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involve among other considerations, comparison of rental costs with the amount which the contractor would have received had he owned the facilities.

(b) Charges in the nature of rent between plants, divisions, or organizations under common control are allowable to the extent such charges do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, and maintenance; provided that no part of such costs shall duplicate any other allowed costs.

(c) Unless otherwise specifically provided in the contract, rental costs specified in sale and leaseback agreements, incurred by contractors through selling plant facilities to investment organizations, such as insurance companies, or to private investors, and concurrently leasing back the same facilities, are allowable only to the extent that such rentals do not exceed the amount which the contractor would have received had he retained legal title to the facilities.

(d) The allowability of rental costs under unexpired leases in connection with terminations is treated in § 1-15.205-42(e). § 1-15.205-35 Research and develop

ment costs. (a) Basic research, for the purpose of this Subpart 1–15.2, is that type of research which is directed toward increase of knowledge in science. In such research, the primary aim of the investigator is a fuller knowledge or understanding of the subject under study, rather than any practical application thereof. Applied research, for the purpose of this Subpart 1–15.2, consists of that type of effort which (1) normally follows basic research, but may not be severable from the related basic research, (2) attempts to determine and expand the potentialities of new scientific discoveries or improvements in technology, materials, processes, methods, devices, and techniques, and (3) attempts to "advance the state of the art.” Applied research does not include any such efforts when their principal aim is the design, development, or test of specific articles or services to be offered for sale, which are within the definition of the term development as hereinafter provided.

(b) Development” is the systematic use of scientific knowledge which is directed toward the production of, or improvements in, useful products to meet

specific performance requirements, but exclusive of manufacturing and production engineering.

(c) A contractor's independent research and development is that research and development which is not sponsored by a contract, grant, or other arrangement.

(d) A contractor's costs of independent research as defined in (a) and (c) above shall be allowable as indirect costs (subject to (h) below), provided they are allocated to all work of the contractor.

(e) Costs of contractor's independent development, as defined in (b) and (c) above (subject to (h) below), are allowable to the extent that such development is related to the product line for which the Government has contracts, provided the costs are reasonable in amount and are allocated as indirect costs to all work of the contractor on such product lines. In cases where a contractor's normal course of business does not involve production work, the cost of independent development is allowable to the extent that such development is related and allocated as an indirect cost to the field of effort of Government research and development contracts.

(f) Independent research and development costs shall include an amount for the absorption of their appropriate share of indirect and administrative costs, unless the contractor, in accordance with his accounting practices consistently applied, treats such costs otherwise.

(g) Research and development costs (including amounts capitalized), regardless of their nature, which were incurred in accounting periods prior to the award of a particular contract, are unallowable except where allowable as precontract costs (see § 1-15.205-30).

(h) The reasonableness of expenditures for independent research and development should be determined in light of all pertinent considerations such as previous contractor research and development activity, costs of past programs and changes in science and technology. Such expenditures should be pursuant to a broad planned program, which is reasonable in scope and well managed. Such expenditures (especially for development) should be scrutinized with great care in connection with contractors whose work is predominantly or substantially with the Government. Advance agreements as described in § 1-15.107 are particularly important in this situation.

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In recognition that cost sharing of the S1-15.205–37 Selling costs. contractor's independent research and

(a) Selling costs arise in the marketdevelopment program may provide mo

ing of the contractor's products and tivation for more efficient accomplish

include costs of sales promotions, negoment of such program, it is desirable in

tiation, liaison between Government repsome cases that the Government bear

resentatives and contractor's personnel, less than an allocable share of the total

and other related activities. cost of the program. Under these cir

(b) Selling costs are allowable to the cumstances, the following are among the

extent they are reasonable and are alapproaches which may be used as the

locable to Government business (but see basis for agreement: (1) Review of the

8 $ 1-15.107 and 1-15.205–1). Allocabilcontractor's proposed independent re

ity of selling costs will be determined in search and development program and

the light of reasonable benefit to the agreement to accept the allocable costs

Government arising from such activities of specific projects; (2) agreement on a

as technical, consulting, demonstration, maximum dollar limitation of costs, an

and other services which are for pur.:4 allocable portion of which will be ac

poses such as application or adaptation cepted by the Government; (3) an agree

of the contractor's products to Government to accept the allocable share of a

ment use. percentage of the contractor's planned

(c) Notwithstanding (b) above, salesresearch and development program.

men's or agents' compensation, fees, mine § 1-15,205–36 Royalties and other costs commissions, percentages, or brokerage for use of patents.

fees, which are contingent upon the TERE (a) Royalties on a patent or amorti

award of contracts, are allowable only ndepeci zation of the cost of acquiring by pur

when paid to bona fide employees or bona the et chase a patent or rights

rights thereto.

fide established commercial or selling related necessary for the proper performance of

agencies maintained by the contractor in the the contract and applicable to contract for the purpose of securing business. search products or processes, are allowable 81-15.205–38 Service and warranty unless:

costs. and de (1) The Government has a license Such costs includes those arising from 10 20 or the right to free use of the patent; fulfillment of any contractual obligaDpropea (2) The patent has been adjudicated tion of a contractor to provide services, no to be invalid, or has been administra such as installation, training, correcting in action tively determined to be invalid;

defects in the products, replacing defectices (3) The patent is considered to be tive parts, making refunds in the case ich unenforceable; or

of inadequate performance, etc. When (4) The patent is expired.

not inconsistent with the terms of the jente (b) Special care should be exercised contract, such service and warranty costs jaren in determining reasonableness where the are allowable. However, care should be in royalties may have been arrived at as a exercised to avoid duplication of the albeste result of less than arm's length bargain lowance as an element of both estimated ing; e.g.:

product cost and risk. (1) Royalties paid to persons, in

§ 1-15.205-39 Severance pay. cluding corporations, affiliated with the EXDet contractor;

(a) Severance pay, also commonly re(2) Royalties paid to unaffiliated ferred to as dismissal wages, is a paylint parties, including corporations, under ment in addition to regular salaries and stuck an agreement entered into in contempla wages, by contractors to workers whose i det tion that a Government contract would employment is being terminated. Costs Pete be awarded; or

of severance pay are allowable only to (3) Royalties paid under an agree- the extent that, in each case, it is required ment entered into after the award of by (1) law, (2) employer-employee agreein the contract.

ment, (3) established policy that consti(c) In any case involving a patent tutes, in effect, an implied agreement The formerly owned by the contractor, the on the contractor's part, or (4) circumin an amount of royalty allowed should not stances of the particular employment. monteret exceed the cost which would have been (b) Costs of severance payments are hot allowed had the contractor retained title divided into two categories as follows: thereto.

(1) Actual normal turnover sever(d) See § 1–15.107, regarding advance ance payments shall be allocated to all understandings.

work performed in the contractor's 99–187—69 25


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plant; or, where the contractor provides (3) Buildings, nonseverable structures for accrual of pay for normal severances (except foundations and similar imsuch method will be acceptable if the provements necessary for the installaamount of the accrual is reasonable in tion of special test equipment), general light of payments actually made for or special machine tools, or similar normal severances over a representative capital items. past period, and if amounts accrued are (c) The cost of special tooling and allocated to all work performed in the special test equipment used in the percontractor's plant; and

formance of one or more Government (2) Abnormal or mass severance pay contracts is allowable and shall be allois of such a conjectural nature that cated to the specific Government conmeasurement of costs by means of an tract or contracts for which acquired, accrual will not achieve equity to both except as otherwise provided in this parties. Thus accruals for this purpose paragraph (c). The cost of items acare not allowable. However, the Gov- quired by the contractor prior to the ernment recognizes its obligation to par effective date of the contract, or reticipate, to the extent of its fair share, placement of such items, whether or not in any specific payment. Thus, allow altered or adapted for use in the perability will be considered on a case-by formance of the contract, or items the case basis in the event of occurrence. acquisition of which by the Govern(29 F.R, 10285, July 24, 1964, as amended at ment is specifically excluded by the 33 F.R. 5454, Apr. 6, 1968] .

contract shall be allowable only as de$ 1-15.205–40 Special tooling and spe

preciation or amortization.

(d) Where items are disqualified as : cial test equipment costs.

special tooling because with less than : (a) The term "special tooling” means substantial modification or alteration all jigs, dies, fixtures, molds, patterns, they can be made general purpose, and taps, gauges, other equipment and manu where items of special test equipment facturing aids, and replacements there with relatively minor expense c of. which are of such a specialized na- made suitable for general purpose use ture that, without substantial modifica- and have a value as such commensution or alteration, their use is limited to rate with their value as special test equipthe development or production of par

ment, the cost of adapting the items for ticular supplies or parts thereof, or the use under the contract and the cost of performance of particular services. The

returning them to their prior configuraterm includes all components of such

tion will be allowable. items, but does not include:

[33 F.R. 5454, Apr. 6, 1968] (1) Consumable property; (2) Special test equipment; or

§ 1-15.205—41 Taxes. (3) Buildings, nonseverable structures

(a) Taxes are certain charges levied (except foundations and similar im

by Federal, State, or local governments. provements involving relatively minor

They do not include fines and penalties expense which are necessary for the in

except as otherwise provided herein. In stallation of special tooling), general or special machine tools, or similar capital general, taxes (including State and local items.

income taxes) which the contractor is (b) The term "special test equipment” required to pay and which are paid or means electrical, electronic, hydraulic, accrued in accordance with generally pneumatic, mechanical, or other items, or accepted accounting principles are alassemblies of equipment, which are of

lowable, except for: such a specialized nature that, without

(1) Federal income and excess profits modification or alteration, the use of such

taxes; items (if they are to be used separately),

(2) Taxes in connection with financor assemblies is limited to testing in the

ing, refinancing, or refunding operations development or production of particular supplies or parts thereof, or in the per

(see § 1-15.205–17); formance of particular services. The term (3) Taxes from which exemptions are “special test equipment” includes all available to the contractor directly or components of any assemblies of such available to the contractor based on an equipment, but does not include:

exemption afforded the Government ex(1) Consumable property;

cept when the contracting officer de(2) Special tooling; or

termines that the administrative burden

incident to obtaining the exemption outweighs the corresponding benefits accruing to the Government;

(4) Special assessments on land which represent capital improvements; and

(5) Taxes on any category of property which is used solely in connection with

s other than on Government contracts. (Taxes on property used solely in connection with either non-Government or Government work should be considered directly applicable to the respective category of work unless the amounts involved are insignificant or comparable results would otherwise be obtained; e.g., taxes on contractorowned work in process which is used solely in connection with non-Government work should be allocated to such work and taxes on contractor-owned work-in-process inventory, and Government-owned work-in-process inventory when taxed, used solely in connection with Government work should be charged to such work.)

(b) Taxes otherwise allowable under paragraph (a) of this section, but upon which a claim of illegality or erroneous assessment exists, are allowable provided the contractor prior to payment of such taxes:

(1) Promptly requests instructions from the contracting officer concerning such taxes; and

(2) Takes all action directed by the contracting officer arising out of subparagraph (1) of this paragraph or an independent decision of the Government as to the existence of a claim of illegality or erroneous assessment, including cooperation with and for the benefit of the Government to (i) determine the legality of such assessment, or (ii) secure a refund of such taxes. Reasonable costs of any such action undertaken by the contractor at the direction or with the concurrence of the contracting officer are allowable. Interest and penalties incurred by a contractor by reason of the nonpayment of any tax at the direction of the contracting officer or by reason of the failure of the contracting officer to issue timely direction after prompt request therefor, are also allowable.

(c) Any refund of taxes, interest, or penalties, and any payment to the contractor of interest thereon, attributable to taxes, interest, or penalties which were allowed as contract costs, shall be credited or paid to the Government in the

manner directed by the Government, provided, any interest actually paid or credited to a contractor incident to a refund of tax, interest, or penalty shall be paid or credited to the Government only to the extent that such interest accrued over the period during which the contractor had been reimbursed by the Government for the taxes, interest, or penalties. [29 F.R. 10285, July 24, 1964, as amended at 33 F.R. 5454, Apr. 6, 1968] 8 1-15.205–42 Termination costs.

Contract terminations generally give rise to the incurrence of costs, or the need for special treatment of costs, which would not have arisen had the contract not been terminated. Cost principles covering these items are set forth below. They are to be used in conjunction with the remainder of this subpart in termination situations.

(a) Common items. The cost of items reasonably usable on the contractor's other work shall not be allowable unless the contractor submits evidence that he could not retain such items at cost without sustaining a loss. In deciding whether such items are reasonably usable on other work of the contractor, the contracting officer should consider the contractor's plans and orders for current and scheduled production. Contemporaneous purchases of common items by the contractor shall be regarded as evidence that such items are reasonably usable on the contractor's other work. Any acceptance of common items as allocable to the terminated portion of the contract should be limited to the extent that the quantities of such items on hand, in transit, and on order are in excess of the reasonable quantitative requirements of other work.

(b) Costs continuing after termination. If in a particular case, despite all reasonable efforts by the contractor, certain costs cannot be discontinued immediately after the effective date of termination, such costs are generally allowable within the limitations set forth in this subpart, except that any such costs continuing after termination due to the negligent or willful failure of the contractor to discontinue such costs shall be considered unallowable.

(c) Initial costs. Initial costs, including starting load and preparatory costs, are allowable, subject to the following:

(1) Starting load costs are costs of a nonrecurring nature arising in the early stages of production and not fully absorbed because of the termination Such costs may include the cost of labor and material, and related overhead attributable to such factors as:

(i) Excessive spoilage resulting from inexperienced labor;

(ii) Idle time and subnormal production occasioned by testing and changing methods of processing;

(iii) Employee training; and

(iv) Unfamiliarity or lack of experience with the product, materials, manufacturing processes and techniques.

(2) Preparatory costs are costs incurred in preparing to perform the terminated contract, including costs of initial plant rearrangement and alterations, management and personnel organization, production planning and similar activities, but excluding special machinery and equipment and starting load costs.

(3) If initial costs are claimed and have not been segregated on the contractor's books, segregation for settlement purposes shall be made from cost reports and schedules which reflect the high unit cost incurred during the early stages of the contract.

(4) When the settlement proposal is on the inventory basis, initial costs should normally be allocated on the basis of total end items called for by the contract immediately prior to termination; however, if the contratc includes end items of a diverse nature, some other equitable basis may be used, such as machine or labor hours.

(5) When initial costs are included in the settlement proposal as a direct charge, such costs shall not also be included in overhead.

(6) Initial costs attributable to only one contract shall not be allocated to other contracts.

(d) Loss of useful value. Loss of useful value of special tooling and special machinery and equipment is generally allowable if:

(1) Such special tooling, machinery, or equipment is not reasonably capable of use in the other work of the contractor;

(2) The interest of the Government is protected by transfer of title or by other means deemed appropriate by the contracting officer; and

(3) The loss of useful value as to any one terminated contract is limited to that portion of the acquisition cost which bears the same ratio to the total acquisi

tion cost as the terminated portion of the contract bears to the entire terminated contract and other Government contracts for which the special tooling and special machinery and equipment was acquired.

(e) Rental costs. Rental costs under unexpired leases are generally allowable where clearly shown to have been reasonably necessary for the performance of the terminated contract, less the residual value of such leases, if:

(1) The amount of such rental claimed does not exceed the reasonable use value of the property leased for the period of the contract and such further period as may be reasonable; and

(2) The contractor makes all reasonable efforts to terminate, assign, settle, or otherwise reduce the cost of such lease. There also may be included the cost of alterations of such leased property, provided such alterations were necessary for the performance of the contract, and of reasonable restoration required by the provisions of the lease.

(f) Settlement expenses. Settlement expenses including the following are generally allowable:

(1) Accounting, legal, clerical, and similar costs reasonably necessary for

(i) The preparation and presentation to contracting officers of settlement claims and supporting data with respect to the terminated portion of the contract, unless the termination is for the default of the contractor (see § 1-8.604(b) (1));


(ii) The termination and settlement of subcontracts; and

(2) Reasonable costs for the storage, transportation, protection, and disposition of property acquired or produced for the contract.

(g) Subcontractor claims. Subcontractor claims, including the allocable portion of claims which are common to the contractor and to other work of the contractor, are generally allowable. [29 F.R. 10285, July 24, 1964, as amended at 33 F.R. 5454, Apr. 6, 1968] $ 1-15.205-43 Trade, business, techni

cal, and professional activity costs. (a) Memberships. This category includes costs of memberships in trade, business, technical and professional organizations. Such costs are allowable.

(b) Subscriptions. This item includes costs of subscriptions to trade, business, professional, or technical periodicals. Such costs are allowable.

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