and performance. Contract provisions requiring advance notification to the contracting officer of proposed subcontracts for materials, components, and other purchases may be appropriate both for information as to sources and prices and to provide an opportunity for review and for approval or objection by the contracting officer prior to award of the subcontracts. Careful and thorough evaluation of subcontracts prior to placement is particularly necessary when:

(1) The prime contractor's purchasing system of performance thereunder is considered inadequate;

(2) Subcontracts are for items for which there is no competition or for which the proposed prices appear unreasonable, and the amounts involved are substantial (see § 1-3.807-10(b));

(3) Close working arrangements or business or ownership affiliations exist between the prime and the subcontractor which may preclude the free use of competition or result in higher subcontract prices than would otherwise be obtained;

(4) A subcontract is being proposed at a price less favorable than that which has been given by the subcontractor to the Government, all other factors such as manufacturing period and quantity being comparable; or

(5) A subcontract is to be placed on a fixed-price incentive, time and material, labor-hour, fixed-price redeterminable, or cost-reimbursement basis.

(b) (1) Prime contract provisions relating to subcontracts, including those requiring advance notification, review, or approval thereof, should be consistent with the amount and character of subcontract work and with the overall character and type of the prime contract and the conditions applicable to its use as described in Subpart 1-3.4; and should involve the Government to the minimum extent practicable in the contractor's exercise of management responsibility, but give reasonable assurance that adequate subcontracting opportunities have been afforded to small business and that the Government is receiving the greatest practical return for its expenditure. For example, if the contract is on a firm fixedprice basis except for a clause permitting price escalation resulting from

cost increases for certain materials, the prime contract may limit the contracting officer's right of review of subcontracts to those for materials covered by the escalation clause. In the case of cost-reimbursement type contracts, advance notification, and prior consent or approval of subcontracts should be required. (Section 304(b) of the Act (41 U.S.C. 254(b)) requires that all such contracts shall provide for advance notification of any subcontract thereunder on a cost-plusa-fixed-fee basis and of any fixed-price subcontract or purchase order which exceeds in dollar amount either $25,000 or 5 per centum of the total estimated cost of the prime contract.)

(2) Provisions in prime fixed-price contracts relating to subcontract review may, as appropriate, be confined to one major subcontract or to certain classes of subcontracts; may set a floor above which advance approval of proposed subcontracts may be required before placement; or may be tailored to cover unusual or particular circumstances.

(3) In those instances where a contractor's purchasing system, including its small business program has been deemed adequate, review of subcontracts generally may not be necessary. However, contracting officers shall conduct periodic reviews of the application of the system to insure conformance therewith.

(4) In instances where subcontracts have been placed on a cost-reimbursement or time and materials basis, contracting officers should be skeptical of approving the repetitive or unduly protracted use of such types of contracts and should follow the principles of § 1-3.803(b).

(c) In cases where the prime contract reserves a right for the contracting officer to review or approve subcontracts, the prime contract shall also reserve to the Government the right to inspect and audit the books and records of such subcontractors. Whenever such first tier subcontracts are of the cost-reimbursement, fixedprice incentive, or time and material type, a similar right shall be reserved to the Government to inspect and audit the books and records of lower tier subcontractors: Provided, That

such a right shall not be reserved contractually at or below the point where a firm' fixed-price subcontract inter

venes.

Subparts 1-3.10-1-3.11-[Reserved]

Subpart 1-3.12—Cost Accounting Standards

SOURCE: 39 FR 43058, Dec. 10, 1974, unless otherwise noted.

§ 1-3.1200 Scope of subpart.

This subpart prescribes policies and procedures with respect to the application of regulations and standards of the Cost Accounting Standards Board (see 4 CFR Part 331 et seq.) to negotiated national defense contracts and negotiated nondefense contracts.

§ 1-3.1201 Purpose.1

Public Law 91-379, 50 U.S.C. App. 2168, as implemented by the regulations of the Cost Accounting Standards Board (see 4 CFR 331 et seq.) requires the development of cost accounting standards to be used in connection with negotiated national defense contracts and disclosure of cost accounting practices to be used in such contracts. Such disclosure of cost accounting practices shall also be used in connection with negotiated nondefense contracts. In addition, cost accounting standards shall be used in negotiated nondefense contracts as the standards become effective and to the same extent that such standards are applicable to defense contracts. If deemed appropriate, however, the application of a particular standard to negotiated nondefense contracts may be limited by a modification or withdrawal of applicability. Such action, if any, will be set forth in § 1-3.1218 entitled Modification or Withdrawal of Applicability. Waivers of cost accounting standards, rules, and regulations are treated in § 1-3.1211.

[41 FR 47237, Oct. 28, 1976]

For a document relating to this section, see Appendix-Temporary Regulations, appearing at the end of Chapter 1.

§ 1-3.1202 Definitions.'

When used in this subpart, the words and terms defined in 4 CFR Part 331 et seq. shall have the meanings set forth therein (see also § 13.1220(b)). In addition, the words and terms defined in this paragraph shall have the meanings set forth below:

(a) "Net awards" means the obligated value of negotiated national defense prime contracts, awarded in the reporting period, minus cancellations, terminations, and other credit transactions relating thereto.

(b) "Company" includes all divisions, subsidiaries, and affiliates of the contractor under common control. (The monetary threshold requirements for applicability of disclosure statement submissions under 4 CFR Part 351 are based on this definition of "company.")

(c) "Contractor" and "subcontractor," as the words pertain to contract applicability requirements of cost accounting standards under the clauses set forth in § 1-3.1204, apply to business units, such as a profit center, division, subsidiary, or similar unit of a company, which perform the contract (including each corporate or group office whose costs are allocated to one or more corporate segments performing under a clause), even in those cases where the contract was entered into on behalf of the overall company rather than the business unit.

(d) For the purpose of determining whether a contract is a national defense or a nondefense contract, the following CASB definitions appearing in 4 CFR 331.20 are set forth below.

(1) A "relevant Federal agency" is any Federal agency making a national defense procurement and any agency whose responsibilities include review, approval, or other action affecting such a procurement.

(2) A "defense contractor" is any contractor entering into a contract with the United States for the production of material or the performance of services for the national defense.

(3) A "defense subcontractor" is any person other than the United States

who contracts, at any tier, to perform any part of a defense contractor's contract.

(4) "National defense" is any program for military and atomic energy production or construction, military assistance to any foreign nations, stockpiling, space, and directly related activity.

(e) A "small business concern" is any concern, firm, person, corporation, partnership, cooperative, or other business enterprise which pursuant to 15 U.S.C. 637(b)(6) and the rules and regulations of the Small Business Administration set forth in 13 CFR Part 121 is determined to be a small business concern for the purpose of Government procurement (see 4 CFR 331.20(k) and § 1-1.701).

(f) A "CAS covered contract" is any negotiated contract or subcontract which pursuant to the requirements of the Cost Accounting Standards Board or agency regulations includes a cost accounting standards clause (see §§ 13.1204-1 and 1-3.1204-2).

(g) A "negotiated subcontract" is any subcontract except a firm fixedprice subcontract made by a contractor or subcontractor after receiving offers from at least two firms not associated with each other or such contractor or subcontractor, providing (1) the solicitation to all competing firms is identical, (2) price is the only consideration in selecting the firms solicited, and (3) the lowest offer received in compliance with the solicitation from among those solicited is accepted (see 4 CFR 331.20(f)).

[39 FR 43058. Dec. 10, 1974, as amended at 43 FR 14110, Apr. 4, 1978]

§ 1-3.1202-1 Materiality.'

Materiality shall be considered in the application of regulations and standards of the CASB to both national defense and nondefense contracts. The provisions of the CASB appearing in 4 CFR 331.71 apply and are set forth below.

(a) In determining whether amounts of cost are material or immaterial, the following criteria shall be considered

For a document relating to this section. see Appendix-Temporary Regulations, appearing at the end of Chapter 1.

where appropriate; no one criterion is necessarily determinative.

(1) The absolute dollar amount involved. The larger the dollar amount, the more likely that it will be material.

(2) The amount of contract cost compared with the amount under consideration. The larger the proportion of the amount under consideration to contract cost the more likely it is to be material.

(3) The relationship between a cost item and a cost objective. Direct cost items, especially if the amounts are themselves part of a base for allocation of indirect cost, will normally have more impact than the same amount of indirect costs.

(4) The impact on Government funding. Changes in accounting treatment will have more impact if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support.

(5) The cumulative impact of individually immaterial items. It is appropriate to consider whether such impacts (1) tend to offset one another, or (a) tend to be in the same direction and hence to accumulate into a material amount.

(6) The cost of administrative processing of the price adjustment modification shall be considered. If the cost to process exceeds the amount to be recovered, it is less likely the amount will be material.

(b)(1) A contract modification for price adjustment or cost allowance under paragraphs (a)(4) and (a)(5) of the Cost Accounting Standards clause set forth in § 331.50 is required only if the cost impact is material (see also § 1-3.1204).

(2) Where a contractor is in noncompliance and does not change a cost accounting practice because the cost impact is immaterial, the contracting agency is not relieved of its responsibilities to ensure that an appropriate price adjustment is obtained if the cost impact of the noncompliance subsequently becomes material. The contractor shall be notified that the Government's decision to forbear action for noncompliance is solely because

the cost impact at the time of the notice is immaterial. If at any time thereafter the Government determines that the cost impact of noncompliance with respect to the practice in question is material, the Government then must require action under paragraph (a)(5) of the contract clause for any accounting period in which the cost impact is material. The fact that the Government does not pursue a price adjustment does not excuse the contractor from his obligation to comply with the Standard involved.

(3) Whether cost impact is recognized by modifying a single contract, several but not all contracts, or all contracts, or any other suitable technique, is a contract administration matter. The Standards, rules, and regulations of the Board do not in any way restrict the capacity of the parties to select the method by which the cost impact attributable to a change in cost accounting practice is recognized.

[43 FR 14110, Apr. 4, 1978]

§ 1-3.1202-2 Cost accounting practice.1

The definitions of "cost accounting practice" and "change to either a disclosed cost accounting practice or an established cost accounting practice" appearing in 4 CFR 331.20 apply to both national defense and nondefense CAS covered contracts and are set forth below:

(a) A "cost accounting practice" is any accounting method or technique which is used for measurement of cost, assignment of cost to cost accounting periods, or allocation of cost to cost objectives.

(1) Measurement of cost encompasses accounting methods and techniques used in defining the components of cost, determining the basis for cost measurement, and establishing criteria for use of alternative cost measurement techniques. The determination of the amount paid or a change in the amount paid for a unit of goods and services is not a cost accounting practice. Examples of cost accounting practices which involve measurement of costs are:

For a document relating to this section, see Appendix-Temporary Regulations, appearing at end of Chapter 1.

(i) The use of either historical cost, market value, or present value;

(ii) The use of standard cost or actual cost; or

(iii) The designation of those items of cost which must be included or exIcluded from tangible capital assets or pension cost.

(2) Assignment of cost to cost accounting periods refers to a method or technique used in determining the amount of cost to be assigned to individual cost accounting periods. Examples of cost accounting practices which involve the assignment of cost to cost accounting periods are requirements for the use of specified accrual basis accounting or cash basis accounting for a cost element.

(3) Allocation of cost to cost objectives includes both direct and indirect allocation of cost. Examples of cost accounting practices involving allocation of cost to cost objectives are the accounting methods or techniques used to accumulate cost, to determine whether a cost is to be directly or indirectly allocated, to determine the composition of cost pools, and to determine the selection and composition of the appropriate allocation base.

(b) A "change to either a disclosed cost accounting practice or an established cost accounting practice" is any alteration in a cost accounting practice, as defined in paragraph (a) of this section, whether or not such practices are covered by a Disclosure Statement, except that:

(1) The initial adoption of a cost accounting practice for the first time a cost is incurred or a function is created is not a change in cost accounting practice. The partial or total elimination of a cost or the cost of a function is not a change in cost accounting practice. As used here, function is an activity or group of activities that is identifiable in scope and has a purpose or end to be accomplished.

(2) The revision of a cost accounting practice for a cost which previously had been immaterial is not a change in cost accounting practice.

[43 FR 21038, May 16, 1978]

§ 1-3.1203 Requirements.1

[43 FR 14111, Apr. 4, 1978]

§ 1-3.1203-1 Prime contractor disclosure statements.'

(a) Nondefense awards. Nondefense contracts, irrespective of whether they are subject to cost accounting standards and contain appropriate clauses, will not be counted in connection with Disclosure Statement dollar threshold submission requirements under 4 CFR Part 351.

(b) National defense awards. The filing of disclosure statements by certain large business concerns is required in connection with the award of certain negotiated national defense contracts and subcontracts in accordance with CASB rules (see 4 CFR Part 351 et seq.). A summary of those rules follow:

(1) A disclosure statement, when required to be submitted, covers the practices of a company's profit centers, divisions, or similar organizational units whose costs are included in the total price of a negotiated national defense "covered" contract. The requirement extends to each corporate or group office whose costs are allocated to such performing units of the company.

(2) Any company, other than a small business concern, which received company-wide net awards of negotiated national defense prime contracts and subcontracts subject to cost accounting standards totaling more than $10 million in its most recent completed cost accounting period, must submit a disclosure statement within 90 days after the end of that period.

(3) Any company, other than a small business concern, that receives a negotiated national defense contract or subcontract award which is subject to cost accounting standards and is for $10 million or more must submit a completed disclosure statement as a condition of award.

(c) Preaward submission of disclosure statement(s). Each offeror submitting an offer which could result in a national defense CAS covered con

'For a document relating to this section, see Appendix-Temporary Regulations, appearing at the end of Chapter 1.

tract shall furnish copies of his disclosure statement(s) to the offices listed in paragraph (d) of this section concurrently with the submission of his proposal to the contracting officer except when the offeror has executed the certificate of monetary exemption, the certificate of interim exemption, or the certificate of previously submitted disclosure statement (see § 13.1203-(a)(1)). More than one disclosure statement may be required in connection with the award of a contract (see 4 CFR 351.40(a)). Award of a contract shall not be made until a determination has been made by the cognizant contracting officer (ACO) that a disclosure statement is adequate (see § 1-3.1205(b)) unless, in order to protect the interests of the Government, the contracting officer waives this requirement. In this event, a determination shall be made as soon as possible after the award.

(d) Distribution of disclosure statement(s). The offeror shall distribute his disclosure statement(s) as follows:

(1) Original and one copy to the cognizant contracting officer (Contract Administration Office (Attn: ACO), see DOD Directory of Contract Administration Components, DOD 4105.59H) unless otherwise specified in accordance with § 1-3.1208(c).

(2) One copy to the cognizant contract auditor; and

(3) One copy to the Cost Accounting Standards Board, 441 G Street NW., Washington, D.C. 20548, within 10 days after the determination of adequacy pursuant to § 1-3.1205(b).

(e) Postward submission of disclosure statement(s). Postward submission of disclosure statement(s) may be authorized only when the contracting officer has made a written determination that such authorization is essential; (i) To the national defense, (ii) because of the public exigency, or (iii) to avoid undue hardship. Each determination shall set forth facts which clearly support the determination to authorize postaward submission, and a copy of the determination shall be included in the contract file. Authorization issued pursuant to this paragraph shall specify the period of time, not to to exceed 90 days after contract