Are they allowed to change their profit rate from the 2% that they proposed on the contract to the 10% on a field change/upcoming modification?
1. The FAR and DFARS references quoted below in pertinent part are applicable to this response.
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FAR 15.404-4 -- Profit
(1) … [A]gencies making noncompetitive contract awards over $100,000 totaling $50 million or more a year -- (i) Shall use a structured approach for determining the profit or fee objective in those acquisitions that require cost analysis;
(c) Contracting officer responsibilities.
(2) When the price negotiation is based on cost analysis, contracting officers in agencies that have a structured approach shall use it to analyze profit.
(6) If a change or modification calls for essentially the same type and mix of work as the basic contract and is of relatively small dollar value compared to the total contract value, the contracting officer may use the basic contract’s profit or fee rate as the prenegotiation objective for that change or modification.
DFARS 215.404-4 -- Profit
(1) 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 … . There are three structured approaches:
(A) The weighted guidelines method;
(B) The modified weighted guidelines method; and
(C) An alternate structured approach.
(c) Contracting officer responsibilities.
(2) When using a structured approach, the contracting officer—
(A) Shall use the weighted guidelines method, except as provided in paragraph (c)(2)(C) of this subsection.
(C) May use an alternate structured approach when – (1) The contract action is (ii) For architect-engineer or construction work.
DFARS 215.404-73 -- Alternate structured approaches
(b) The contracting officer may design the structure of the alternate, but it shall include—
(1) Consideration of the three basic components of profit--performance risk, contract type risk (including working capital), and facilities capital employed.
(2) Offset for facilities capital cost of money.
FAR 15.408 - Table 15-2 -- Instructions for Submitting Cost/Price Proposals When Certified Cost or Pricing Data Are Required
II. -- Cost Elements
[P]rovide breakdowns for the following basic cost elements, as applicable:
A. Materials and services.
B. Direct Labor.
C. Indirect Costs.
D. Other Costs
F. Facilities Capital Cost of Money.
III. -- Formats for Submission of Line Item Summaries
B. Change Orders, Modifications, and Claims
Column (1): Cost Elements
Column (2): Estimated Costs of all Work Deleted
Column (3): Cost of Deleted Work Already Performed
Column (4): Net Cost to be Deleted
Column (5): Cost of Work Added
Column (6): Net Cost of Change
Column (7): Reference
Column and Instruction
(1) Enter appropriate cost elements.
(2) Include the current estimates of what the cost would have been to complete the deleted work not yet performed (not the original proposal estimates), and the cost of deleted work already performed.
(3) Include the incurred cost of deleted work already performed, using actuals incurred if possible, or, if actuals are not available, estimates from your accounting records.
(4) Enter the net cost to be deleted, which is the estimated cost of all deleted work less the cost of deleted work already performed. Column (2) minus Column (3) equals Column (4).
(5) Enter your estimate for cost of work added by the change. When nonrecurring costs are significant, or when specifically requested to do so by the Contracting Officer, provide a full identification and explanation of them. When any of the costs in this column have already been incurred, describe them on an attached supporting schedule.
(6) Enter the net cost of change, which is the cost of work added, less the net cost to be deleted. Column (5) minus Column (4) equals Column (6). When this result is negative, place the amount in parentheses.
(7) Identify the attachment in which the information supporting the specific cost element may be found.
2. The negotiation of the profit rate resulting from a contract change is a matter of negotiation and mutual agreement between the parties. As required by FAR 15.404-4, DFARS 215.404-4, and DFARS 215.404-73 as described above, the Contracting Officer must develop the Government’s profit objective using a structured approach in preparation for negotiations. Pursuant to DFARS 215.404-73(b), this alternate structured approach for construction type contract modifications must include consideration of the three basic components of profit--performance risk, contract type risk (including working capital), and facilities capital employed and must provide for an offset for facilities capital cost of money.
3. Additionally regarding proposed changes to the overall contract costs as indicated in this inquiry, and assuming the absolute value of this change (i.e., the value of the deleted work plus the value of the new work) vice the net value of this change exceeds $750,000, then the contractor must also submit its cost proposal in accordance with the procedures set forth in FAR 15.408, Table 15-2. Notably, the contractor’s proposal must provide the current estimates of what the cost would have been to complete the deleted work not yet performed and not the original proposal estimates used to negotiate the current contract price. This procedure precludes the contractor from “getting well” on the change if it would have been in a loss position in completing the original work.