SECTION I

GENERAL

1. Purpose of Manual. The purpose of this manual, which is applicable only to negotiated settlements of fixed-price supply contracts terminated at the option or for the convenience of the Government, is to guide Government accounting personnel in their accounting review or examination of settlements proposed by contractors, so that contracting officers may have a factual basis upon which to negotiate settlements. It is intended, also, that this manual will provide useful information on the accounting aspects of terminations.

2. Termination Article. Paragraphs 324 and 15-901 of the War Department Procurement Regulations contain the Uniform Termination Article for insertion in fixed-price supply contracts. The text of this article is set forth in appendix A. The Termination Article previously prescribed and now superseded (see PR 15-901-A) is reproduced in appendix B, since certain contracts containing the old Termination Article are in the process of settlement. Procedures contained in this manual are applicable to negotiated settlements under either article.

3. Manual Does Not Prescribe Regulations for Contracting Officer. Procurement Regulations prescribe the principles and rules for contracting officers in dealing with termination settlements. Wherever statements are made in this manual as to duties of contracting officers, such statements are based on Procurement Regulations and are solely for the purpose of informing accounting personnel. They are not to be interpreted as instructional to contracting officers.

4. Presentation of Proposed Settlement by Contractor. When a War Department fixed-price supply contract is terminated by the Govern

ment, the contractor prepares a statement setting forth his proposed settlement. The contracting officer has the responsibility of passing upon this proposal and arriving at an agreement with the contractor. In carrying out these functions, it is the further responsibility of the contracting officer to decide the extent to which he requires independent review and verification of the contractor's statement by personnel qualified to deal with accounting matters. In this connection, the accounting personnel will assist the contracting officer in an advisory capacity when such technical assistance is requested by him.

5. Documentary Evidence Requirements. War Department requirements as to documentary evidence, such as are in force with respect to CPFF contracts, are not applicable to fixedprice supply contract termination settlements. In the case of a negotiated settlement, the only documentary evidence to be attached to the voucher will be a copy of the supplemental agreement evidencing the amount and terms of the settlement. The contracting officer, however, should maintain records of the settlement in the manner prescribed by the chief of the technical service in accordance with PR 15–222. Paragraph (h) of the Uniform Termination Article provides that the contractor, for a period of three years after final settlement under the contract, must make available to the Government at all reasonable times at its office all of its books, records, documents, and other evidence bearing on the cost and expenses of the contractor under the contract and with respect to the termination of work thereunder.

6. Detailed Auditing To Be Minimized.

a. It is desirable that auditing be reduced to a minimum consistent with protecting the interest of the Government. Whenever possible, reliance should be placed on intelligent reviews rather than on audits. In cases where audits appear to be necessary, they will be carried out in accordance with the principles of selective auditing.

b. Chapters 1 and 2 of this manual are of general application in all reviews; chapters 3 and 4 apply only in those cases where audits are made. However, a general reading of the latter chapters should be useful in applying the procedures outlined in chapters 1 and 2.

7. Office Review of Proposed Settlement by Accounting Personnel. PR 15-424.1 requires contracting officers to have an office review made by qualified accounting personnel of each statement submitted by a contractor in connection with a fixed-price supply contract termination.

a. The purpose of the office review is to appraise the adequacy of the supporting information submitted by the contractor with his settlement proposal, so that the accounting personnel can recommend to the contracting officer the extent to which reliance can be placed thereon as a basis for a negotiated settlement. In making this appraisal the accounting personnel may be guided by the test of what evidence would be satisfactory in accordance with prudent business standards.

b. Before beginning the office review, the accounting personnel should refer to the terms of the contract or purchase order under which the settlement proposal is being made. They should also avail themselves of any other information pertinent to the contract.

c. Upon completion of the office review, the accountant will furnish the contracting officer an appropriate memorandum expressing his conclusions as to the adequacy of the supporting information and the indicated reliability of the data submitted by the contractor.

d. In making recommendations to the contracting officer, the accountant should consider the following:

(1) Amount and complexity of the proposed settlement.

(2) Result of the office review.

(3) Available reports of independent public accountants.

(4) Information available from War Department personnel having contacts with the operations under the contract.

(5) Information available from price adjustment boards.

(6) Status of renegotiation proceedings.

e. The accountant should realize that the contracting officer will rely to a considerable extent on his recommendations. Therefore, in view of the general need for minimizing auditing to the extent practicable, he should not

recommend further examination when the interests of the Government can be protected adequately by relying on more readily available information.

8. Procedure for Office Review. The fundamental objectives of an office review are the same as those of an audit performed in the field, as discussed in chapters 3 and 4. However, the review is necessarily more limited than the field audit, since it is based upon the supporting evidence submitted by the contractor as a part of his settlement proposal and other information available in the office of the procurement district. In general, the accountant analyzes and tests the information submitted by the contractor to determine inconsistencies or other indications that the items included are overstated or inapplicable. The following summary is suggestive of the major steps in an office review:

a. A check of the mathematical accuracy of the settlement proposal and all supporting or related schedules should be made.

b. The accuracy of the information submitted in connection with outstanding "V" or other Government guaranteed loans and advance payments should be checked.

c. Each item of cost should be reviewed to determine that it conforms with the Statement of Principles for Determination of Costs. (See par. 24.)

d. In examining overhead charges (indirect factory expense or general and administrative expense), a review should be made of the available data with respect to significant items to determine

(1) That the individual accounts included in the overhead "pool" are proper and reasonable. (2) That the bases of prorating the overhead to the contract are acceptable.

(3) That the overhead rates are reasonable and have been applied properly.

e. Consideration should be given to the reasonableness of each item of cost in relation to the stage of completion of the contract.

f. Consideration should be given to the reasonableness of the relationships between the amounts of the various items, based on normal commercial standards.

g. A check should be made of the finished units shipped and billed to determine the number of units covered by the termination notice.

h. Quantities of material and work in process on hand should be carefully reviewed to

determine that they are not in excess of the reasonable requirements for the uncompleted portion of the contract.

i. The available inventory data should be reviewed to determine whether the contractor has included defective items.

j. Reconcilements of inventory quantities of significant items listed by the contractor with quantities disposed of or taken over by the Government should be made to the greatest extent practicable. (See par. 66.) If at the time of the office review the property disposition is not complete, a partial reconcilement should be made subject to completion of the check at the time of final settlement.

k. Consideration should be given to the possibility of common items and where they exist, and the propriety of the allocation of such items to the terminated contract should be carefully appraised.

i. Amounts included for handling charges and post termination charges should be reviewed as to their reasonableness, and to determine any indication that they have been estimated or arbitrarily determined to an unreasonable extent.

m. If the contractor has included a charge for profit, the accountant should review all information pertaining to the indicated rate of profit on this contract, (par. 23a), rates shown by applicable cost estimates, rates allowed in renegotiation, and other similar data. Consideration also should be given to the items of cost to which the rate or rates have been applied.

n. Consideration should be given to other work the contractor is doing and to any indication that costs for tools or other equipment are included which are properly applicable to such other work.

o. Settlement proposals submitted by the same contractor in connection with other terminated contracts should be reviewed for any evidence of inconsistency in the application of procedures or policies.

9. Appropriate Extent of Examination Beyond an Office Review.

a. It is the contracting officer's responsibility to determine what further examination, if any, will be made of the contractor's proposed settlement beyond the office review.

b. The following steps are illustrative of what further examination, if any, the contracting officer may require:

(1) The contractor may be requested to submit additional data or explanations in writing.

(2) Government accounting personnel may be instructed to visit the contractor's plant to discuss the statement and to make any necessary reference to the accounting records.

(3) An audit by qualified accounting personnel may be requested in accordance with the procedures outlined in chapter 3.

c. While it is the contracting officer's responsibility to decide whether or not an audit is to be made, the procedures by which such examinations are actually carried out are dependent the judgment and technical knowledge of the accounting personnel.

upon

10. Completion of Negotiated Settlement.

a. The reports of accounting personnel, whether based on office reviews or more extensive examinations, will be submitted in an appropriate manner to the contracting officer. It is then the contracting officer's sole responsibility to negotiate a settlement with the contractor. It is to be emphasized that the reports of the accounting personnel are for the general guidance of the contracting officer and do not limit that officer in arriving at what he considers to be a proper settlement.

b. The accountant's report should include comments, in reasonable detail, upon the bases of the determination of the rate or rates of profit used in the computations. The report should also call to the attention of the contracting officer any special factors relating to the allowance of profit which should be given study in connection with the settlement negotiations and should suggest any qualifications of the results of the computations which may occur to the accounting personnel as deserving consideration by the contracting officer.

11. Coordination in Certain Cases With Renegotiation Proceedings.

a. Where accounting work has been done in connection with renegotiation, it should be utilized so far as practicable to avoid duplication of effort. This is particularly necessary when costs included in the settlement proposal were incurred during a period for which accounting statements were submitted in renegotiation proceedings. However, this policy should not be interpreted to justify delaying termination settlements until renegotiation

501911-44

3

proceedings for a given period have been completed. (See PR 15–550.)

b. In other cases, the accounting examination in connection with termination can be used by the Price Adjustment Board. If, for example, all Government contracts were being terminated, the Price Adjustment Board should be advised, so that the one accounting examination can serve the needs of all interested agencies. It is also highly desirable that copies of accounting reports covering terminations be made available to Price Adjustment Boards for their assistance in dealing with renegotiation.

12. Consolidation of Termination Accounting Where More Than One Contract Is Terminated.

a. Where more than one contract with one contractor, for a particular technical service or for Army Air Forces, is being terminated at one time, the termination accounting should be consolidated to the greatest practicable extent with a provision for the apportionment of the total amount of the settlement to the various contracts on some reasonably satisfactory basis. Where more than one War Department agency is involved, the coordination of any audits should be handled through the Audit Division, Office of the Fiscal Director, Headquarters, Army Service Forces.

b. In the case of certain contractors, the responsibility for making the accounting review of all termination settlement proposals under all Government contracts has been assigned to one of the services of the War Department or to another Government agency. This was authorized by a Joint Directive of the Army and Navy dated 18 March 1944, and is known as the Field Accounting Representative program. In such cases Government personnel, as well as other contractors, will be informed that all accounting reviews will be coordinated and performed by the responsible Government agency. While the procedures for making accounting reviews outlined in this manual generally are applicable, the special problems and procedures involved in the FAR program will be covered in greater detail in chapter 6 of this manual, to be issued at a later date.

13. Expediting Partial Payments. The Uniform Termination Article (PR 15-901) provides that "the Government shall make partial payments and payments on account, from time to time,

of the amounts to which the contractor shall be entitled." It is the duty of accounting personnel, when called upon, to facilitate them in every proper manner. For example, in appropriate cases, a brief preliminary office review may suffice as a basis for the advice requested by the contracting officer.

14. Manual Not Applicable to Formula Settlements. This manual does not prescribe auditing procedures for settlements made through the use of the formula set forth in the Uniform Termination Article, as contrasted with settlements made on the negotiated basis. The audit instructions for each formula settlement will be issued by the Commanding General, Army Air Forces, or the Chief of the Technical Service concerned. These instructions will be consistent with Procurement Regulation 15 and with accounting methods prescribed by the Office of the Fiscal Director, Headquarters, Army Service Forces.

15. Examination of Subcontractors' Claims. This manual is prescribed as a guide to the accounting examination of claims of subcontractors when such examinations are to be made by Government personnel. It is also suitable for use by contractors in their examination of subcontractors' claims.

16. Manual Not Applicable to Sections of Contract Already on Cost Basis. Some fixed-price supply contracts provide that certain facilities. shall be furnished on a cost basis. Reimbursement is made for these facilities on a cost basis to the extent completed, and no part of this reimbursement is to be included in the settlement proposal covering the supply portion of the contract. Therefore, this manual is not applicable to such portions of the contract. The audit procedures in connection with costs of facilities contracts are set forth in TM 14-1000, "Administrative Audit Procedures for Cost-Plus-AFixed-Fee Supply Contracts," 1 March 1944, formerly published as the "Manual for Administrative Audit of Cost-Plus-A-Fixed-Fee Supply Contracts."

17. Review of Previous Termination Settlements with Contractor. Where the contractor has made settlements in connection with other contract terminations, those settlements should be reviewed for such information as may be per