tinent. Care should be exercised that policies indicated in the various settlements are consistently followed and that there is no duplication of charges as between the individual statements.

18. Definitions and Explanations of Certain Terms Used in Manual.

a. Termination. A termination may involve all or any specified portion of the supplies covered by the contract. It refers to those circumstances where a lump-sum settlement is to be made for costs incurred. It does not include a situation involving a reduction of quantities where adjustment is made for this change through increased unit contract prices for the remainder of the contract.

b. Other work. The term "other work" refers to all work other than the fixed-price supply contract affected by the termination and includes both other Government contracts and civilian business.

c. Subcontractor. The term "subcontractor" includes suppliers, commonly referred to as vendors, whether dealing directly with a prime contractor or dealing through other subcontractors.

d. Common items. A "common item" is one that is normally usable on both the contract and other work. It may be an item of raw material or a part which is either partially or completely processed. The term may also refer to common claims of subcontractors.

SECTION II

GENERAL BASES OF PRESENTING ACCOUNTING INFORMATION FOR NEGOTIATED SETTLEMENTS

19. The Negotiated Settlement. The uniform Termination Article for Fixed Price Supply Contracts (PR 15-901) provides that the contractor and the contracting officer may agree upon "the whole or any part of the amount or amounts to be paid to the contractor by reason of the total or partial termination of the work." It is also provided that in the event a negotiated settlement cannot be agreed upon, for any portion of the proposed settlement, a settlement of that portion shall be made in accordance with. a prescribed formula. The negotiated settlement basis gives the contracting officer maximum flexibility in working out a fair settlement of the amount due with a minimum of delay.

20. Presentation of Settlement Proposal for Contractor's Own Charges.

a. Inventory method. Costs applicable to the uncompleted portion of the contract normally will be determined by pricing the inventory in detail at purchase or manufacturing cost and adding any other applicable costs. This is known as the "inventory method." It is especially practicable when the inventory consists largely of purchased materials and parts on which little or no work has been performed. This method is also to be used when dependable unit cost information is available for the pricing of work in process. To the costs thus ascertained the profit allowance, if any, is added.

b. Total cost method. In the absence of dependable unit cost information, and particularly when the contract is terminated in the early stages of performance, there may arise serious problems in determining a fair basis for pricing the inventory and for segregating other costs between the completed and uncompleted portions of the contract. An alternative method of computing the contractor's own charges may be utilized to meet these problems. The costs chargeable to the entire contract to date of termination are summarized and a profit allowance, if any, is added. All payments previously made and to be made by the Government for completed units are then deducted. This is known as the "total cost method."

c. Procedure when a loss on entire contract is indicated. If it is determined that the contractor would have suffered a loss on the entire contract had it been completed, procedure under the inventory method remains unchanged. Procedure under the total cost method, however, is as follows: from the total costs of the contract are deducted the payments for completed units adjusted upward to reflect the fact that the indicated cost of these units exceeds their contract price. Thus, if a 6 percent loss on cost were indicated, the contract price of the completed units would represent 94 percent of the indicated cost. By dividing those contract prices by .94 the indicated cost can be determined. The deduction of the higher amount will leave only the costs applicable to the uncompleted portion of the contract.

21. Treatment of Disposal Credits. The term costs, as used in the foregoing, refers to costs on a gross basis, that is, before disposal credits. Disposal credits may arise either from the retention of items by the contractor at prices

mutually agreed upon or from the sale of property to others with the approval of the contracting officer. The total amount thus determined will be deducted from the amount of the proposed settlement of the contractor as otherwise computed.

22. Claims of Subcontractors. The costs arising from the settlement of claims of subcontractors for uncompleted work as of the date of termination will be added to the portion of the proposed settlement covering the contractor's own costs.

23. Accounting Aspects of Profit Allowance. When the contracting officer requests information on which to make a determination of an appropriate profit allowance, the accountant may furnish such information based on the following data:

a. The contractor's indicated rate of profit or loss.

(1) This is the rate which it is indicated, based upon the contractor's accounting data as to performance thus far and expected costs to complete the contract, would have resulted had the contract run to completion.

(2) The computation may take into consideration nonrecurring preparatory costs and other "initial" costs incurred in the early period of the contract which are applicable to the entire contract.

b. The nature of the work done on the uncompleted portion of the contract.

(1) The summary of costs included in the accountant's report should disclose by major classifications the nature of the work done.

(2) Costs representing articles or materials not processed by the contractor should be shown separately.

(3) Costs of an unusual nature and important in amount should be shown separately.

SECTION III

STATEMENT OF PRINCIPLES FOR DETERMINATION OF COSTS UPON TERMINATION OF GOVERNMENT FIXED PRICE SUPPLY CONTRACTS

24. Statement of Principles.

a. The following is the statement of principles for determination of costs upon termination of Government contracts, approved by the

Joint Contract Termination Board, December 31, 1943, referred to in paragraph (h) of the Uniform Termination Article, applicable to the termination of fixed price supply contracts at the option of the Government.

"1. General Principles. The costs contemplated by this Statement of Principles are those sanctioned by recognized commercial accounting practices and are intended to include the direct and indirect manufacturing, selling and distribution, administrative and other costs incurred which are reasonably necessary for the performance of the contract, and are properly allocable or apportionable, under such practices, to the contract (or the part thereof under consideration). The general principles set out in this Statement are subject to the application of any special provisions of the contract. Certain costs are specifically described below because of their particular significance, and, as in the case of other costs, should be included to the extent that they are allocable to or should be apportioned to the contract or the part thereof under consideration.

(a) Common Inventory. The costs of items of inventory which are common to the contract and to other work of the contractor.

(b) Common Claims of Subcontractors. The claims of subcontractors which are common to the contract and to other work of the contractor.

(c) Depreciation. An allowance for depreciation at appropriate rates on buildings, machinery and equipment and other facilities, including such amounts for obsolescence due to progress in the arts and other factors as are ordinarily given consideration in determining depreciation rates. Depreciation as defined herein shall not include loss of useful value of the type covered by subparagraph (f).

(d) Experimental and Research Expense. General experimental and research expense to the extent consistent with an established prewar program, or to the extent related to war purposes.

(e) Engineering and Development and Special Tooling. Costs of engineering and development and of special tooling; provided that the contractor protects any interests of the Government by transfer of title or by other means deemed appropriate by the Government.

(f) Loss on facilities-Conditions on Allowance. In the case of any special facility acquired by the contractor solely for the per

formance of the contract, or the contract and other war production contracts, if upon termination of the contract such facility is not reasonably capable of use in the other business of the contractor having regard to the then condition and location of such facility, an amount which bears the same proportion to the loss of useful value as the deliveries not made under the contract bear to the total of the deliveries which have been made and would have been made had the contract and the other contracts been completed, provided that the amount to be allowed under this paragraph shall not exceed the adjusted basis of the facility for Federal income tax purposes immediately prior to the date of the termination of the contract, and provided further that no amount shall be allowed under this paragraph unless upon termination of the contract title to the facility is transferred to the Government, except where the Government elects to take other appropriate means to protect its interests.

(g) Special Leases. (1) Rentals under leases clearly shown to have been made for the performance of the contract, or the contract and other war production contracts, covering the period necessary for complete performance of the contract and such further period as may have been reasonably necessary; (2) costs of reasonable alteration of such leased property made for the same purpose; and (3) costs of restoring the premises, to the extent required by reasonable provisions of the lease; less (4) the residual value of the lease; provided that the contractor shall have made reasonable efforts to terminate, assign, or settle such leases or otherwise reduce the cost thereof.

(h) Advertising. Advertising expense to the extent consistent with a pre-war program or to the extent reasonable under the circumstances.

(i) Limitation on Costs Described in Subparagraphs (d), (e), (f), (g), and (h). In no event shall the aggregate of the amounts allowed under subparagraphs (d), (e), (f), (g), and (h) exceed the amount which would have been available from the contract price to cover these items, if the contract had been completed, after considering all other costs which would have been required to complete it.

(j) Interest. Interest on borrowings.

(k) Settlement expenses. Reasonable accounting, legal, clerical and other expenses necessary in connection with the termination and settlement of the contract and subcontracts

and purchase orders thereunder, including expenses incurred for the purpose of obtaining payment from the Government only to the extent reasonably necessary for the preparation and presentation of settlement proposals and cost evidence in connection therewith.

(1) Protection and disposition of Property. Storage, transportation and other costs incurred for the protection of property acquired or produced for the contract or in connection with the disposition of such property.

2. Initial Costs. Costs of a non-recurring nature which arise from unfamiliarity with the product in the initial stages of production should be appropriately apportioned between the completed and the terminated portions of the contract. In this category would be included high direct labor and overhead costs, including training, costs of excessive rejections and similar items.

3. Excluded Costs. Without affecting the generality of the foregoing provisions in other respects, amounts representing the following should not be included as elements of cost:

(a) Losses on other contracts, or from sales or exchanges of capital assets; fees and other expenses in connection with reorganization or recapitalization, anti-trust or federal income-tax litigation, or prosecution of federal income tax claims or other claims against the Government (except as provided in paragraph 1 (k)); losses on investments; provisions for contingencies; and premiums on life insurance where the contractor is the beneficiary.

(b) The expense of conversion of the contractor's facilities to uses other than the performance of the contract.

(c) Expenses due to the negligence or wilful failure of the contractor to discontinue with reasonable promptness the incurring of expenses after the effective date of the termination notice.

(d) Costs incurred in respect to facilities, materials or services purchased or work done in excess of the reasonable quantitative requirements of the entire contract.

(e) Costs which, as evidenced by accounting statements submitted in renegotiation under Section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942, as amended, were charged off during a period covered by a previous renegotiation, may not be subsequently included in the termination settlement if a re

fund was made for such period, or to the extent that such charging off is shown to have avoided such refund.

4. To the extent that, they conform to recognized commercial accounting practices and the foregoing Statement of Principles, the established accounting practices of the contractor as

indicated by his books of account and financial reports will be given due consideration in the preparation of statements of cost for the purposes of this article.

5. The failure specifically to mention in this statement any item of cost is not intended to imply that it should be included or excluded."

25. Responsibility of Contractor to Submit His Statement of Proposed Settlement. The contractor will file with the contracting officer an accounting statement relating to the amount due to the contractor by reason of the termination which shall constitute a proposal for a negotiated settlement covering the work done with respect to the uncompleted portion of the contract.

26. Contractor's Statement and Proposal for Settlement. The contractor's statement of costs and other accounting data showing the amounts due him by reason of the termination should be prepared in accordance with the principles set forth in PR 15 and this manual. This settlement proposal, together with the schedules in support of it, constitute the basic representation of the contractor. In submitting any such statement to the Government, the contractor represents that the facts stated are true. He is subject to penalties for any false certification. (See 18 U. S. Code 80.) All costs claimed to have been incurred by the contractor should be supported by data sufficiently specific to permit satisfactory review or examination. It usually will expedite the preparation of the contractor's statement if the contractor's representatives will confer with the contracting officer and his accounting personnel before undertaking accounting work in connection with this

statement.

27. War Department Termination Forms. Standard forms, together with general instructions, have been issued by the War Department for the use of prime contractors and subcontractors in presenting their settlement proposals under terminated fixed-price supply contracts. The general instructions applicable to all of the standard forms are shown on pages 10 and 11.

The standard forms have been filled in to show the general manner in which they are to be used and are shown in figures 1 to 9, inclusive (pars. 28 to 32). However, the amounts of the various items shown in the illustrations, as well as any indicated relationships between those amounts, are not to be considered as significant in respect to the general propriety of such amounts or relationships.

28. Settlement Proposal Over $10,000-Inventory Basis. The forms normally required for a settlement proposal of $10,000 or over, before disposal credits, presented on an inventory basis, are shown in figures 1 to 5, inclusive.

29. Settlement Proposal Over $10,000-Total Cost Basis. The forms required for a settlement proposal over $10,000, before disposal credits, presented on a total cost basis, are the same as those illustrated in figures 1 to 5, except that Form No. B-1 would be replaced by Form No. B-2. The latter form is illustrated in figure 7. Forms No. A-1, C-1, C-2, and C-3, necessary to complete this settlement proposal, are not shown since their use has already been illustrated in figures 1, 3, 4, and 5.

30. Settlement Proposal Under $10,000-Inventory Basis. The form to be used when the settlement proposal, before disposal credits, is under $10,000 and is presented on an inventory basis, is illustrated in figure 7.

31. Settlement Proposal Under $10,000-Total Cost Basis. The form to be used when the settlement proposal, before disposal credits, is under $10,000, and is presented on a total cost basis, is illustrated in figure 8.

32. Settlement Proposal Under $500. The form to be used when the net settlement proposal is under $500 is shown in figure 9.