that contracting officer's agency. Factors considered in selecting an interagency cognizant contracting officer should include distribution by agency of unliquidated dollar balance of contracts being administered, existence of a designated cognizant contracting officer for CASB matters, location of contract audit support and any other particular factors which may be relevant to the particular case. A list of such designations will be published from time to time in DOD Defense Procurement Circulars and in FPR Bulletins. The results of the negotiation will be binding upon all agencies participating in the vote selection of a cognizant contracting officer with interagency negotiation responsibility.

(f) Prior to undertaking negotiation of an advance agreement, the procurement of cognizant contracting officer shall (1) determine whether there are other procurement offices within his agency, or in other agencies, that have a significant unliquidated dollar balance in contracts with the same contractor, (2) inform any such activity or agency of the cost item(s) or other matters under consideration for negotiation, and (3) as appropriate, invite such activity or agency and the cognizant audit activity to participate in pre-negotiation discussions and/or in the subsequent negotiations. At the completion of the negotiation, the cognizant contracting officer who has the negotiation responsibility shall prepare and distribute to other interested agencies and activities (including the cognizant audit activity) copies of the fully executed agreement together with a memorandum setting forth the principal elements of the negotiation and containing, as a minimum, the information specified in § 1-3.811, to the extent applicable.

(g) Examples of cost on which advance agreements may be particularly important are:

(1) Compensation for personal services, including but not limited to allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living differential;

(2) Use charges for fully depreciated assets;

(3) Deferred maintenance costs; (4) Precontract costs;

(5) Independent research and development costs;

(6) Royalties and other costs for use of patents;

(7) Selling and distribution costs;

(8) Relocation costs, as related to special or mass personnel movements; (9) Idle facilities and idle capacity; (10) Automatic data processing equipment;

(11) Bid and proposal costs;

(12) Severance pay to employees on support service contracts;

(13) Plant reconversion;

(14) Professional services (legal, accounting, engineering, etc.); and

(15) General and administrative costs (including corporate, division, or branch 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 §§ 115.203(f), 1-15.403-7, and 1-15.502-4).

[40 FR 14913, Apr. 3, 1975]

§ 1-15.108 Grants and contracts with State and local governments.

Subpart 1-15.7 of this Part 1-15 provides principles and standards for determining costs applicable to grants and contracts with State and local governments. They are designed to provide the basis for a uniform approach to the problem of determining costs and to promote efficiency and better relationships between grantees and the government. These cost principles apply to all programs that involve grants and contracts with State and local governments. They do not apply to grants and contracts with:

(a) Publicly financed educational institutions subject to Subpart 1-15.3 of this Part 1-15; or

(b) Publicly owned hospitals and other providers of medical care subject to requirements promulgated by the sponsoring Government agencies.

[35 FR 18797, Dec. 11, 1970]

§ 1-15.109 Definitions.

As used in this part, except with respect to those contracts exempted

under §§ 1-3.1203(a)(1), (a)(2), or (h)(1), the words and phrases shall have the meanings prescribed by the Cost Accounting Standards Board. For convenience, CASB definitions are set forth in § 1-3.1220.

[40 FR 18787, Apr. 30, 1975]

Subpart 1-15.2-Contracts with Commercial Organizations

§ 1-15.201 Basic considerations.

§ 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) standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the particular circumstances, and (d) any limitations or exclusions set forth in this Subpart 1-15.2 or otherwise included in the contract as to types or amounts of cost items. When a contractor has disclosed his cost accounting practices in accordance with Cost Accounting Standards Board rules, regulations, and standards and any such practices are inconsistent with any of the provisions of this Subpart 1-15.2, costs resulting from such inconsistent practices shall not be allowed in excess of the amount that would have resulted from the use of practices consistent with this Subpart 1-15.2. [39 FR 43074, Dec. 10, 1974]

§ 1-15.201-3 Definition of reasonableness. A cost is reasonable if, in its nature or amount, it does not exceed that which would be incurred by an ordi

narily 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 one or more cost objectives (see § 1-3.1220 for definition) 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 and other work, and can be distributed to them in reasonable proportion to the benefits received; or

(c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.

[37 FR 13094, July 1, 1972, as amended at 39 FR 43074, Dec. 10, 1974]

§1-15.201-5 Credits.

The applicable portion of any ncome, 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. However, payment of interest on contractors' claims pursuant to § 1-1.322 is exempt from the requirements of this section. [40 FR 14914, Apr. 3, 1975]

1-15.202 Direct costs.

(a) A direct cost is any cost which can be identified specifically with a particular final cost objective. (See § 13.1220 for definitions.) No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective. Costs identified specifically with the contract are direct costs of the contract and are to be charged directly thereto. Costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

(b) Any direct cost of minor dollar amount may be treated as an indirect cost for reasons of practicality where the accounting treatment for such cost is consistently applied to all final cost objectives, Provided, That such treatment produces results which are substantially the same as the results which would have been obtained if such costs had been treated as a direct cost.

[39 FR 43074, Dec. 10, 1974]

$1-15.203 Indirect costs.

(a) An indirect cost (see § 1-3.1220 for definition) is one which, because of its incurrence for common or joint objectives, is not readily subject to treatment as a direct cost. Any direct cost of minor dollar amount may be treated as an indirect cost for reasons of practicality under the circumstances set forth in § 1-15.202(b). 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 cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective.

(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 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. Once an appropriate base for the distribution of indirect costs has been accepted, such base shall not be fragmented by the removal of individual elements. Consequently, all items properly includable in an indirect cost base should bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost of sales base is deemed appropriate for the distribution of general and administrative (G&A) costs, all items chargeable to

cost of sales, whether allowable or unallowable, shall be included in the base and bear their pro rata share of G&A costs.

(d) The method of allocation of indirect costs must be based on the particular circumstances involved. The method shall be in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable to the contract. Otherwise, the method shall be in accordance with generally accepted accounting principles. When Cost Accounting Standards Board standards are not applicable to the contract, the contractor's established practices, if in accordance with generally acceptable accounting principles, shall generally be acceptable. However, the method used by the contractor may require examination when:

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

(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; or

(3) Indirect cost groupings developed for a contractor's primary location are applied to offsite locations. Separate cost groupings for costs allocable to offsite locations may be necessary to permit equitable distribution of costs. on the basis of the benefits accruing to the several cost objectives.

(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 FR 10285, July 24, 1964, as amended at 33 FR 5452, Apr. 6, 1968; 34 FR 18164, Nov. 13, 1969; 39 FR 43075, Dec. 10, 1974]

§ 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 or payments to a subcontractor under a cost-reimbursement, fixedprice incentive, or price redeterminable type subcontract of any tier above the first firm fixed-price or fixed-price escalation 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 of this Part 1-15 were incorporated in the subcontract. Similarly, costs incurred as payments under firm fixed-price or fixed-price escalation subcontracts or modifications thereto, when cost analysis was

performed pursuant to § 1-3.807-10(b), shall be allowable only to the extent that the price was negotiated in accordance with the principles in § 115.106.

(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.

[29 FR 10285, July 24, 1964, as amended at 40 FR 14914, Apr. 3, 1975]

§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.

(c) Advertising costs other than those specified above are not allowable.

[29 FR 10285, July 24, 1964, as amended at 34 FR 18164, Nov. 13, 1969]

§ 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 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. Rea