The Weighted Guideline Approach

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

2. 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.

3. 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.

4. 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

5. 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.

6. 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”

7. Technical Risk • Standard 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

8. 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

9. 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

10. 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

11. Assignment of Values • Below Normal (4% - 5%) • 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

12. 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.

13. 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

14. Above Normal Rating • Above Normal • 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

15. 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.

16. 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.

17. Contract Type Risk

18. Other Factors • Facilities Capital employed • 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

19. 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.

20. 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

21. 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

22. 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