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Is there any materials I could read on how the original weighted guidelines method  (ASPR 308 and FAR 15.4)  was introduced and specifically how and when the original ranges were developed  and when they were modified and why.  I have the 1985 Touche Ross Survey for DOD contractors.  But was there one in 1962 which set up the base ranges?

Any help is greatly appreciated.

 

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You asked the right question on the right day.  I have been researching this very topic recently as part of a DARPA-funded initiative and below is a raw dump of what I've found.  I'd be happy to talk through this more.

Spoiler Alert:  There appears to be no logical basis for the original ranges other than they allowed the WG to "calculate" profit ranges that fit the desired target rates (7-15%ish).  It's just a house of cards that appears unrelated to the market-based profit rates earned in the private sector. (My editorial opinion.)

The Dump: 

August 1942, Limitation of War Profits, Edward Stimson (https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9271&context=penn_law_review) 

“The large profits by manufacturers of war materials…are in sharp contrast to the wages of men in our armed forces.  The resulting pressure on Congress for some limitation upon war profits has resulted in a number of proposals and several bills.” 

  • March 27, 1934, Vinson-Trammel Act 

Secretary of the Navy should not let contracts >$10K unless contractor agreed to pay all profit in excess of 10% (profit after tax) 

  • June 25, 1936, amendment to Vinson-Trammel to make the excess payable in the year in which the contract was completed 

  • Merchant Marine Act of 1936:  Added a clause that no salary over $25K/year should be considered a part of the calculation for excess profits.  Suggested reviewing costs to make sure they were fair, just, and not in excess of reasonable market prices 

  • Act of April 3, 1939 – extended Vinson-trammel to Army aircraft…increased profit from 10% to 12% 

  • March 16, 1942:  The Smith Bill 

Requires “every naval contractor” whose fiscal year contracts completed exceed $10K to limit profit to 6% of total contract cost (does not allow taxes to be calculated out) 

Opposition:  “Limitation based on the cost of completing the contract would leave a profit which would in many cases bear no reasonable relation to capital invested.  Total cost of completion of contracts completed in any one year might be a fraction of the invested capital or several times the amount of invested capital.  If the total cost of completing the contracts completed in one year was one-third of the invested capital, then the profit would only be two percent.  If the total cost was four times the invested capital, then the permitted profit would be twenty-four precent of the capital. 

Permits profit as a percent of cost.   

Only applies to war contracts…incentivizes companies to work with commercial customers over the government. 

Did not apply to subs 

High cost of auditing 

They felt that an excess profits tax would be a better remedy.  It was suggested that a tax of 75% of profits in excess of $500K would work well. 

 

Impact of the Weighted Guidelines Profit System on Defense Contract Fees 

April 8, 1970, The Rand Corporation (https://apps.dtic.mil/sti/pdfs/AD0703274.pdf) 

  • WWI:  introduction of various excess profit taxes.   

  • From 1911 to 1913, a tax was applied to any profit in excess of the average of the period 1911-1913, or profit in excess of 10% on invested capital, whichever was greater. 

  • This was the last time rate of return on investment was figured into profit policy 

  • After WWI, production returned to government facilities. 

  • 1930’s:  Government increasingly turned to commercial entities for production; contracts were negotiated one by one without a framework for looking at profit overall. 

  • WWII:  Instead of excess profit taxes, new statutes emerged that had renegotiation clauses.  At end of the contract, the actual costs were inspected and re-evaluated for fairness. 

  • 1944 amendments contained wording that implied intent to create a broader standard for profit 

  • Included looking at pre-war earnings, risk, contractor efficiency, extent and type of subcontracting, turnover rate, capital employed, and contractor’s net worth 

  • During this time and throughout the 1950’s, there was an aversion to creating a formula to determine profits.  All profit analysis was done on a case-by-case basis. 

  • Armed services procurement act of 1947:  Forbids cost-plus-percentage-of-cost contracting and CPFF cannot exceed 10%, unless it’s R&D, then it’s 15% 

  • “With cost-based procurement prices, the appropriate fee is a part of the problem of determining a price; but determining an appropriate profit is also a problem in determining the rate of return on investment capital, which is required to make defense production attractive to a sufficient number of producers.  The former problem has received great attention from officials ever since the start of WWII.  The later problem is recognized in principle, but has been largely avoided in practice.  

 

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9 minutes ago, Patrick Mathern said:

You asked the right question on the right day.  I have been researching this very topic recently as part of a DARPA-funded initiative and below is a raw dump of what I've found.  I'd be happy to talk through this more.

Spoiler Alert:  There appears to be no logical basis for the original ranges other than they allowed the WG to "calculate" profit ranges that fit the desired target rates (7-15%ish).  It's just a house of cards that appears unrelated to the market-based profit rates earned in the private sector. (My editorial opinion.)

The Dump: 

August 1942, Limitation of War Profits, Edward Stimson (https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=9271&context=penn_law_review) 

“The large profits by manufacturers of war materials…are in sharp contrast to the wages of men in our armed forces.  The resulting pressure on Congress for some limitation upon war profits has resulted in a number of proposals and several bills.” 

  • March 27, 1934, Vinson-Trammel Act 

Secretary of the Navy should not let contracts >$10K unless contractor agreed to pay all profit in excess of 10% (profit after tax) 

  • June 25, 1936, amendment to Vinson-Trammel to make the excess payable in the year in which the contract was completed 

  • Merchant Marine Act of 1936:  Added a clause that no salary over $25K/year should be considered a part of the calculation for excess profits.  Suggested reviewing costs to make sure they were fair, just, and not in excess of reasonable market prices 

  • Act of April 3, 1939 – extended Vinson-trammel to Army aircraft…increased profit from 10% to 12% 

  • March 16, 1942:  The Smith Bill 

Requires “every naval contractor” whose fiscal year contracts completed exceed $10K to limit profit to 6% of total contract cost (does not allow taxes to be calculated out) 

Opposition:  “Limitation based on the cost of completing the contract would leave a profit which would in many cases bear no reasonable relation to capital invested.  Total cost of completion of contracts completed in any one year might be a fraction of the invested capital or several times the amount of invested capital.  If the total cost of completing the contracts completed in one year was one-third of the invested capital, then the profit would only be two percent.  If the total cost was four times the invested capital, then the permitted profit would be twenty-four precent of the capital. 

Permits profit as a percent of cost.   

Only applies to war contracts…incentivizes companies to work with commercial customers over the government. 

Did not apply to subs 

High cost of auditing 

They felt that an excess profits tax would be a better remedy.  It was suggested that a tax of 75% of profits in excess of $500K would work well. 

 

Impact of the Weighted Guidelines Profit System on Defense Contract Fees 

April 8, 1970, The Rand Corporation (https://apps.dtic.mil/sti/pdfs/AD0703274.pdf) 

  • WWI:  introduction of various excess profit taxes.   

  • From 1911 to 1913, a tax was applied to any profit in excess of the average of the period 1911-1913, or profit in excess of 10% on invested capital, whichever was greater. 

  • This was the last time rate of return on investment was figured into profit policy 

  • After WWI, production returned to government facilities. 

  • 1930’s:  Government increasingly turned to commercial entities for production; contracts were negotiated one by one without a framework for looking at profit overall. 

  • WWII:  Instead of excess profit taxes, new statutes emerged that had renegotiation clauses.  At end of the contract, the actual costs were inspected and re-evaluated for fairness. 

  • 1944 amendments contained wording that implied intent to create a broader standard for profit 

  • Included looking at pre-war earnings, risk, contractor efficiency, extent and type of subcontracting, turnover rate, capital employed, and contractor’s net worth 

  • During this time and throughout the 1950’s, there was an aversion to creating a formula to determine profits.  All profit analysis was done on a case-by-case basis. 

  • Armed services procurement act of 1947:  Forbids cost-plus-percentage-of-cost contracting and CPFF cannot exceed 10%, unless it’s R&D, then it’s 15% 

  • “With cost-based procurement prices, the appropriate fee is a part of the problem of determining a price; but determining an appropriate profit is also a problem in determining the rate of return on investment capital, which is required to make defense production attractive to a sufficient number of producers.  The former problem has received great attention from officials ever since the start of WWII.  The later problem is recognized in principle, but has been largely avoided in practice.  

 

Many thanks.  This is a great start.  Looks like the original ranges were based on a 100 contractor survey,  I have the 1985 Touche Ross survey - were the ranges changed based on that?  I know at some point only CPFF is now limited to 10% and 15% for R&D.  Have you gone beyond the 1947?   What was done in the 1963 study that ended up in the ranges for weighted guidelines?

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1 hour ago, Tzarina of Compliance said:

Is there any materials I could read on how the original weighted guidelines method  (ASPR 308 and FAR 15.4)  was introduced and specifically how and when the original ranges were developed  and when they were modified and why.

The Weighted Guidelines (WGL) method was the product of a study by Logistics Management Institute (LMI) that was done for DOD and presented in 1963. The first version of the WGL was added to the Armed Services Procurement Regulation (ASPR) on November 23, 1963, 28 Fed. Reg. 12555 - 12561. You can see the original ranges there. The ASPR adopted the LMI recommendations with minor changes.

A reasonably good discussion of the origins of the WGL contains an appendix that includes the original LMI recommendations. See Craig and Pousardian, Weighted Guidelines: An Empirical Investigation of Research and Development Acquisitions, Appendix B, which can be accessed at https://apps.dtic.mil/sti/pdfs/ADA123040.pdf.

See also Trueger, "Defense Contract Profits - Weighted Guidelines Method," Journal of Accountancy, February 1965, p. 45.

If you call LMI you may be able to obtain a copy of their original study report. I don't think it is available online. I don't know of any copy in any library.

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1 hour ago, Patrick Mathern said:

Spoiler Alert:  There appears to be no logical basis for the original ranges other than they allowed the WG to "calculate" profit ranges that fit the desired target rates (7-15%ish).  It's just a house of cards that appears unrelated to the market-based profit rates earned in the private sector. (My editorial opinion.)

That's wrong. Way off base. A lot of analysis and theory went into the development of the WGL. Nevertheless, there have long been questions about the effectiveness of the WBL.

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1 hour ago, Vern Edwards said:

The Weighted Guidelines (WGL) method was the product of a study by Logistics Management Institute (LMI) that was done for DOD and presented in 1963. The first version of the WGL was added to the Armed Services Procurement Regulation (ASPR) on November 23, 1963, 28 Fed. Reg. 12555 - 12561. You can see the original ranges there. The ASPR adopted the LMI recommendations with minor changes.

A reasonably good discussion of the origins of the WGL contains an appendix that includes the original LMI recommendations. See Craig and Pousardian, Weighted Guidelines: An Empirical Investigation of Research and Development Acquisitions, Appendix B, which can be accessed at https://apps.dtic.mil/sti/pdfs/ADA123040.pdf.

See also Trueger, "Defense Contract Profits - Weighted Guidelines Method," Journal of Accountancy, February 1965, p. 45.

If you call LMI you may be able to obtain a copy of their original study report. I don't think it is available online. I don't know of any copy in any library.

This is exactly what I was looking for.  I know that they did do a study to come up with the ranges.   I am writing something to encourage a civilian agency to conduct their own study and so wanted to give a primer and use the methodology as an example.  Imperfect as it is.  Thank you so much @Vern Edwards!!!! Spasibo 

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I have found the LMI study at the Haithi Trust: https://babel.hathitrust.org/cgi/pt?id=uc1.l0050759224&view=page&seq=7&skin=2021

Unfortunately, you cannot download or print it. You can only read it online. Good luck reaching anyone at LMI. Apparently, they are all working from home. Covid-19 appears to have finally put an end to business communication by telephone.

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1 hour ago, Vern Edwards said:

That's wrong. Way off base. A lot of analysis and theory went into the development of the WGL. 

I'll gladly walk back my editorial commentary, Vern, but haven't yet seen anything that leads me any closer to the "analysis and theory" that went into the WGL.

 

15 minutes ago, Vern Edwards said:

I have found the LMI study at the Haithi Trust: https://babel.hathitrust.org/cgi/pt?id=uc1.l0050759224&view=page&seq=7&skin=2021

Unfortunately, you cannot download or print it. You can only read it online. Good luck reaching anyone at LMI. Apparently, they are all working from home. Covid-19 appears to have finally put an end to business communication by telephone.

This is a great study, but does not provide insight into "how the original ranges" were developed.  This article simply explains the WGL development as a tool that fits profit within the range limits set forth by the FAR.  It appears their point is that KO's weren't using consistent logic in analyzing profit, so they set out to create something and voila!  Weighted Guildelines was born.  Thus, the study appears to support an idea that "there appears to be no logical basis for the original ranges other than they allowed the WG to "calculate" profit ranges that fit the desired target rates (7-15%ish)."

What if we all focused on one piece of the puzzle:  Why does a limitation of 15% apply to non-R&D CPFF?  Why not 17.5%?  Or 4.6%?  Where did the 15% come from?

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37 minutes ago, Patrick Mathern said:

What if we all focused on one piece of the puzzle:  Why does a limitation of 15% apply to non-R&D CPFF?  Why not 17.5%?  Or 4.6%?  Where did the 15% come from?

I thought we were talking about the weighted guidelines. The fee limitation on non-R&D CPFF is 10 percent, not 15 percent, of estimated cost, and it is statutory per 10 USC 2306(d) and 41 USC 3905.

So are we talking about WGL or statute?

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1 hour ago, Vern Edwards said:

I have found the LMI study at the Haithi Trust: https://babel.hathitrust.org/cgi/pt?id=uc1.l0050759224&view=page&seq=7&skin=2021

Unfortunately, you cannot download or print it. You can only read it online. Good luck reaching anyone at LMI. Apparently, they are all working from home. Covid-19 appears to have finally put an end to business communication by telephone.

Just asked one my friends at LMI for a copy.  Can you elaborate on "big mistake"?  Do you have thoughts on how to determine what acceptable fees are under CPFF contracts when you do not really have competition?

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1 minute ago, Vern Edwards said:

I thought we were talking about the weighted guidelines. The fee limitation on non-R&D CPFF is 10 percent, not 15 percent of estimated cost, and it is statutory per 10 USC 2306(d) and 41 USC 3905.

So are we talking about WGL or statute?

Talking about WGL and the ranges in my original question.  

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1 minute ago, Tzarina of Compliance said:

Can you elaborate on "big mistake"?  Do you have thoughts on how to determine what acceptable fees are under CPFF contracts when you do not really have competition?

Yes. It would be a lot of work. You would have to publish a proposed rule and deal with public comments. And how would you be better off? There are statutory limits. Just set prenegotiation objectives and negotiate within those limits.

 

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@Vern Edwards So yes, this exercise is for pre-negotiated objectives.   DOD ranges % for various technical, management, cost, capital, IT etc are based on DOD contractors and their industry.    In my review of my agency's 250 contracts so far, the range that is acceptable seems to be 3-8% with average of 5%.  Even though it is not based on anything but random CO's experience with what is acceptable.   So I am trying to see if that is, in fact, the case and then see what could influences the above "normal" of 5% and below normal of  5% in the contracts with this specific agency.  How does a CO and a contractor determine and justify what is a reasonable fee.  Sorry I know there is a lot more to that, but that is my objective.  Not to raise the statutory limitations but the mechanics of how to determine where within the limitations the fee objective should be.   Sorry for sloppy grammar, trying to do too many things.

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1 hour ago, Vern Edwards said:

I thought we were talking about the weighted guidelines. The fee limitation on non-R&D CPFF is 10 percent, not 15 percent, of estimated cost, and it is statutory per 10 USC 2306(d) and 41 USC 3905.

So are we talking about WGL or statute?

Typo.  Should have said:

What if we all focused on one piece of the puzzle:  Why does a limitation of 10% apply to non-R&D CPFF?  Why not 17.5%?  Or 4.6%?  Where did the 10% come from?

OP talked about the "original ranges" - this conversation is about statute, but not in a vacuum.  WGL is a very widely-utilized tool with a foundation in statute.

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2 hours ago, Patrick Mathern said:

This is a great study, but does not provide insight into "how the original ranges" were developed.  This article simply explains the WGL development as a tool that fits profit within the range limits set forth by the FAR.  It appears their point is that KO's weren't using consistent logic in analyzing profit, so they set out to create something and voila!  Weighted Guildelines was born.  Thus, the study appears to support an idea that "there appears to be no logical basis for the original ranges other than they allowed the WG to "calculate" profit ranges that fit the desired target rates (7-15%ish)."

Wrong again. The WGL ranges were not designed to reflect what was going on in a free market, because there was (and is) no free market for the kinds of work to which they were to be applied. (See Peck & Scherer, The Weapons Acquisition Process: An Economic Analysis (Harvard, 1962), pp. 55-64 .)

The WGL ranges were designed to provide a rational and consistent basis for setting profit or fee objectives based on a socio-political consensus among politicians, bureaucrats, and business people about what would be fair for certain kinds of negotiations—in particular, negotiations in non-market transactions, such as weapon research and development. The goal was consistency within a tradition and a consensus among participants in a monopsony. A tradition and consensus that had been developed in negotiations between government and industry over the course of many years, since before and immediately after WWII. LMI alluded to that consensus in pages 42 - 48 of its report.

It does not follow that such traditional consensus rates had "no logical basis" just because you don't understand the logic. They were, in fact, very logical, but the logic was not free-market logic.

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21 hours ago, Patrick Mathern said:

Typo.  Should have said:

What if we all focused on one piece of the puzzle:  Why does a limitation of 10% apply to non-R&D CPFF?  Why not 17.5%?  Or 4.6%?  Where did the 10% come from?

Why 10 percent? Why not another number?

See my remarks, above, about socio-political tradition and consensus.

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3 hours ago, Vern Edwards said:

Yes. It would be a lot of work. You would have to publish a proposed rule and deal with public comments. And how would you be better off? There are statutory limits. Just set prenegotiation objectives and negotiate within those limits.

 

So yes, this exercise is for pre-negotiated objectives.   DOD ranges % for various technical, management, cost, capital, IT etc are based on DOD contractors and their industry.    In my review of my agency's 250 contracts so far, the range that is acceptable seems to be 3-8% with average of 5%.  Even though it is not based on anything but random CO's experience with what is acceptable.   So I am trying to see if that is, in fact, the case and then see what could influences the above "normal" of 5% and below normal of  5% in the contracts with this specific agency.  How does a CO and a contractor determine and justify what is a reasonable fee.  Sorry I know there is a lot more to that, but that is my objective.  Not to raise the statutory limitations but the mechanics of how to determine where within the limitations the fee objective should be.   Sorry for sloppy grammar, trying to do too many things.

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On 1/26/2022 at 6:28 PM, ji20874 said:

Tzarina,

Other than the statutory maximums, why do you want to establish limitations on what a fee objective should be?

I don't.  I want a way to calculate fee objectives within the maximum for various effort and for an industry which is other than DOD contractors.  I am trying to see the best way to do that - what affects lower than normal 5% what affects higher than normal 5%, so the ranges.  I just wanted to see how those ranges were developed originally for DOD so that I can have something to compare my exercise to.  I think the LMI study is the best explanation although I run down all the rabbit holes that Vern linked in 🙂 and that was useful.

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