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unsuccessful bids and proposals normally will be treated as allowable indirect costs, in which event no bidding costs of past accounting periods shall be allowable in the current period to the Government contract. However, if the contractor's established practice is to treat bidding costs by some other method, the results obtained may be accepted only if found to be reasonable and equitable. § 1–15.205–4 Bonding costs.

(a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds.

(b) Costs of bonding required pursuant to the terms of the contract are allowable.

(c) Costs of bonding required by the contractor in the general conduct of his business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances. § 1–15.205–5 Civil defense costs.

(a) Civil defense costs are those incurred in planning for, and the protection of life and property against, the possible effects of enemy attack. Reasonable costs of civil defense measures (including costs in excess of normal plant protection costs, first-aid training and supplies, fire fighting training and equipment, posting of additional exit notices and directions, and other approved civil defense measures) undertaken on the contractor's premises pursuant to suggestions or requirements of civil defense authorities are allowable when allocated to all work of the contractor.

(b) Costs of capital assets under (a) above are allowable through depreciation in accordance with $1–15.205–9.

(c) Contributions to local civil defense funds and projects are unallowable. 8 1-15.205–6 Compensation for per

sonal services. (a) General.

(1) Compensation for personal seryices includes all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred,

for services rendered by employees to the contractor during the period of contract performance. It includes, but is not limited to, salaries, wages, directors' and executive committee members' fees, bonuses (including stock bonuses), incentive awards, employee stock options, employee insurance, fringe benefits, and contributions to pension, annuity, and management employee incentive compensation plans. Except as otherwise specifically provided in this § 1-15.205–6, such costs are allowable to the extent that the total compensation of individual employees is reasonable for the seryices rendered and they are not in excess of those costs which are allowable by the Internal Revenue Code and regulations thereunder.

(2) Compensation is reasonable to the extent that the total amount paid or accrued is commensurate with compensation paid under the contractor's established policy and conforms generally to compensation paid by other firms of the same size, in the same industry, or in the same geographic area, for similar services. In the administration of this principle, it is recognized that not every compensation case need be subjected in detail to the above tests. Such tests need to be applied only to those cases in which a general review reveals amounts or types of compensation which appear unreasonable or otherwise out of line. However, certain conditions give rise to the need for special consideration and possible limitation as to allowability for contract cost purposes where amounts appear excessive. Among such conditions are the following:

(i) Compensation to owners of closely held corporations, partners, sole proprietors, or members of the immediate families thereof, or to persons who are contractually committed to acquire a substantial financial interest in the contractor's enterprise. Determination should be made that such compensation is reasonable for the actual personal services rendered rather than a distribution of profits.

(ii) Any change in a contractor's compensation policy resulting in a substantial increase in the contractor's level of compensation, particularly when it was concurrent with an increase in the ratio of Government contracts to other business, or any change in the treatment of allowability of specific types of compensation due to changes in Government policy.


(iii) The contractor's business is such form of cash, products, or services, and that his compensation levels are not sub- are allowable. However, premiums for ject to the restraints normally occur- overtime, extra-pay shifts, and multiring in the conduct of competitive shift work are allowable to the extent apbusiness.

proved pursuant to § 1-12.102-4 or per(3) Compensation in lieu of salary mitted pursuant to § 1-12.102-5. for services rendered by partners and (c) Cash bonuses and incentive comsole proprietors will be allowed to the pensation. Incentive compensation for extent that it is reasonable and does not management employees, cash bonuses, constitute a distribution of profits.

suggestion awards, safety awards, and (4) Notwithstanding any other provi- incentive compensation based on prosions of this § 1-15.205-6, costs of com duction, cost reduction, or efficient perpensation are not allowable to the ex- formance, are allowable to the extent tent that they result from provisions of that the overall compensation is delabor-management agreements that, as termined to be reasonable and such costs applied to work in the performance of are paid or accrued pursuant to an agreeGovernment contracts, are determined to ment entered into in good faith between be unreasonable either because they are the contractor and the employees before unwarranted by the character and cir the services were rendered, or pursuant cumstances of the work or because they to an established plan followed by the are discriminatory against the Govern contractor so consistently as to imply, in ment. The application of the provisions effect, an agreement to make such payof a labor-management agreement de- ment. (But see $ 1–15.107.) Bonuses, signed to apply to a given set of circum awards, and incentive compensation stances and conditions of employment when any of them are deferred are al(for example, work involving extremely lowable to the extent provided in (f) hazardous activities or work not requir below. ing recurrent use of overtime) is un (d) Bonuses and incentive compensawarranted when applied to a Govern- tion paid in stock. Costs of bonuses and ment contract involving significantly incentive compensation paid in the stock different circumstances and conditions of the contractor or of an affiliate are of employment (for example, work in allowable to the extent set forth in (c) volving less hazardous activities or work above (including the incorporation of continually requiring use of overtime). the principles of (f) below for deferred It is discriminatory against the Govern- bonuses and incentive compensation), ment if it results in individual personnel subject to the following additional compensation (in whatever form or requirements: name) in excess of that being paid for (1) Valuation placed on the stock similar non-Government work under transferred shall be the fair market comparable circumstances. Disallow value at the time of transfer, determined ance of costs will not be made under upon the most objective basis available; this subparagraph (4) unless:

and (i) The contractor has been permitted (2) Accruals for the cost of stock prior an opportunity to justify the costs; and to the issuance of such stock to the em

(ii) Due consideration has been given ployees shall be subject to adjustment to whether there are unusual conditions according to the possibilities that the pertaining to the Government contract employees will not receive such stock and work which impose burdens, hardships, their interest in the accruals will be or hazards on the contractor's em forfeited. ployees, for which compensation that

Such costs otherwise allowable are submight otherwise appear unreasonable is required to attract and hold necessary

ject to adjustment according to the

principles set forth in (f) (3) below. personnel. (5) In addition to the general require

(But see § 1-15.107.) ments set forth in (a) (1) through (4)

(e) Stock options. The cost of opof this § 1-15.205–6, certain forms of

tions to employees to purchase stock of compensation are subject to further re the contractor or of an affiliate is unquirements as specified in (b) through allowable. (j) of this § 1-15.205-6.

(f) Deferred compensation. (b) Salaries and wages. Salaries and (1) As used herein, deferred comwages for current services include gross pensation includes all remuneration, in compensation paid to employees in the whatever form, for which the employee is not paid until after the lapse of a evaluated with reasonable accuracy, by stated period of years or the occurrence actuarial or other sound computation of other events as provided in the plans, shall be reflected by an adjustment of except that it does not include normal current costs otherwise allowable; and end of accounting period accruals. It (ii) Abnormal forfeitures, not within includes (i) contributions to pension, an (i) above, may be made the subject of nuity, stock bonus, and profit sharing agreement between the Government and plans, (ii) contributions to disability, the contractor either as to an equitable withdrawal, insurance, survivorship, and adjustment or a method of determining similar benefit plans, and (iii) other de such adjustment. ferred compensation, whether paid in (4) In determining whether deferred cash or in stock.

compensation is for services rendered (2) Deferred compensation is allow during the contract period or is for able to the extent that (i) except for past future services, consideration shall be service pension and retirement costs, it given to conditions imposed upon evenis for services rendered during the con- tual payment, such as, requirements of tract period; (ii) it is, together with all continued employment, consultation other compensation paid to the em after retirement, and covenants not to ployee, reasonable in amount; (iii) it is compete. paid pursuant to an agreement entered (g) Fringe benefits. Fringe benefits into in good faith between the contractor are allowances and services provided by and employees before the services are the contractor to his employees as comrendered, or pursuant to an established pensation in addition to regular wages plan followed by the contractor so con and salaries. Costs of fringe benefits, sistently as to imply, in effect, an agree such as pay for vacations, holidays, sick ment to make such payments; and (iv) leave, military leave, employee insurance, for a plan which is subject to approval and supplemental unemployment benefit by the Internal Revenue Service, it falls plans are allowable to the extent rewithin the criteria and standards of the suired by law, employer-employee agreeInternal Revenue Code and the regula ment, or an established policy of the tions of the Internal Revenue Service. contractor. (But see § 1-15.107.)

(h) Severence pay. See § 1–15.205-39. (3) In determining the cost of de (i) Training and education expenses. ferred compensation allowable under the See § 1–15.205-44. contract, appropriate adjustments shall (j) Location allowances. “Location be made for credits or gains, including allowances”, sometimes called “supplethose arising out of both normal and mental pay” or “incentive pay”, are abnormal employee turnover, or any allowable to the extent consistent with other contingencies that can result in a § 1-12.105. forfeiture by employees of such deferred

8 1-15.205–7 Contingencies. compensation. Adjustments shall be made only for forfeitures which directly

(a) A contingency is a possible future or indirectly inure to the benefit of the event or condition arising from presently contractor; forfeitures which inure to known or unknown causes, the outcome the benefit of other employees covered

of which is indeterminable at a present by a deferred compensation plan with no

time. reduction in the contractor's costs will

(b) In historical costing, contingencies not normally give rise to adjustment in

are not normally present since such costcontract costs. Adjustments for normal

ing deals with costs which have been inemployee turnover shall be based on the curred and recorded on the contractor's contractor's experience and on foresee

books. Accordingly, contingencies are able prospects, and shall be reflected in

generally unallowable for historical costthe amount of cost currently allowable. ing purposes. However, in some cases, Such adjustments will be unnecessary to

as for example, terminations, a continthe extent that the contractor can dem

gency factor may be recognized which is onstrate that his contributions take into

applicable to a past period to give recogaccount normal forfeitures. Adjust

nition to minor unsettled factors in the ments for possible future abnormal for

interest of expeditious settlement. feitures shall be effected according to the

(c) In connection with estimates of following rules:

future costs, contingencies fall into two (i) Abnormal forfeitures that are categories: foreseeable and which can be currently (1) Those which may raise from

presently known and existing conditions, ject to the limitations of the Internal the effects of which are foreseeable with Revenue Code of 1954, as amended, in reasonable limits of accuracy; e.g., includinganticipated costs of rejects and defec (i) The straight line method; tive work; in such situations where they (ii) The declining balance method, exist, contingencies of this category are using a rate not exceeding twice the rate to be included in the estimates of future which would have been used had the cost so as to provide the best estimate annual allowance been computed under of performance costs; and

the method described in (i) above; (2) Those which may arise from (iii) The sum of the years-digits presently known or unknown conditions, method; and the effect of which cannot be measured (iv) Any other consistent method so precisely as to provide equitable re productive of an annual allowance sults to the contractor and to the Gov which, when added to all allowances for ernment; e.g., results of pending litiga the period commencing with the use of tion, and other general business risks. the property and including the current Contingencies of this category are to be year, does not, during the first twoexcluded from cost estimates under the thirds of the useful life of the property, several items of cost, but should be dis- exceed the total of such allowances closed separately including the basis which would have been used had such upon which the contingency is computed allowances been computed under the in order to facilitate the negotiation of method described in (ii) above. appropriate contractual coverage (see, (c) Depreciation should usually be for example, $ $ 1–15.205–16, 1-15.205–20, allocated to the contract and other work and 1–15.205-39).

as an indirect cost. The amount of de$ 1-15.205-8 Contributions and dona.

preciation allowed in any accounting

period may, consistent with the basic tions.

objectives set forth in (a) above, vary Contribution and donations are un

with volume of production or use of allowable.

multi-shift operations. $ 1–15.209–9 Depreciation.

(d) For depreciation on idle facilities

and idle capacity, see § 1-15.205–12. (a) Depreciation is a charge to cur

(e) No depreciation, rental, or use rent operations which distributes the

charge shall be allowed on the contraccost of a tangible capital asset, less esti

tor's assets which have been fully depremated residual value, over the estimated

ciated when a substantial portion of such useful life of the asset in a systematic

depreciation was on a basis that repreand logical manner. It does not involve

sented, in effect, a recovery thereof as a a process of valuation. Useful life has

charge against Government contracts or reference to the prospective period of

subcontracts. Otherwise, a reasonable economic usefulness in the particular

use charge may be agreed upon and alcontractor's operations as distinguished

lowed. (But see § 1-15.107.) In deterfrom physical life.

mining this charge, consideration should (b) Normal depreciation on a con

be given to cost, total estimated useful tractor's plant, equipment, and other

life at time of negotiation, and effect of capital facilities is an allowable element

any increased maintenance charges or of contract cost; provided that the

decreased efficiency due to age. amount thereof is computed:

[29 F.R. 10285, July 24, 1964, as amended at (1) Upon the property cost basis used

33 F.R. 5452, Apr. 6, 1968] by the contractor for Federal income tax purposes (see section 167 of the Internal

§ 1-15.205-10 Employee morale, health, Revenue Code of 1954); or

welfare, food service, and dormitory (2) In the case of nonprofit or tax

costs and credits. exempt organizations, upon a property (a) Employee morale, health, and welcost basis which could have been used fare activities are those services or beneby the contractor for Federal income tax fits provided by the contractor to its empurposes, had such organizations been ployees to improve working conditions, subject to the payment of income tax; employer-employee relations, employee and in either case

morale, and employee performance. Such (3) By the consistent application to activities include house publications, the assets concerned of any generally health or first-aid clinics, recreation, emaccepted accounting method, and sub ployee counseling services, and, for the purpose of this $ 1-15.205-10, food and receipts or similar sources, may be indormitory services. Food and dormitory cluded as costs incurred under paragraph services include operating or furnishing (b) of this section, only to the extent facilities for cafeterias, dining rooms, that the contractor demonstrates that an canteens, lunch wagons, vending ma- equivalent amount of the costs incurred chines, living accommodations or similar by the employee organization would be types of services for the contractor's em allowable if incurred by the contractor ployees at or near the contractor's directly. facilities.

(33 F.R. 5452, Apr. 6, 1968] (b) Except as limited by paragraph

8 1-15.205-11 Entertainment costs. (c) of this section, the aggregate of costs incurred on account of all activities

Costs of amusement, diversion, social mentioned in paragraph (a) of this sec

activities and incidental costs relating tion, less income generated by all such

thereto, such as meals, lodging, rentals, activities, is allowable to the extent that

transportation, and gratuities, are unthe net amount is reasonable.

allowable (but see $$ 1-15.205-10 and (c) Losses from the operation of food 1-15.205-43). and dormitory services may be included § 1-15.205-12 Idle facilities and idle as costs incurred under paragraph (b) of capacity. this section only if the contractor's ob

(a) As used in this section, the words jective is to operate such services on a

and phrases defined in this paragraph break-even basis. Losses sustained be

(a) shall have the meanings set forth cause food services or lodging accom

below. modations are furnished without charge

(1) "Facilities" means plant or any or at prices or rates which obviously

portion thereof (inclusive of land integral would not be conducive to accomplish

to the operation); equipment individument of the above objective are not al

ally or collectively; or any other tangible lowable, except as otherwise provided in

capital asset, wherever located, and this paragraph (c). A loss may be allowed

whether owned or leased by the conto the extent the contractor can demon

tractor. strate that unusual circumstances exist

(2) "Idle facilities” means completely (e.g., (1) where the contractor must

unused facilities that are excess to the provide food or dormitory services at re

contractor's current needs (see paramote locations where adequate com

graph (c) of this § 1-15.205–12). mercial facilities are not reasonably

(3) "Idle capacity” means the unused available, or (2) where it is necessary to

capacity of partially used facilities. It operate a facility at a lower volume than

is the difference between that which a the facility could economically support)

facility could achieve under 100 percent where, even with efficient management,

operating time on a one-shift basis less operation of the services on a break-even

operating interruptions resulting from basis would require charging inordi

time lost for repairs, setups, unsatisnately high prices or prices or rates

factory materials, and other normal higher than those charged by commercial delays, and the extent to which the facilestablishments offering the same services ity was actually used to meet demands in the same geographical areas. Cost of during the accounting period. A multiple food and dormitory services shall in shift basis may be used for evaluation clude an allocable share of indirect ex purposes if it can be shown that this penses pertaining to these activities. amount of usage could normally be

(d) In those situations where the con- expected for the type of facility involved. tractor has an arrangement authorizing (4) “Cost of idle facilities or idle an employee association to provide or capacity” means costs such as mainteoperate a service such as vending ma nance, repair, housing, rent, and other chines in the contractor's plant, and related costs, e.g., property taxes, insurretain the profits derived therefrom, such

ance, and depreciation. profits shall be treated in the same man- (b) The costs of idle facilities are unner as if the contractor were providing allowable except to the extent that: the service (see paragraph (e) of this (1) They are necessary to meet fluctusection).

ations in workload; or (e) Contributions by the contractor to (2) Although not necessary to meet an employee organization, including fluctuations in workload, they were necfunds set over from vending machine essary when acquired and are now idle


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