouraged except where required by other statutes." SBIR legislation further states that cost sharing is allowed but will not be an evaluation factor for selection of a Phase I award. Cost sharing may be proposed for a Phase I contract for several reasons:
- The contractor is limited by the funding level provided in the solicitation; however, it may be desirable for the contractor to provide work in excess of what will be funded in the contract.
- If the feasibility study for Phase I cannot be completed sufficiently with allotted funds, the contractor may want to perform all necessary work without additional funding in order to enhance commercialization, improve the chances of qualifying for the fast track, and/or selection for Phase II.
- Cost sharing, although not an evaluation factor for Phase I awards, may improve the technical score. When a contractor proposes to accomplish work beyond what can reasonably be expected to be accomplished with the hours and money proposed, that contractor's proposal may be scored lower for that reason. The only way to overcome this is to show all the effort and cost in the proposal. If this is the case, the contractor would have to absorb some of the costs to stay within the funding limit.
- If the technology being proposed has a very high potential for commercialization, the contractor may want to contribute a considerable sum towards its development.
- When a contractor wishes to participate in the cost of the effort, and a fixed-price contract is to be awarded, the following should be recognized:
- Profit is allowed. No fee is allowed in cost-sharing contracts; however, a fixed-price contract is not a cost-sharing contract. A cost-sharing contract is a cost-reimbursement contract in which contractors receive no fee and are reimbursed only for an agreed-upon portion of the allowable costs.
- In a fixed-price contract, a reasonable price (cost and profit) must be negotiated prior to award. If the contracting officer takes exception to some of the cost elements or profit, but the price (what is being funded in the contract) is considered fair and reasonable, that price should be allowed even though all cost elements or profit may not be agreed upon. Consider the proposed dollar amount prior to deducting any amount the contractor claims to be cost sharing; and if the amount to be funded is reasonable for the total effort proposed, further negotiation on price should not be necessary.
- Cost participation could serve the mutual interest of the participating agencies and certain SBIR performers by helping to assure the efficient use of available resources. Cost sharing, however, shall not normally be encouraged except where required by other statutes." SBIR legislation further states that cost sharing is allowed but will not be an evaluation factor for selection of a Phase I award. Cost sharing may be proposed for a Phase I contract for several reasons:
- A Cost-sharing contract may be appropriate if a cost-reimbursement contract is to be negotiated and cost sharing is proposed. The description and application for this type of contract is at FAR 16.303.
- Funding Profile and Schedule of Payments
- It is extremely important that the funds be provided be sufficient for the contractor to perform on schedule. Any delay while awaiting a funding authorization will likely impact the small SBIR contractor to a much greater extent than larger contractors. The very small SBIR contractor may have at least one engineer whose primary work is for the accomplishment of a specific SBIR contract. It becomes very costly to retain that person when funds are not available to continue the work.
- Funding schedules (specifying the amount presently available for payment and anticipated dates for future allotments) for incrementally funded contracts are discussed at Part VI. C. The funding schedule should be a part of the negotiation. The clause at DFARS 252-232-7007 required in incrementally funded fixed-price contracts, provides that the amount available for payment upon award be included at paragraph (a) of that clause. Also, paragraph (i) of the clause requires a schedule of the dates the parties contemplate funds will be made available. The clause at FAR 52.232-22, required in incrementally funded cost-reimbursement contracts, contains no such paragraphs; however, the same information should be included in the schedule of the contract.
- Payment schedules (specifying when and under what circumstances payments will be made) are discussed at Part VI. A. A schedule of payments should be developed and agreed upon during negotiations. The contracting officer should explain the payment procedure, reach agreement, and include it in the contract. If the contract does not include complete instructions for how and under what circumstances each payment may be made, the voucher will surely be rejected by the paying office. It may be helpful to call the contractor within two weeks after contract award and offer any assistance required in the vouchering and payment process.
- Confirmation of Negotiations
- At the completion of negotiations, the contractor should be required to provide a letter confirming the agreed-upon price, terms and conditions. Examples of what might be included in the confirmation letter would be the method and schedule of payments and any exceptions to the work originally proposed which were discussed and agreed upon during negotiations. If the contract amount is over $700,000, the contractor will usually be required to provide a certificate of current cost or pricing data (format at FAR 15.406-2) as of the date the negotiations were completed.
- The DoD SBIR Program Solicitation requires that the awardee certify that "he or she has not previously been, nor is currently being, paid for essentially equivalent work by an agency of the Federal Government." If this has not been accomplished by other documentation, the contractor should be required to include this statement in the letter confirming negotiations.
If you have any suggestions or comments regarding this Desk Reference, please send them via the SBIR/STTR Help Desk or phone 866-SBIRHLP (866-724-7457).
Last Updated: Monday, 22-Aug-2011 09:48:36 EDT