Chapter 10 - Cost and profit

10.1 Cost and profit: General information

Effective date: 2024-04-19

1. Contracting officers should refer to the Practitioner’s Guide for Procurement Pricing, Section 5 Pricing Principles for more information and guidance on contract pricing, including cost and profit principles.
2. When a contract must be awarded on a non-competitive basis, or when, following a competitive process, price negotiations with the successful bidder are required, contracting officers must determine the contract price based on the procedures outlined in this Chapter.
3. Where the contract price is based on estimated or actual costs, there may be a need to mitigate price risk and make adjustment to allowable amounts based on a verification of the supporting records. To mitigate price risk, SACC Manual clause C1004C should be included in the terms and conditions of the contract.
4. In addition, when a procurement presents any of the characteristics noted below and described in the Directive on the Use of Cost and Price Analysis Services (accessible only on the Government of Canada network) (PDF file - 314 KB) - (Help on File Formats), it is mandatory that the contracting officer consult a Price Support Directorate advisor and document the consultation and pricing decisions in the procurement file:
   1. Any potential sole-source procurement with a total estimated value of $7,500,000 or more, including applicable taxes, options and amendments.
   2. Any competitive procurement with a total estimated value of $7,500,000 or more, including applicable taxes and options where only one compliant bid is received.
   3. Any competitive procurement with a total estimated value of $7,500,000 or more, including applicable taxes, with contract provisions for negotiated prices or where prices are likely to be negotiated as a result of a contract amendment.
   4. Any competitive procurement, with a total estimated value of $10,000,000 or more, including applicable taxes, options and amendments.
5. The determination of prices depends on the circumstances of each contract. Before referring to the general sections the establishing of costs (see Section 5.1 Principles for Establishing the Cost Base of the Practitioner’s Guide for Procurement Pricing) and profit (see Section 5.2 Profit Principles of the Practitioner’s Guide for Procurement Pricing), contracting officer must determine that the following special circumstances do not apply:
   1. Research and Development Contracts with Universities and Colleges (see Annex 10.1 Research and development contracts with universities and colleges);
   2. Non-competitive Contracts with Non-profit Organizations, excluding Universities and Colleges (see Annex 10.2 Non-competitive contracts with non-profit organizations, excluding universities and colleges);
   3. Non-competitive Acquisitions of Manufactured Products and Repair and Overhaul Services from Agency and Resale Outlets (see Annex 10.3 Non-competitive acquisitions of manufactured products and repair and overhaul services, from agency and resale outlets).

   Contracting officers should also refer to the requirements for audit. (see Supply Manual section 4.70.20.35 Cost reimbursable contracts: Audit).

6. The following discussion papers are found in the Practitioner’s Guide for Procurement Pricing, Section 6.0, Annex 5.1: Discussion Papers:
   • Annex 5.1.1 - Financial Accounting vs. Cost Accounting
   • Annex 5.1.2 - Rules-Based vs. Principles-Based Standards
   • Annex 5.1.3 - Accrual vs. Cash Based Accounting

10.5 Establishing the cost base

Effective date: 2024-02-16

The first step in building a negotiated contract price is the establishment of a cost base. In cost-based pricing, the price of the contract is based on the acceptability of costs incurred, cost estimates, or a combination thereof with a profit margin calculated in accordance with of the Practitioner’s Guide for Procurement Pricing. The acceptable estimated or actual costs in a contract are determined using:

1. Contract Cost Principles (Standard Acquisition Clause and Conditions (SACC) Contract Cost Principles 1031-2);
2. Costing Standard (Attributable, Appropriate, and Reasonable Costs);
3. Cost Accounting Practices (CAP) Submission; and
4. Costing Discussion Papers (see Practitioner’s Guide to Procurement Pricing, Annex 5).

Low Dollar Value Contracts: Contracts valued under $50,000 do not require negotiation of profit under this section. (Refer to Practitioner’s Guide for Procurement Pricing, Section 5.2: Profit Principles for overall profit threshold).

Commercial Pricing: Cost-Based Pricing Principles are not required for commercial goods and services, since these are used regularly for non-government purposes, and are sold by the supplier in the course of carrying out its normal business operations; and there is a sufficient number of buyers, other than the government, to establish a relevant market price for the good or service. Sufficient price support for a commercial price must be available to support a commercial price or Cost-Based Pricing Principles will apply. (Refer to Practitioner’s Guide for Procurement Pricing, Section 5.0.2: Commercial Pricing for guidance).

1. Contract Cost Principles

   Whenever a contract price is negotiated based on costs, the costs will be determined using Contract Cost Principles 1031-2 of the Standard Acquisition Clauses and Conditions (SACC) Manual.

   For non-competitive contracts valued at $50,000 and over, with a fixed price or fixed time rate basis of payment, except in cases for the acquisition of commercial goods and services, the price or rate will be negotiated based on the estimated costs computed in accordance with the Contract Cost Principles 1031-2.

   For non-competitive contracts valued at $50,000 or over, with a cost reimbursable basis of payment, except in cases for the acquisition of commercial goods and services, the price will be determined based on actual costs incurred computed in accordance with the Contract Cost Principles.

   In both of the above cases, the Contract Cost Principles will be included as a condition of the contract. Annex 2 Costing Standard in the Practitioner’s Guide for Procurement Pricing includes additional guidance and interpretation on why certain costs are considered non-applicable when utilizing Contract Cost Principles 1031-2.

2. Costing Standard

   The Costing Standard (Section 6 Annexes, Annex 2 in the Practitioner’s Guide for Procurement Pricing) is supplementary guidance for the Contract Cost Principles SACC 1031-2, explaining why certain costs are considered nonapplicable when utilizing Contract Cost Principles. Additional information, including flow charts, decisions trees, and examples are available in the Practitioner’s Guide for Procurement Pricing, Section 5.1.1 Costing Standard and Annex 2: Costing Standard. As an augmentation of SACC 1031-2, the Costing Standard applies principles-based and risk-guided approaches to facilitate consistency, to improve understanding, and to support contracting officer’s professional judgement for determining fair, reasonable, and effective pricing. To be acceptable, a contract cost must meet the criteria of:

   • Attributable: A cost is attributable if it is incurred directly or indirectly for the fulfilment of the contract and it is necessary to fulfil the requirements of that contract;
   • Appropriate: A cost is appropriate if it, by its character and nature, represents a cost that is expected to be incurred in the conduct of delivering the contract; and
   • Reasonable: A cost is reasonable if by its nature it does not exceed what might be expected to be incurred in the normal delivery of the contract in question, whether under a competitive or non-competitive procurement.

   The following specific costs categorized by cost groups are included in Section 6.0 Annexes, Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing:

   • Asset-Based Costs
     • Sub-section 1.1 Amortization of Unrealized Appreciation of Assets
     • Sub-section 1.2 Depreciation
     • Sub-section 1.3 Excess Production Capacity
     • Sub-section 1.4 Excess Facilities
     • Sub-section 1.5 Impairment of Assets
     • Sub-section 1.6 Leases
     • Sub-section 1.7 Special Production Tooling and Special Test Equipment
     • Sub-section 1.8 Government Assistance Related to Fixed Assets, Research and Product Development
   • Employed-Based Compensation Costs
     • Sub-section 2.1 Dues and Membership
     • Sub-section 2.2 Downtime
     • Sub-section 2.3 Employee Benefits
     • Sub-section 2.4 Executive Benefits and Employee Compensation
     • Sub-section 2.5 Overtime Costs
     • Sub-section 2.6 Pension Costs
     • Sub-section 2.7 Pension Plan Refunds
     • Sub-section 2.8 Severance Payments
     • Sub-section 2.9 Training and Staff Development
     • Sub-section 2.10 Travel Costs and Living Expenses
     • Sub-section 2.11 Department of National Defence (DND) Facility Costs
     • Sub-section 2.12 Displacement/Dislocation Pay Allowance
   • Good/Services-Based Costs
     • Sub-section 3.1 Bad Debts and Collection Charges
     • Sub-section 3.2 Inventory Losses and Obsolescence
     • Sub-section 3.3 Rework and Faulty Workmanship
     • Sub-section 3.4 Surplus Materials Expenses
   • Corporate/Various-Based Costs
     • Sub-section 4.1 Allowance for Interest on Debt and Capital
     • Sub-section 4.2 Extraordinary or Unusual Matters or Events
     • Sub-section 4.3 Financial Related Expenses
     • Sub-section 4.4 Fines and Penalties
     • Sub-section 4.5 Fees for Professional Advice
     • Sub-section 4.6 Goodwill
     • Sub-section 4.7 Insurance
     • Sub-section 4.8 Legal, Accounting and Consulting Fees in Connection with Financial Reorganization, Security Issues, Capital Stock Issues, Obtaining of Patents and Licenses and Prosecution against the Crown
     • Sub-section 4.9 Losses on Investment
     • Sub-section 4.10 Losses on Other Contract
     • Sub-section 4.11 Patents and License
     • Sub-section 4.12 Prosecution of Claims against the Crow
     • Sub-section 4.13 Provisions for Contingencies and Warranty Costs
     • Sub-section 4.14 Refunds
     • Sub-section 4.15 Research and Development
     • Sub-section 4.16 Sales and Marketing Costs
     • Sub-section 4.17 Taxes
     • Sub-section 4.18 Joint Venture
     • Sub-section 4.19 Transfer Pricing
     • Sub-section 4.20 Head Office Expense
     • Sub-section 4.21 Environment Costs
     • Sub-section 4.22 Government Supplied Materials
     • Sub-section 4.23 Donations
     • Sub-section 4.24 Strategic Innovation Fund (SIF) Repayment
3. Cost Accounting Practices Submission

   Where a contract price will be based on estimated or actual costs, the contracting officers, in consultation with the Procurement Support Services Sector, may require a Cost Accounting Practices (CAP) Submission evidenced by a CAP Submission Acceptance Letter to clarify the cost accounting practices to be used for contract pricing. The CAP Submission is a formal disclosure of a contractor’s cost accounting practices including the identification of direct and indirect costs and disclosure of methodologies used to allocate indirect costs. The CAP Submission and the CAP Submission Acceptance Letter (see the Practitioner’s Guide for Procurement Pricing, Section 5.1.2) ensure that the cost accounting practices to be used for contract pricing are clear and understood by all parties by fully disclosing the acceptance of the practices during the pre-contract award period (see Section 5.1.2 Cost Accounting Practices (CAP) Submission and Annex 4 Process Steps for Costing Accounting Practices (CAP) Submission of the Practitioner’s Guide for Procurement Pricing for additional information). The CAP Submission serves to reinforce the contractor’s obligation to comply with SACC 1031-2. The CAP Submission does not address the reasonableness of the amount of costs but rather the nature of the cost or costing practices.

4. Costing Discussion Papers

   The discussion papers are intended to support cost interpretation and provide additional guidance for cost acceptability decisions to support contracting officers’ understanding of the complex areas in preparing for contract negotiations and in managing a contract through its lifecycle. The following discussion papers are found in the Practitioner’s Guide for Procurement Pricing, Section 6.0 Annexes, Annex 5: Discussion Papers:

   • Annex 5.3.1 - Sales and Marketing
   • Annex 5.3.2 - Executive Compensation and Bonus
   • Annex 5.3.3 - Asset Valuation
   • Annex 5.3.4 - Transfer Pricing
   • Annex 5.3.5 - Production Capacity and Indirect Costs Allocation
   • Annex 5.3.6 - Research and Development Costs

10.10 Travel and living expenses

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.10 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.15 Prices for out of plant services of individuals

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.15 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.20 Surplus materials in cost reimbursable contracts

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.20 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.25 Costing of lease transactions

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.25 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.30 Service contracts

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.30 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.35 Joint ventures

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.35 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.40 Research and development contracts with universities and colleges

Effective date: 2023-04-20

With the promulgation of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.1.

The obsolete content of section 10.40 has been deleted but can be viewed for reference only in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.45 Non-competitive contracts with non-profit organizations, excluding universities and colleges

Effective date: 2023-04-20

With the promulgation of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.2.

The obsolete content of section 10.45 has been deleted but can be viewed for reference only in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.50 Non-competitive acquisitions of manufactured products and repair and overhaul services, from agency and resale outlets

Effective date: 2023-04-20

With the promulgation of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.3.

The obsolete content of section 10.50 has been deleted but can be viewed for reference only in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.50.1 Non-competitive requirements of commercial goods and/or services

Effective date: 2023-04-20

With the promulgation of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.3.1.

The obsolete content of section 10.50.1 has been deleted but can be viewed for reference only in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.50.5 Non-competitive requirements of non-commercial goods and/or services

Effective date: 2023-04-20

With the promulgation of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.3.2.

The obsolete content of section 10.50.5 has been deleted but can be viewed for reference only in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.50.10 Agency and resale outlets: Additional Requirements

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.3.

For reference purposes, section 10.50.10 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.50.15 Price analysis

Effective date: 2023-04-20

With the promulgation of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.3.3.

The obsolete content of section 10.50.15 has been deleted but can be viewed for reference only in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.55 Transfer pricing

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.55 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.60 Special production tooling and special test equipment

Effective date: 2024-02-16

This section has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, section 10.60 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

10.65 Profit principles: Determination of profit on negotiated contracts

Effective date: 2023-04-20

1. This section has been greatly augmented by the Practitioner’s Guide for Procurement Pricing. For determination of profit in negotiated contracts, see the Practitioner’s Guide for Procurement Pricing, Section 5.2. Profit Principles.
2. The policy and guidelines for the determination of the amount of profit is applicable to all negotiated contracts, in line with the applicability requirements detailed in Section 5.0.1 Cost-Based Pricing Principles in the Practitioner’s Guide for Procurement Pricing for both goods and services. Detailed guidance can be found in the Practitioner’s Guide for Procurement Pricing, Section 5.2 Profit Principles.

   For agency and resale outlets, the procedures for profit determination in Supply Manual Annex 10.3.3 Price analysis for agency and resale outlets apply.

3. When for any reason it is not possible to establish an acceptable basis of price by competition or a fair and reasonable price assessment, the price must be negotiated. The objective of price negotiation is to duplicate a fair market price, while establishing a realistic division of responsibilities and risks between the contractor and Canada.

    

   A fair market price for non-competitive contracts for the procurement of goods or services (other than commercial goods or services) must be negotiated. The objective of such negotiation is to arrive at a price which is considered to be fair and reasonable in the circumstances based upon an estimate of the costs, to be incurred in the performance of the contract, computed in accordance with the Contract Cost Principles 1031-2, plus a fair profit. A fair profit is an amount no greater than that calculated in the Practitioner’s Guide for Procurement Pricing, Section 5.2 Profit Principles and under this section.

   There are the following exceptions:

   1. Contracts valued under $50,000 do not require negotiation of profit under this section.
   2. Contracts or parts thereof for which the price is based on catalogues, price lists or fee schedules where only discounts are subject to negotiation.
   3. Contracts for which the pricing is determined based on alternative approaches that are not addressed by Section 10.65, such as when pricing is not determined by cost plus profit or when profit is not calculated in accordance with 10.65(c). For such contracts, follow the process outlined in the Practitioner’s Guide for Procurement Pricing, Section 5.3 Alternative Pricing Strategies.
4. Profit levels will vary:
   1. to recognize the cost of money associated with the capital employed by the contractor in performance of the contract;
   2. to recognize the levels of general business and contractual risk assumed by the contractor in performance of the contract;
   3. to recognize the levels of contractual risk assumed by the contractor in performance of the contract.
5. The determination of the amount of profit attributable to each of the above factors must normally be made in accordance with the following guidelines and Practitioner’s Guide for Procurement Pricing, Section 5.2 Profit Principles.
6. The profit determination template (see Annex 6.1 of the Practitioner’s Guide for Procurement Pricing) includes instructions and schedules to support the determination of profit in accordance with the guidance as detailed in Section 5.2 Profit Principles of the Practitioner’s Guide for Procurement Pricing:
   1. Contractors are responsible for the completion of the template prior to the price negotiation. This includes the provision of supporting documentation for the figures presented in the template;
   2. Contracting officers with the support of the Price Advisor will review the Profit Determination Template for accuracy and reasonability in advance of the price negotiation. The final determination of fairness and reasonableness of profit rests with the Contracting Officer.

10.65.1 Capital employed

Effective date: 2023-04-20

1. The Capital Employed component of profit is designed to recognize the capital investment required to deliver a contract, and provide a reasonable return, regardless of how a contractor is financed.
2. Capital employed includes working capital employed and fixed capital employed. See the Practitioner’s Guide for Procurement Pricing, Section 5.2.1 Negotiated Profit Element: Capital Employed, for more guidance on determination of capital employed, including objectives, factors to consider, formulas, examples, and template for return on capital calculations.
3. The return on capital employed is determined in the following two parts:
   1. return on working capital employed; and
   2. return on fixed capital employed.
4. Standard calculation tools and templates are available for the determination of both working and fixed capital employed in a contract. As specified in the following sections, contractors must submit a schedule estimating the working capital employed and fixed capital employed in a contract for the profit negotiation, using the Profit Determination Template provided in Annex 6.1 of the Practitioner’s Guide for Procurement Pricing.
5. Working Capital
   1. Working capital employed refers to the costs of maintaining daily operations within an organization. When performing work under contract with the Government of Canada, a contractor makes working capital investments to fund the day-to-day contractual operations, whether it is with current assets, such as cash and investments or with current liabilities, such as loans and accounts payable. (See Section 5.2.1.1 Return on Working Capital Employed of the Practitioner’s Guide for Procurement Pricing);
   2. The return on working capital will vary depending on the degree of working capital investment in a contract. The two-tiered approach provides a simplified approach for contracts with lower dollar costs and a full schedule approach for contracts with higher costs.
      1. Tier 1 return on working capital employed is optional. This simplified approach is intended only for contracts where the total estimated or acceptable contract costs are less than or equal to $1,000,000;
      2. For Tier 2 return on working capital employed, the total estimated or acceptable costs must be greater than $1,000,000 or for Tier 1 contracts where a contractor requests a Tier 2 determination. Contractors must submit a schedule estimating the working capital employed in a contract for the profit negotiation, using the Profit Determination Template provided in Practitioner’s Guide for Procurement Pricing Annex 6.1.
6. Fixed Capital
   1. Fixed capital employed consists of the investment’s contractors make that the company will use for more than one year. Fixed costs are typically purchased for use in the current and future years. The investment in fixed capital is capitalized so that the cost to the contractor can be spread out over the useful life of the asset. Contractors are required to invest in fixed capital for the purposes of carrying out contracts and the fixed capital can often be used for one or multiple contracts. (See Section 5.2.1.2 Return on Fixed Capital Employed of the Practitioner’s Guide for Procurement Pricing);
   2. The provision of a return on fixed capital employed is intended not only to compensate contractors for the cost of money associated with the fixed capital employed on the contract, but also to encourage investment in new capital equipment, the result of which is generally greater productivity and consequently reduced costs to Canada.

      For the purpose of this section, the fixed capital employed is defined as the net book value of fixed assets, less:

      1. land and any intangible assets;
      2. any fixed assets not in use such as idle plant; and
      3. any surplus value arising from re-appraisal.
   3. The return on fixed capital employed will vary depending on the degree of fixed capital investment in a contract. A three-tiered approach has been adopted to incorporate a lower dollar threshold as well as a simplified approach for contracts with lower levels of fixed capital investments.
      1. Tier 1 is a simplified optional approach for all contracts where the total estimated or acceptable contract costs are less than or equal to $1,000,000.
      2. Tier 2 relates to simplified optional approaches for contracts where the total estimated or acceptable costs are less than or equal to $20,000,000, and contracts with lower fixed capital intensity level, such as services contracts with minimal fixed capital needs.
      3. Tier 3 is a full schedule approach for contracts where the total estimated or acceptable contract costs are greater than $1,000,000 and contracts that do not meet the criteria for Tier 1 and Tier 2 or for Tier 1 or Tier 2 contracts where a contractor requests the full Tier 3 determination.
7. These approaches are further described in the Practitioner’s Guide for Procurement Pricing, 5.2.1 Negotiated Profit Element: Capital Employed, including examples of each.

10.65.5 Return on working capital employed (Tier 1: All contracts where total estimated or acceptable contract costs are less than or equal to $1,000,000)

Effective date: 2024-02-16

1. For detailed calculations, considerations and examples for Return on Working Capital Employed, see the Practitioner’s Guide for Procurement Pricing, 5.2.1.1 Return on Working Capital Employed.
2. For contracts with total estimated or acceptable contract costs less than or equal to $1,000,000, the return on working capital employed can be calculated using the Tier 1 approach. Contracts that meet the applicability criterion for Tier 1 have the option of applying the Tier 2 calculation detailed below. However, contracts that do not meet the applicability criterion detailed above (i.e., greater than $1,000,000) should not apply Tier 1.
3. The Tier 1 simplified approach of return on working capital employed is calculated as follows:

   Tier 1: Return on Working Capital Employed = 1-Year GIC Rate x Total Acceptable Contract Cost.

   1. 1-Year GIC Rate: A 3-year rolling average of the 1- Year Guaranteed Investment Certificate (GIC) Rate is applied in Tier 1 Working Capital Employed calculations and can be found in the Applicable Rates for Profit Determination Table in Annex 6.2 in the Practitioner’s Guide for Procurement Pricing. This rate is sourced from the Bank of Canada. In the case that profit determination is related to previous periods, applicable rates during the same periods must be used. In the event that the relevant rates at the time of contract award have changed by more than one full point, up or down, the return will be recomputed applying the revised rates. The following clause must be included in the price proposal, after consultation with the Price Advisory Group:

      "The price quoted includes an amount of profit using the 3-year rolling average 1-Year GIC Rate of ______ (insert appropriate rate) percent. In the event that the annual 1-Year GIC Rate at the time of contract award, has changed by more than one full point, up or down from the previous year after consultation with the Price Advisory Group, the price will be adjusted to reflect the applicable rate".

   2. Total Acceptable Contract Cost: The total estimated acceptable contract costs are applied as the base against which the 3-year average GIC rate is applied, representing the maximum working capital a contractor would have employed in the contract. (See Example 5.2.1.1a in the Practitioner’s Guide for Procurement Pricing for Tier 1 return on working capital employed calculation).

10.65.10 Return on working capital employed (Tier 2: All contracts where total estimated or acceptable contract costs are greater than $1,000,000)

Effective date: 2024-02-16

1. For calculations and considerations for Return on Working Capital Employed, see the Practitioner’s Guide for Procurement Pricing, 5.2.1.1 Return on Working Capital Employed.
2. Tier 2 involves the full calculation of estimated working capital employed in a contract and applies to contracts that meet the following criteria:
   1. Total estimated or acceptable contract costs are greater than $1,000,000; or
   2. Contracts for which a contractor requests the full Tier 2 determination.
3. The Tier 2 full approach of return on working capital employed is calculated as follows:

   Tier 2: Return on Working Capital Employed = Bank Prime Rate/12 x Sum of Cumulative Monthly Working Capital

   1. Bank Prime Rate/12: The 3-year average bank prime rate applicable to the contract for the Tier 2 Working Capital calculation can be found in the Applicable Rates for Profit Determination Table in Annex 6.2 of the Practitioner’s Guide for Procurement Pricing. This rate is sourced from the Bank of Canada. In the case that profit determination is related to previous periods, applicable rates during the same periods must be used. In the event that the relevant rate at the time of contract award have changed by more than one full point, up or down, the return will be recomputed applying the revised rate. The following clause must be included in the price proposal, after consultation with the Price Advisory Group:

      "The price quoted includes an amount of profit using the 3-year rolling average Bank Prime Rate of ____ (insert appropriate rate) percent. In the event that the annual Bank Prime Rate at the time of contract award, has changed by more than one full point, up or down from the previous year after consultation with the Price Advisory Group, the price will be adjusted to reflect the applicable rate".

   2. Cumulative Working Capital Employed: Contractors must submit a schedule of estimated monthly net working capital for the contract, using the Return on Working Capital Employed Tab found in the Profit Determination Template in the Practitioner’s Guide for Procurement Pricing. In order to prepare and review this schedule, the following information is required:

      Monthly Estimated Net Working Capital:

      1. Schedule of Acceptable contract costs, exclusive of depreciation (calculated in accordance with Standard Acquisitions Clauses and Conditions, Contract Cost Principles, 1031-2 and Practitioner’s Guide for Procurement Pricing Annex 2 Costing Standard);
      2. Schedule of contract revenue payments, exclusive of profit (Payment plan/Schedule);
      3. Advance Payments must be applied in the full schedule;
      4. Contracts with Advance Payments and Progress Payments do not require a return on working capital employed.
   3. Calculation Methodology: The 3-year average bank prime rate, as defined above, is an annual rate of return. The calculation below accumulates the monthly working capital return, and as such, the 3-year average bank prime rate is divided by 12 to reflect the monthly earning. The return on the cumulative working capital employed is calculated as follows:

      Total: Bank Prime Rate/12 x Monthly Cumulative Working Capital

4. Refer to the Working Capital Employed Tab in the Profit Determination Template in Annex 6.1 of the Practitioner’s Guide for Procurement Pricing for working capital determination. (See examples 5.2.1.1b and 5.2.1.1c in the Practitioner’s Guide for Procurement Pricing for Tier 2 return on working capital employed calculation).

10.65.15 Return on fixed capital employed (Tier 1: All contracts where total estimated or acceptable contract costs are less than or equal to $1,000,000)

Effective date: 2023-04-20

1. For calculations, considerations and examples for Return on Fixed Capital Employed, see the Practitioner’s Guide for Procurement Pricing, 5.2.1.2 Return on Fixed Capital Employed.
2. For contracts with total estimated or acceptable contract costs less than or equal to $1,000,000, the return on fixed capital employed can be calculated using the Tier 1 approach. Contracts that meet the applicability criterion for Tier 1 have the option of applying either the Tier 2 calculation or the Tier 3 full calculation detailed below. However, contracts that do not meet the applicability criterion detailed above (i.e., greater than $1,000,000) should not apply Tier 1.
3. The Tier 1 approach of return on fixed capital employed is calculated as follows:

   Tier 1: Return of Fixed Capital Employed = 1% x Total Acceptable Contract Cost

4. If machinery and/or equipment owned by the contractor are used on a regular basis in the manufacture of the product(s) or provision of the service(s) being acquired under the contract, an amount equivalent to 1 percent of total allowable costs will be awarded as a return on fixed capital employed. (See Example 5.2.1.2a in the Practitioner’s Guide for Procurement Pricing for Tier 1 return on fixed capital employed calculation).

10.65.20 Return on fixed capital employed (Tier 2: All contracts where total estimated or acceptable contract costs are less than or equal to $20,000,000 with lower capital intensity levels)

Effective date: 2024-02-16

1. For calculations, considerations and examples for Return on Fixed Capital Employed, see the Practitioner’s Guide for Procurement Pricing, 5.2.1.2 Return on Fixed Capital Employed.
2. The Tier 2 determination is designed to provide a simplified approach for contracts with lower capital intensity levels (such as service contracts with minimal fixed capital needs) with total costs less than or equal to $20,000,000, to provide a fair level of return in line with what could be earned if the full calculation were applied. Contracts that meet the applicability criteria for Tier 2 have the option of applying the Tier 3 full calculation detailed below. However, contracts that do not meet the applicability criteria detailed above (i.e., greater than $20,000,000) should not apply Tier 2.
3. The Tier 2 simplified approach of return on fixed capital employed is calculated as follows:

   Tier 2: Return on Fixed Capital Employed = Capital Intensity Rate x Corporate Bond Rate % x Total Acceptable Contract Cost

   1. The Capital Intensity Rate, posted in the Applicable Rates for Profit Determination Table in the Practitioner’s Guide for Procurement Pricing Annex 6.2, is applied to the Total Acceptable Contract Costs to estimate the fixed capital employed for contracts with lower levels of fixed capital investments. The rate will be established annually based on a review of fixed capital employed calculations on a sample of contracts to best reflect a lower level of capital intensity.
   2. Corporate Bond Rate: A 3-year average long-term BBB corporate bond rate applicable to the contract can be found in the Applicable Rates for Profit Determination Table in the Practitioner’s Guide for Procurement Pricing Annex 6.2. In the case that profit determination is related to previous periods, applicable rates during the same periods must be used. In the event that the published rates at the time of contract award have changed by more than one full point, up or down, the return will be recomputed applying the revised rates.
   3. Total Acceptable Contract Cost: The total estimated acceptable contract costs are the base against which the Capital Intensity Rate and Corporate Bond Rate are applied. As detailed above, this is done to ensure the simplified approach produces a return in line with the application of the full return on fixed capital employed calculation on contracts with lower fixed capital requirements. In order to conform to (iii) above, the following clause must be included in the price proposal, after consultation with the Price Advisory Group:

      "The price quoted includes an amount of profit using a 3-year rolling average Canada BBB long-term corporate bond rate of _____ (insert appropriate rate) percent. In the event that the annual corporate bond rate at the time of contract award, has changed by more than one full point, up or down from the previous year after consultation with the Price Advisory Group, the price will be adjusted to reflect the applicable rate".

4. Refer to Examples 5.2.1.2b in the Practitioner’s Guide for Procurement Pricing for Tier 2 approach for return on fixed capital calculation.

10.65.21 Return on fixed capital employed (Tier 3: All contracts where the total estimated or acceptable contract costs are greater than $1,000,000)

Effective date: 2024-02-16

1. For calculations, considerations and examples for Return on Fixed Capital Employed, see the Practitioner’s Guide for Procurement Pricing, 5.2.1.2 Return on Fixed Capital Employed. The Profit Determination Template referred to in this section can be found in the Practitioner’s Guide for Procurement Pricing, Annex 6.1.
2. The Tier 3 approach involves the full estimation of fixed capital employed in a contract and applies to contracts that meet the following criteria:
   • Total estimated or acceptable contract costs are greater than $1,000,000;
   • Contracts that do not meet Tier 1 and Tier 2 applicability criteria; or
   • Contracts for which a contractor requests the full Tier 3 determination.

   The Tier 3 determination is designed to ensure that a contractor receives a level of return in line with what could be earned in the capital market within an investment of similar terms.

3. The Tier 3 approach for return on fixed capital employed is calculated as follows:

   Tier 3: Return on Fixed Capital Employed = Corporate Bond Rate % x Fixed Capital Employed

   1. Corporate Bond Rate: A 3-year average long-term BBB corporate bond rate applicable to the contract can be found in Annex 6.2 the Applicable Rates for Profit Determination Table in the Practitioner’s Guide for Procurement Pricing. In the case that profit determination is related to previous periods, applicable rates during the same periods must be used. In the event that the relevant rates at the time of contract award have changed by more than one full point, up or down, the return will be recomputed applying the revised rates. The following clause must be included in the price proposal, after consultation with the Price Advisory Group:

      "The price quoted includes an amount of profit using a 3-year rolling average Canada BBB long-term corporate bond rate of ___ (insert appropriate rate) percent. In the event that the annual corporate bond rate at the time of contract award, has changed by more than one full point, up or down from the previous year after consultation with the Price Advisory Group, the price will be adjusted to reflect the applicable rate".

   2. Fixed Capital Employed: This represents the percentage of a contractor's fixed capital to be used in the process of carrying out the contract.
      1. Contractors must submit a schedule of estimated fixed capital employed for the contract, using the Return on Fixed Capital Employed Tab in the Profit Determination Template found in the Practitioner’s Guide for Procurement Pricing. In order to prepare and review this schedule, the following information is required:

         Listing of Fixed Assets required for the contract, including Net Book Values of each asset. Fixed capital employed includes the net book value of fixed assets less:

         • land and any intangible assets;
         • any fixed assets not in use such as idle plant; and
         • any surplus value arising from re-appraisal.
      2. A determination of the percentage of fixed assets in use for the purpose of the specific contract, i.e., the allocation of the portion of the net book value of assets to be employed in the performance of the contract, determined as follows:
         1. Applying the applicable overhead recovery rates (overhead recovery base/total budget amount of recovery base) for the contract to the applicable assets, as detailed in the Profit Determination Template in the Practitioner’s Guide for Procurement Pricing, Annex 6.1.

            Unless a contract represents 100% of an organization’s fixed capital use, the above allocation methodology will be required.

         2. When the contract period extends over more than one of the contractor's fiscal years, the determination of fixed capital employed must be done for each fiscal year within the contract term. The process outlined above applies for the contractor’s first fiscal year in the contract. In order to determine the fixed capital employed in the years subsequent to the first fiscal year, the following process applies:
            • The contractor’s net book value of applicable fixed assets is estimated for each fiscal year arise subsequent to the first year of the contract.
            • The estimated overhead recovery factors for each fiscal year, determined via the contract costing rate negotiations are applied for the allocation of the capital assets.
            • The Fixed Capital Employed for the contract is the sum of the fixed capital employed for each fiscal year of the contractor within the duration of the contract.
            • The Long-Term Corporate Bond Rate established in Step i above, is applied to the Total Fixed Capital Employed in the contract.
4. Refer to Examples 5.2.1.2 c and 5.2.1.2 d in the Practitioner’s Guide for Procurement Pricing for Tier 3 approach for return on fixed capital calculation.

10.65.25 General business risk

Effective date: 2023-04-20

1. For more on General Business Risk, including cost element definition, intention, examples, and calculations, see the Practitioner’s Guide for Procurement Pricing, 5.2.2 Negotiated Profit Element: General Business Risk. Also, the Profit Determination Template in Annex 6.1 of the Practitioner’s Guide for Procurement Pricing facilitates the calculation of rates of profit for General Business Risk.
2. The award of profit under General Business Risk factor is intended to recognize the level of effort a contractor makes in the management of all the resources required to perform the contract in an efficient and economical manner.
3. The General Business Risk return, along with the level of effort, responsibility and risk, will vary in accordance with the nature of the costs and the different cost elements of a contract. This is reflected in the following rates of profit to be applied to the total actual or estimated costs in each element below. The sum of the return for each element equals the total General Business Risk Profit:
   1. direct materials: 1.5 percent
   2. subcontracts: 2 percent
   3. accountable advance spares embodied: 2 percent
   4. direct labour: 4 percent
   5. overhead: 4 percent
   6. all other allowable costs: 1.5 percent
   7. pass through costs: 0 percent

10.65.30 Contractual risk

Effective date: 2024-02-16

1. For more on Contractual Risk, including definitions, intension, examples and calculations, see the Practitioner’s Guide for Procurement Pricing, 5.2.3 Negotiated Profit Element: Contractual Risk. Also, the Contractual Risk Assessment Tool in Section 6.0 Annexes, Annex 6.3 of the Practitioner’s Guide for Procurement Pricing, has been developed to facilitate the calculation of rates of profit, as summarized below.
2. The contractual risk factor represents the probability of financial loss to the contractor related to contract specific factors. Assessing contractual risk involves understanding the risks present within the contract and understanding which party is best to carry the risk for the various components of the contract. The level of profit on contractual risk is based on how much of the risk is carried by the contractor. A higher profit rate for contractual risk, is the result of the risk being assigned to and borne by the contractor. It is important to ensure the assignment of risk is clear, transparent and well defined.
3. The following list outlines the key contractual risk factors to consider in the negotiation of profit. (Follow the steps listed in the Contractual Risk Assessment Tool in Annex 6.3 of the Practitioner’s Guide for Procurement Pricing to support the assessment of contractual risk in a procurement to establish an appropriate contractual risk profit rate.
   1. Basis of payment: The degree of financial risk taken on by a contractor is dependent on the contract basis of payment. The basis of payment (see Section 4.1 Basis of Payment of the Practitioner’s Guide for Procurement Pricing) determines the standard (the lowest rate in the range) and the available ranges of profit:
      1. fixed price: 4 to 7 percent maximum
      2. firm price: 4 to 7 percent maximum
      3. fixed time/unit rate with ceiling price: 1 to 4.5 percent maximum
      4. fixed time/unit rate without ceiling price: 1 to 3.5 percent maximum
      5. cost reimbursable incentive fee/ target cost: 1 to 4.5 percent maximum
      6. cost reimbursable fixed fee with ceiling price: 1 to 4.5 percent maximum
      7. cost reimbursable fixed fee without ceiling price: 0 to 1 percent maximum
      8. cost reimbursable no fee no ceiling price: 0 percent
   2. Once the standard contractual risk profit rate is determined based on basis of payment, the level of contractual risk profit that varies within the ranges depends on the presence, likelihood, and impact of the key risk factors of:
      1. Accuracy of costing: The risk that the costing estimates are not accurate and the contract will cost more than planned.

         Cost Risk Factors include:

         • Well established scope, requirements, and demand;
         • Reliable cost estimates;
         • Potential fluctuations from external factors; and
         • Timing of negotiation.
      2. Technical and Schedule: The risk that contract specific factors and requirements will impact a contractor’s ability to successfully complete the contract.

         Technical and Schedule Risk Factors include:

         • Technical risk;
         • Familiarity and program maturity (Products/Services/Processes/Tasks);
         • Performance specifications; and
         • Contract durations.
4. Justification must be provided for the Total Contractual Risk Profit Percentage. See Table 5.2.3.b and Table 5.2.3.c in Section 5.2.3 of the Practitioner’s Guide for Procurement Pricing for detailed explanation of contractual risk factors and the assessment of the presence, likelihood and impact of contract risk in a contract.
5. The contractual risk profit rate is applied to the total estimated contract costs to develop the contract price. The contract risk profit formula is as follows:

   Total Contractual Risk Profit = Contractual Risk Rate% x Total Contract Costs

10.65.35 Total profit

Effective date: 2024-02-16

1. The total profit is the maximum profit amount that should be awarded under the Profit Principles (Section 5.2 of the Practitioner’s Guide for Procurement Pricing) for negotiated, cost-based pricing. Profit Determination Template as found in the Practitioner’s Guide for Procurement Pricing Annex 6.1 illustrates the Profit Determination Process including all components of profit described in this section.
2. The total negotiated profit is determined by adding together the amount of profit for each of the components of profit. The total profit of a contract is calculated as follows:

   Total Profit = Return on Capital Employed + General Business Risk + Contractual Risk

   1. The total allowable amount of profit must be the lowest of:
      1. sum of supportable amounts by factor; and
      2. 16 percent of the total cost.
   2. The total amount of profit awarded under all the above factors must in no event exceed 16 percent of the total contract costs.
   3. The amount of profit for all factors should be calculated separately and included in the price of each line item with a distinct basis of payment in the contract.
3. The maximum contract profit rate will not exceed 16 percent of total contract costs, which represents the maximum profit threshold reflecting the highest risk and rare fixed price contract scenarios with significant Capital Employed, extreme General Business Risk (primarily Direct Labour and Overhead costs) and maximum Contractual Risk.
4. While incentives are not included in the Profit Principle (Section 5.2 of the Practitioner’s Guide for Procurement Pricing) determination of the negotiated contract profit, it is essential to understand the impact of incentives in a procurement on the overall contract price. The total contract price is comprised of the total contract costs/estimated costs, profit, and incentives. The additional potential earnings that arise from the use of incentives will result in an increase in the contract price and overall profit and earnings to the contractor.
5. Subcontract costs included in the contract costs will also have a degree of profit included in the costs that are submitted to Canada. Each subcontractor in the supply chain is compensated for costs incurred plus a profit. It is important to be aware that profit is layered into subcontract costs at each step in the supply chain, and to be aware of the degree or level of profit awarded to subcontractors where possible, as Canada then includes a final layer of profit on the total through the General Business and Contractual Risk profit factors. For this reason, transparency and clarity on the total cumulative profit within the supply chain is important where possible to understand and assess for reasonability and added value. Refer to Section 5.2 Profit Principles of the Practitioner’s Guide for Procurement Pricing for additional information. Related party transactions are another area where profit layering can happen. For information specifically on related party transactions, refer to Section 6.0 Annexes, Annex 5: Discussion Papers, 5.3.4 Transfer Pricing of the Practitioner’s Guide for Procurement Pricing.

10.70 Recovery and settlement of contract claims

Effective date: 2023-04-20

1. Introduction
   1. The recovery and settlement of contract claims adjustments can only be made if the contract, and its terms and conditions, contain clauses that allow for audits and for recovery. The recovery and settlement of contract claims adjustments relate to overclaims and excess profit detected and reported in assurance engagement reports prepared for the Cost and Profit Assurance Program (CPAP). The CPAP is delivered by the Assurance Services Group (ASG) within the Price Support Directorate (PSD) of the Procurement Support Services Sector (PSSS) of the Procurement Branch at Public Works and Government Services Canada (PWGSC). The PSD can be contacted by email at: TPSGC.PASoutiendesprix-APPriceSupport.PWGSC@tpsgc-pwgsc.gc.ca. The CPAP employs account verification tools to demonstrate that the price charged to the Government of Canada is in accordance with the contract to assist contracting officers in safeguarding the Crown from overpaying on contracts, primarily in regard of major procurements. Assurance engagements are undertaken as a result of either an assurance strategy developed with the assistance of ASG’s assurance advisors, or as a response to risks identified by a contracting officer, price advisor, or other government stakeholders.
   2. ASG auditors examine the support for a contractor’s claims against the contractor’s terms and conditions related to basis of payment and compares amounts claimed against the contractor’s records. Assurance engagement reports can provide contracting officers and their clients information in order to safeguard the Crown against overpaying through the detection of:
      1. Inadequate accounting and labour recording systems for accumulating and billing costs on Government contracts;
      2. Non-compliance with contract terms and conditions, Canada’s Contract Cost Principles (SACC 1031-2), and the Profit Principles (Section 5.2 of the Practitioner’s Guide for Procurement Pricing);
      3. Billing errors resulting from the application of incorrect rates, quantities, or invoiced amounts; and
      4. Profit variance in excess of authorized contract profit.
2. Throughout the assurance engagement, there is close collaboration and regular communication among all key stakeholders, specifically the Assurance Advisor, who advises the contracting officers regarding assurance related issues, the Auditor Team that performed the engagement, the PWGSC contracting officer who manages the contract, the client department representative, and the Price Advisor, if the Price Advisor was involved in negotiating the pricing arrangements relevant to the contract(s) subject to examination.
3. The process for the recovery and settlement of contract claims adjustments starts upon receipt of the assurance engagement report by the Assurance Advisor.
4. Notification Report and Action Plan
   1. A notification report is initiated, drafted and prepared by the ASG Assurance Advisor. Its purpose is to explain the key findings and recommend actions that should be taken by contracting officers in dealing with the contractor’s claims for payment or excess profit, its accounting practices, or its internal controls. The Assurance Advisors sends this notification report, along with a copy of the engagement report, to the contracting officer. The notification report summarizes the results of the engagement report and provides advice on the actions required by Crown Representatives to mitigate the risk of overpayment on current and future contracts. The engagement report contains the full details of the assurance engagement results.
   2. The notification report is intended to support the contracting officer’s:
      1. negotiations with the contractor on final settlement of financial claims for payment;
      2. follow-up on matters of contractor compliance, as it relates to records, internal controls, cost accounting or billing practices;
      3. documentation and approval of the disposition of findings raised in the assurance engagement report; and
      4. strategic decision-making, including modification to the basis of payment, clarifying terms and conditions of contracts, and modifications in costing methodology.
   3. The notification report includes:
      1. A plain language description of proposed adjustments to contractor claims for payment with details on its findings, time period and contract(s) covered by the engagement, and, if observed, information on internal control or accounting system weaknesses;
      2. Identification of the potential risks on current and future contracts awarded to the Contractor based on issues identified in the audit;
      3. Recommendations requiring response by the contracting officer;
      4. A request for an action plan in response to recommendations contained in the notification report with expected timelines for completion.
   4. The action plan is prepared and approved by procurement and responds to recommendations contained in the notification report, as prepared by ASG.
   5. The contracting officer must provide the action plan to the Assurance Advisor within 30 calendar days of receipt of the notification report.
   6. The contracting officer should provide updates to the Assurance Advisor on progress made against the action plan on a monthly or as required basis.
5. General Assistance

   Once the action plan is received from the contracting officer, assistance will be provided by the Assurance Advisor. This could include advice on the pursuit of recoveries, recommendations for changes in internal control in the contractor's accounting systems, or modifications to the terms and conditions of the contract. Also, assistance relates to clarifying any questions that the contracting officer may have and obtaining additional details from the Auditor related to the basis of support for adjustments to contractor claims and other matters, as may be required.

6. Technical Support in Negotiation of Adjustments

   Given the technical complexity of the Auditor’s findings, procurement may require assistance of a professional accountant to support the contractor negotiations. If such assistance is required, please contact ASG.

7. Rejection of Adjustments to Contractor Claims

   Any plans to reject proposed adjustments to contractor claims must be approved prior to discussion with the contractor. Approvals are in accordance with subsection k. below and must include the client department, the Public Works and Government Services Canada (PWGSC) contracting officer and PSSS.

8. Reporting
   1. ASG closely monitors, tracks and reports on recovery and settlement actions and follows-up with the respective contracting officers until all recommendations contained in the notification report have been resolved.
   2. On a semi-annual basis, ASG will report to the procurement’s Senior Management the status of recovery and resolution of adjustments as well as lessons learned through the course of the assurance engagement process.
9. Repayment of Overclaimed Amounts

   When the contractor provides a cheque(s) to the contracting officer in repayment of overclaimed amounts or excess profits, the contracting officer must provide the following items to the Assurance Advisor within 7 calendar days of deposit:

   1. Copy of contractor’s cheque(s);
   2. Copy of the Official Receipt from the Client Department’s Revenue & Receivables Cashier’s Office; and
   3. Copy of the Client Department’s Refund Coding Form indicating the financial general ledger account coding.
10. Closeout

    ASG is responsible for the final administrative closeout of this recovery and settlement of contract claims process. Once the tasks contained in the action plan have been completed, the Assurance Advisor prepares a report summarizing the disposition of contract claims adjustments and matters related to contractor compliance for the contracting officer’s concurrence. Closeout is finalized upon the report’s approval, as delineated below, under subsection k.

11. Approvals of Disposition of Assurance Engagement Report

    Sign-off thresholds with tiered delegations are required from all three parties, namely the client department, the PWGSC contracting authority and PSSS. The management level required for sign-off is determined by the total dollar value of the contract claims adjustments, as stated in the notification report. The sign-off thresholds are as follows:

    1. Senior Directors and Regional Directors: up to and including $300,000;
    2. Director Generals: $300,001 to $999,999;
    3. Assistant Deputy Minister, Defence and Marine Procurement Branch, or Assistant Deputy Minister, Procurement Branch, (Signoff will be by ADM under which the procurement was awarded) $1,000,000 and over.
12. Disputes

    Disagreements between contractors and Crown representatives that cannot be solved amicably are to be referred to Legal Services for an assessment of the facts involved, including the strength of the contract language concerning audits and recoveries and with a listing of all steps involved that led the Parties to the dispute.

10.75 Alternative pricing strategies

Effective date: 2023-04-20

1. For more guidance on considerations and procedures of applying Alternative Pricing Principles, see the Practitioner’s Guide for Procurement Pricing, Section 5.3 Alternative Pricing Strategies.
2. Alternative Pricing Principles are part of the Pricing Principles that refers to the procedures and guidance in place for contracting officers to follow when a contract price is established by applying an approach that does not fully incorporate the Cost-Based Pricing Principles outlined in Section 5.0.1 Cost-Based Pricing Principles of the Practitioner’s Guide for Procurement Pricing.
3. The purpose of the Alternative Pricing Principles is to encourage contracting officers to broadly consider other factors or alternative approaches in their pursuit of best value to Canada, in the development of contract pricing.

   For example, these could include:

   1. Access to better pricing via gainsharing or price reductions over time;
   2. Enhanced performance of government services to the public;
   3. Flexible contracting arrangements responsive to changing budgets and/or operational demands; or
   4. Improved contractor behaviour or customer satisfaction for goods and services rendered.
4. Alternative Pricing Principles can be applied when justification exists that an alternative pricing method might generate better value to Canada than the application of the Cost-Based Pricing Principles.
5. The following requirements must be met in order to apply the Alternative Pricing Principles:
   1. The contract pricing is sanctioned by the delegated contracting authority;
   2. Concurrence is obtained from the client;
   3. The decision is documented as described in the procedures outlined in Section 5.3.3 Procedures for Application of Alternative Pricing Principles of the Practitioner’s Guide for Procurement Pricing; and
   4. The record of decision showing justification, client concurrence and the contracting authority’s approval is shared with the Price Support Directorate (PSD).
6. Alternative Pricing Principles are not commonly applied and as such, guidance on specific alternatives is not yet in place. In the event that alternative methods are applied, contracting officers should ensure the alternative methods are appropriately analyzed with consideration for the risks and benefits by following the outlined procedures.

Annexes

Consult the list of annexes below related to Chapter 10 – Cost and profit.

• 10.1 - Annex: Research and development contracts with universities and colleges
  • 10.1.1 - Annex: Examples to determine the fixed capital employed
• 10.2 - Annex: Non-competitive contracts with non-profit organizations, excluding universities and colleges
• 10.3 - Annex: Non-competitive acquisitions of manufactured products and repair and overhaul services, from agency and resale outlets
  • 10.3.1 - Annex: Non-competitive requirements of commercial goods and/or services
  • 10.3.2 - Annex: Non-competitive requirements of non-commercial goods and/or services
  • 10.3.3 - Annex : Price analysis for agency and resale outlets
• 10.4 - Annex: Technology Partnership Canada royalty amount for cost rate negotiations
• 10.5 - Annex: Cost Interpretation Bulletins 01 to 19
  • 10.5.1 - Annex: Cost Interpretation Bulletin - Number 01 Excess facilities
  • 10.5.2 - Annex: Cost Interpretation Bulletin - Number 02 Depreciation
  • 10.5.3 - Annex: Cost Interpretation Bulletin - Number 03 Lease costs
  • 10.5.4 - Annex: Cost Interpretation Bulletin - Number 04 Travel costs
  • 10.5.5 - Annex: Cost Interpretation Bulletin - Number 05 Head office expense
  • 10.5.6 - Annex: Cost Interpretation Bulletin - Number 06 Pension costs
  • 10.5.7 - Annex: Cost Interpretation Bulletin - Number 07 Research and development expenses
  • 10.5.8 - Annex: Cost Interpretation Bulletin - Number 08 Bid and proposal expenses
  • 10.5.9 - Annex: Cost Interpretation Bulletin - Number 09 Selling and marketing expenses
  • 10.5.10 - Annex: Cost Interpretation Bulletin - Number 10 Severance payments
  • 10.5.11 - Annex: Cost Interpretation Bulletin - Number 11 Pension plan refunds
  • 10.5.12 - Annex: Cost Interpretation Bulletin - Number 12 Company funded costs
  • 10.5.13 - Annex: Cost Interpretation Bulletin - Number 13 Executive compensation
  • 10.5.14 - Annex: Cost Interpretation Bulletin - Number 14 Mobile repair party requirements
  • 10.5.15 - Annex: Cost Interpretation Bulletin - Number 15 Environmental costs
  • 10.5.16 - Annex: Cost Interpretation Bulletin - Number 16 Take-out rates
  • 10.5.17 - Annex: Cost Interpretation Bulletin - Number 17 Government supplied materiel
  • 10.5.18 - Annex: Cost Interpretation Bulletin - Number 18 Incentive remuneration profit sharing plans
  • 10.5.19 - Annex: Cost Interpretation Bulletin - Number 19 Purchased labour - Personnel procured from outside sources
• 10.6 - Annex: Cost Notifications 01 to 02
  • 10.6.1 - Annex: Cost Notification 01 - Technology Partnership Canada royalty amount for cost rate negotiations
  • 10.6.2 - Annex: Cost Notification 02 - Goodwill