1-15.602

1-15.603

Scope of subpart.

Definition of fixed-price type contracts.

Basic considerations.

Cost principles and their use. AUTHORITY: The provisions of this Part 1-15 issued under sec. 205 (c), 63 Stat. 390; 40 U.S.C. 486 (c).

SOURCE: The provisions of this Part 1-15 appear at 29 F.R. 10285, July 24, 1964, unless otherwise noted.

§ 1-15.000 Scope of part.

This part contains general cost principles and procedures for the determination and allowance of costs in connection with the negotiation and administration of cost-reimbursement type contracts and contains guidelines for use, where appropriate, in the evaluation of costs in connection with certain negotiated fixed-price type contracts and contracts terminated for the convenience of the Government.

Subpart 1-15.1-Applicability § 1-15.101 Scope of subpart.

This subpart describes the applicability of succeeding subparts of this part to the various types of contracts in connection with which cost principles and procedures are used, and the need for advance understandings.

§ 1-15.102 Cost-reimbursement supply

and research contracts with concerns other than educational institutions. This category includes all cost-reimbursement type contracts (see § 1-3.405) for supplies, services, or experimental, developmental, or research work (other than with educational institutions, as to which § 1-15.103 applies), except that it does not include construction and architect-engineer contracts (see § 1-15.104) or facilities contracts (see § 1-15.105). The cost principles and procedures set forth in Subpart 1-15.2 may be incorporated (by reference, if desired) in

99-187-69-24

cost-reimbursement supply and research contracts with other than educational institutions as the basis

(a) For determination of reimburseable costs under such contracts, including cost-reimbursement type subcontracts thereunder, and the cost-reimbursement portion of time-and-materials contracts (§ 1-3.406-1) except in such contracts where material is priced, in accordance with § 1-3.406-1(d), on а basis other than at cost;

(b) For the negotiation of overhead rates; and

(c) For the determination of costs of terminated cost-reimbursement type contracts during the period invoices or vouchers are submitted in accordance with 81-8.402, and for the settlement of such contracts by determination (§ 1-8.209-7).

[29 F.R. 10285, July 24, 1964, as amended at 33 F.R. 5451, Apr. 6, 1968]

§ 1-15.103 Cost-reimbursement research contracts with educational institutions.

(a) This category includes all costreimbursement type contracts (see § 1-3.405) for experimental, developmental, or research work with educational institutions. The cost principles and procedures set forth in Subpart 1-15.3 shall be incorporated (by reference, if desired) in cost-reimbursement research contracts with educational institutions as the basis

(1) For determination of reimbursable costs under cost-reimbursement type contracts, including cost-reimbursement type subcontracts thereunder;

(2) For the negotiation of overhead rates; and

(3) For the determination of costs of terminated cost-reimbursement type contracts during the period invoices or vouchers are submitted in accordance with § 1-8.402, and for settlement of such contracts by determination (§ 1-8.209-7).

(b) In addition, Subpart 1-15.3 is to be used in determining allowable costs of research and development performed by educational institutions under grants. § 1-15.104 Cost-reimbursement con

struction and architect-engineer con

tracts.

(a) This category includes all costreimbursement type contracts for construction as defined in § 1-15.401. It also

includes cost-reimbursement type contracts for architect-engineer services related to such construction. It does not include contracts for vessels, aircraft, or other kinds of personal property.

(b) The cost principles and procedures set forth in Subpart 1-15.4 may be incorporated (by reference, if desired) in cost-reimbursement construction and architect-engineer contracts as the

basis

(1) For determination of reimbursable costs under cost-reimbursement type contracts, including cost-reimbursement type subcontracts thereunder;

(2) For the negotiation of overhead rates (see Subpart 1-3.7); and

(3) For the determination of costs of terminated cost-reimbursement type contracts during the period invoices or vouchers are submitted in accordance with § 1-8.402, and for settlement of such contracts by determination

(§ 1-8.209-7).

[33 F.R. 5451, Apr. 6, 1968]

§ 1-15.105 Facilities contracts.

Subpart 1-15.5 contains principles and procedures for the evaluation and determination of costs under facilities contracts, as defined in § 1-15.501, and subcontracts thereunder. Such principles and procedures may be incorporated (by reference, if desired) in facilities contracts as the basis

(a) For determination of reimbursable costs under facilities contracts, including cost-reimbursement type subcontracts thereunder;

(b) For the negotiation of overhead rates (see Subpart 1-3.7); and

(c) For the determination of costs of terminated cost-reimbursement type contracts during the period invoices or vouchers are submitted in accordance with § 1-8.402, and for settlement of such contracts by determination (see § 1-8.209-7).

[33 F.R. 5451, Apr. 6, 1968]

§ 1-15.106 Use of cost principles for fixed-price type contracts.

Subpart 1-15.6 provides guidance for the use of Subparts 1-15.2, 1-15.3, and 1-15.4 where appropriate, in the evaluation of costs in connection with the negotiation of certain fixed-price type contracts and termination settlements.

§ 1-15.107 Advance understandings on particular cost items.

The extent of allowability of the selected items of cost covered in Subparts 1-15.2, 1-15.3, 1-15.4, and 1-15.5 has been stated to apply broadly to many accounting systems in varying contract situations. Thus, as to any given contract, the reasonableness and allocability of certain items of cost may be difficult to determine, particularly in connection with firms or separate divisions thereof which may not be subject to effective competitive restraints. In order to avoid possible subsequent disallowance or dispute based on unreasonableness or nonallocability, it is important that prospective contractors, particularly those whose work is predominantly or substantially with the Government, seek agreement with the Government in advance of the incurrence of special or unusual costs in categories where reasonableness or allocability are difficult to determine. Such agreement may also be initiated by contracting offices individually or jointly, for one or more contracts (as appropriate) of the procurement activity or agency with the contractor. Any such agreement should be incorporated in cost-reimbursement type contracts, or made a part of the contract file in the case of negotiated fixed-price type contracts, and should govern the cost treatment covered thereby throughout the performance of the contract. The absence of such an advance agreement on any element of cost will not, in itself, serve to make that element either allowable or unallowable. Examples of costs on which advance agreements may be particularly important include:

(a) Facilities costs, such as: (1) Depreciation;

(2) Rental;

(3) Use charges for fully depreciated assets;

(4) Idle facilities and idle capacity; (5) Plant reconversion;

(6) Extraordinary or deferred maintenance and repair; and

(7) Acquisition (rental or purchase) of automatic data processing equipment (ADPE).

(b) Precontract costs;

(c) Professional services (legal, accounting, engineering, etc.);

(d) Independent research and development;

(e) Royalties and other costs for the use of patents;

(f) Selling costs;

(g) General and administrative costs (including corporate, division, or branch office allocations) and similar expenses, attributable to the general management, supervision, and conduct of the contractor's business as a whole. These costs are of particular significance in construction, job-site architect-engineer, facilities, and Government-owned contractor operated (GOCO) plant contracts (see §§ 1-15.203 (f), 1-15.403-7, and 1-15.502-4);

(h) Unemployment insurance experience ratings; and

(i) Employee compensation, travel, and other personnel costs, including:

(1) Compensation for personal services of executive officers and employees, including wages and salaries, bonuses and incentives, premium payments, pay for time not worked, and supplementary compensation and benefits, such pension and retirement, group insurance, severance pay plans, and other forms of compensation covered by § 1-15.205-6; (2) Morale, health, welfare,

service, and dormitory costs;

as

food

(3) Training and education costs; (4) Travel costs of executive officers and employees (both domestic and foreign); and

(5) Relocation costs, including special or mass personnel movement.

[33 F.R. 5452, Apr. 6, 1968]

Subpart 1-15.2-Principles and Procedures for Use in Cost-Reimbursement Type Supply and Research Contracts With Commercial Organizations

§ 1-15.201-1 Composition of total cost. The total cost of contract is the sum of the allowable direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits. In ascertaining what constitutes costs, any generally accepted method of determining or estimating costs that is equitable under the circumstances may be used, including standard costs properly adjusted for applicable variances.

§ 1-15.201-2 Factors affecting allowability of costs.

Factors to be considered in determining the allowability of individual items of cost include (a) reasonableness, (b) allocability, (c) application of those gen

A cost is reasonable if, in its nature or amount, it does not exceed that which would be incurred by an ordinarily prudent person in the conduct of competitive business. The question of the reasonableness of specific costs must be scrutinized with particular care in connection with firms or separate divisions thereof which may not be subject to effective competitive restraints. What is reasonable depends upon a variety of considerations and circumstances involving both the nature and amounts of the cost in question. In determining the reasonableness of a given cost, consideration shall be given to:

(a) Whether the cost is of a type generally recognized as ordinary and necessary for the conduct of the contractor's business or the performance of the contract;

(b) The restraints or requirements imposed by such factors as generally accepted sound business practices, arm's length bargaining, Federal and State laws and regulations, and contract terms and specifications;

(c) The action that a prudent businessman would take in the circumstances, considering his responsibilities to the owners of the business, his employees, his customers, the Government, and the public at large; and

(d) Significant deviations from the established practices of the contractor which may unjustifiably increase the contract costs.

§ 1-15.201-4 Definition of allocability.

A cost is allocable if it is assignable or chargeable to a particular cost objective, such as a contract, product, product line, process, or class of customer or activity, in accordance with the relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it:

(a) Is incurred specifically for the contract;

(b) Benefits both the contract and other work, or both Government work

The applicable portion of any income, rebate, allowance, and other credit relating to any allowable cost, received by or accruing to the contractor, shall be credited to the Government either as a cost reduction or by cash refund, as appropriate.

§ 1-15.202 Direct costs.

(a) A direct cost is any cost which can be identified specifically with a particular cost objective. Direct costs are not limited to items which are incorporated in the end product as material or labor. Costs identified specifically with the contract are direct costs of the contract and are to be charged directly thereto. Costs identified specifically with other work of the contractor are direct costs of that work and are not to be charged to the contract directly or indirectly. When items ordinarily chargeable as indirect costs are charged to Government work as direct costs, the cost of like items applicable to other work of the contractor must be eliminated from indirect costs allocated to Government work.

(b) This definition shall be applied to all items of cost of significant amount unless the contractor demonstrates that the application of any different current practice achieves substantially the same results. Direct cost items of minor amount may be distributed as indirect costs as provided in § 1-15.203.

§ 1-15.203 Indirect costs.

(a) An indirect cost is one which, because of its incurrence for common or joint objectives, is not readily subject to treatment as a direct cost. Minor direct cost items may be considered to be indirect costs for reasons of practicality. After direct costs have been determined and charged directly to the contract or other work as appropriate, indirect costs are those remaining to be allocated to the several classes of work.

(b) Indirect costs shall be accumulated by logical cost groupings with due consideration of the reasons for incurring the costs. Each grouping should be determined so as to permit distribution of

the grouping on the basis of the benefits accruing to the several cost objectives. Commonly, manufacturing overhead, selling expenses, and general and administrative expenses are separately grouped. Similarly, the particular case may require subdivisions of these groupings, e.g., building occupancy costs might be separable from those of personnel administration within the manufacturing overhead group. The number and composition of the groupings should be governed by practical considerations and should be such as not to complicate unduly the allocation where substantially the same results are achieved through less precise methods.

(c) Each cost grouping shall be distributed to the appropriate cost objectives. This necessitates the selection of a distribution base common to all cost objectives to which the grouping is to be allocated. The base should be selected so as to permit allocation of the grouping on the basis of the benefits accruing to the several cost objectives. This principle for selection is not to be applied so rigidly as to complicate unduly the allocation where substantially the same results are achieved through less precise methods.

(d) The method of allocation of indirect costs must be based on the particular circumstances involved. The method shall be in accord with those generally accepted accounting principles which are applicable in the circumstances. The contractor's established practices, if in accord with such accounting principles, shall generally be acceptable. However, the methods used by the contractor may require reexamination when:

(1) Any substantial difference OCcurs between the cost patterns of work under the contract and other work of the contractor; or

(2) Any significant change occurs in the nature of the business, the extent of subcontracting, fixed asset improvement programs, the inventories, the volume of sales and production, manufacturing processes, the contractor's products, or other relevant circumstances.

(e) A base period for allocation of indirect costs is the period during which such costs are incurred and accumulated for distribution to work performed in that period. Normally, the base period

will be the contractor's fiscal year; however, use of a shorter period may be appropriate in case of (1) contracts whose performance involves only a minor portion of the fiscal year, or (2) where it is general practice in the industry to use a shorter period. In any event the base period or periods shall be so selected as to avoid inequities in the allocation of costs. When the contract is performed over an extended period of time, as many such base periods will be used as will be required to represent the period of contract performance.

(f) Special care should be exercised in applying the principles in paragraphs (b), (c), and (d) of this section when Government-owned contractor operated (GOCO) plants are involved. The distribution of corporate, division, or branch office general and administration expenses to such plants when they operate with little or no dependence on corporate administrative activities, may require more precise cost groupings, detailed accounts screening, and carefully developed distribution bases.

[29 F.R. 10285, July 24, 1964, as amended at 33 F.R. 5452, Apr. 6, 1968]

§ 1-15.204 Application of principles and procedures.

(a) Costs shall be allowed to the extent that they are reasonable (see § 1-15.201-3), allocable (see § 1-15.2014), and determined to be allowable in view of the other factors set forth in §§ 1-15.201-2 and 1-15.205. These criteria apply to all of the selected items of cost which follow, notwithstanding that particular guidance is provided in connection with certain specific items for emphasis or clarity.

(b) Costs incurred as reimbursements to a subcontractor under a cost-reimbursement type subcontract of any tier above the first fixed-price subcontract are allowable to the extent that allowance is consistent with the subpart of this Part 1-15 which is appropriate to the subcontract involved. Thus, if the subcontract is for supplies, such costs are allowable to the extent that the subcontractor's costs would be allowable if this Subpart 1-15.2 were incorporated in the subcontract; if the subcontract is for construction, such costs are allowable to the extent that the subcontractor's costs would be allowable if Subpart 1-15.4 were incorporated in the subcontract.

(c) Selected items of cost are treated

in § 1-15.205. However, § 1-15.205 does not cover every element of cost and every situation that might arise in a particular case. Failure to treat any item of cost in § 1-15.205 is not intended to imply that it is either allowable or unallowable. With respect to all items, whether or not specifically covered, determination of allowability shall be based on the principles and standards set forth in this subpart and, where appropriate, the treatment of similar or related selected items.

§ 1-15.205 Selected costs.

§ 1-15.205-1 Advertising costs.

(a) Advertising costs mean the costs of advertising media and corollary administrative costs. Advertising media include magazines, newspapers, radio and television programs, direct mail, trade papers, outdoor advertising, dealer cards and window displays, conventions, exhibits, free goods and samples, and the like.

(b) The only advertising costs allowable are those which are solely for (1) the recruitment of personnel required for the performance by the contractor of obligations arising under the contract, when considered in conjunction with all other recruitment costs, as set forth in § 1-15.205-33; (2) the procurement of scarce items for the performance of the contract; or (3) the disposal of scrap or surplus materials acquired in the performance of the contract. Costs of this nature, if incurred for more than one Government contract or for both Government work and other work of the contractor, are allowable to the extent that the principles in §§ 1-15.201-3, 1– 15.201-4, and 1-15.203 are observed.

§ 1-15.205-2 Bad debts.

Bad debts, including losses (whether actual or estimated), due to uncollectible customers' accounts and other claims, related collection costs, and related legal costs, arising from other business of the contractor, are unallowable.

[33 F.R. 5452, Apr. 6, 1968]

§ 1-15.205-3 Bidding costs.

Bidding costs are the costs of preparing bids or proposals on potential Government and non-Government contracts or projects, including the development of engineering data and cost data necessary to support the contractor's bids or proposals. Bidding costs of the current accounting period of both successful and