from indirect costs allocable to the DOE contract (see §9-50.1509-1).

$9-50.1510-7 Preparatory and make-ready costs.

Since indirect costs are usually apportioned to individual jobs wholly or substantially on the basis of the direct labor applied to the particular job, a contract will absorb no overhead by apportionment prior to the inception of the actual performance of direct work on the contract. The effort of the contractor's overhead organization in preparing for one job and in getting it underway, will thus be absorbed by jobs previously commenced and still being performed; later, the job, which in its initial stages of preparation and make-ready was relieved of expenses that were actually applicable to it, will partially absorb, through their apportionment as overhead, similar costs equally applicable in fact to other, subsequently undertaken jobs. This procedure is in accordance with generally accepted accounting practices and normally is reasonably equitable in its results. The initial advantages and subsequent disadvantages to the individual contract that result from consistent application of the procedure tend to offset each other and balance out. It is quite appropriate, however, to employ the direct charge method in connection with overhead costs in preparing for actual performance by segregating such preparatory and make-ready costs and identifying them specifically with the contract to which the effort actually pertains. However, if preparatory and make-ready costs are charged direct to a DOE contract, care must be taken, as performance of the DOE contract work proceeds toward completion, to segregate subsequent indirect expenses similarly applicable to the preparation for, and commencement of, other jobs and to account for them as direct charges to these other jobs.

89-50.1510-8 Severence pay.

(a) Severance pay is a payment, in addition to regular salaries and wages, but exclusive of payments for vested rights under pension plans, by an organization to personnel whose employment is terminated. Severance pay is allowable as a cost only to the extent that it is required by law, employer-employee agreement, or established policy that constitutes in effect an implied agreement on the contractor's part.

(b) Severance payments are divided into two categories as follows:

(1) Those due to normal, recurring turnover. The actual costs of such payments shall be regarded as expense applicable to the current fiscal year and equitably apportioned to the contractor's activities during that period. Accruals of such normal severance pay will be acceptable in lieu of actual severance pay, if the accruals are reasonable in the light of payments actually made due to normal severance over a representative past period.

(2) Those due to abnormal or mass terminations resulting from abrupt cessation of substantial work and inability of remaining work to afford continuing employment at the same level. The actual costs of such severance payments shall be regarded as expense applicable to the approximate average of the entire periods of employment of the terminated employees and equitably apportioned to the contractor's activities during such average period. (Accruals of such abnormal or mass severance pay are not allowable in view of its conjectural nature.)

(c) It will usually be acceptable to apportion severance payments on the basis of the ratio of total severance payments to a suitable base for the period established, pursuant to paragraph (b)(1) or (2) of this section, such as payrolls of all employees, direct salaries and wages, etc. The rate so determined shall be applied to the corresponding element of cost on the individual contracts. The rate should be determined on the basis of the operations of individual activities or other organizational units, such as departments, where such separate computations effect more accurate and equitable results. Severance pay should ordinarily not be considered as directly applicable to any particular contract or contracts. The foregoing applies to cost-type supply and research contracts with commercial organizations.

(d) Subject to paragraph (a) of this section, the following standards apply in determining allowability of costs for severance pay plans of operating contractors:

(1) Payments shoulu be made only upon involuntary termination by reduction in force (RIF) of an employee which results in a permanent separation from the employment of the contractor. However, payments may also be made upon voluntary separation of an employee within a RIF grouping, but not otherwise scheduled for termination, which thereby eliminates the need for terminating another employee involuntarily.

(2) Payments should not be provided for in the event of (i) temporary layoffs, (ii) employment or offer of employment with a replacement contractor (employer) where continuity of employment with credit for prior length of service is preserved under substantially equal conditions of employment, (iii) early or normal retirement, or (iv) continued employment by the contractor at another facility, subsidiary, affiliate, or parent company of the contractor. Contractor employees should not have the option of refusing employment to receive severance pay.

§9-50.1510-9 Precontract costs.

Precontract costs are those incurred prior to the effective date of the contract directly pursuant to the negotiation and in anticipation of the award of the contract, where such incurrence is necessary to comply with the proposed contract delivery schedule. Such costs are allowable to the extent that they would have been allowable if incurred after the date of the contract. They do not include costs of preparing bids or of participation in the negotiation. The allowability of precontract costs is dependent upon appropriate coverage in the contract.

89-50.1510-10 Plant reconversion costs.

Plant reconversion costs are those incurred in the restoration or rehabilitation of the contractor's facilities to approximately the same condition existing immediately prior to the commencement of the contract work, fair wear and tear excepted.

$9-50.1510-11 Depreciation.

(a) Depreciation is allowable subject to the following:

(1) The charge represents normal depreciation on a contractor's plant and equipment. (2) The charge to current operations is a distribution of the cost of acquisition of a tangible capital asset, less estimated residual value, over the estimated useful life of the asset, in a systematic and logical manner.

(3) Any generally accepted accounting method consistently applied to the assets concerned having the approval of the Internal Revenue Service for Federal income tax purposes, if subject to the Internal Revenue Code of 1954, as amended, may be used including:

(i) The straight-line method;

(ii) The declining balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in subdivision (i) of this subparagraph;

(iii) The sum of the-years-digits method;

(iv) Any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with the use of the property and including the current year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used, had such allowances been computed under the method described in subdivision (ii) of this subparagraph.

(4) If a nonprofit or tax-exempt organization, the method shall be such that it could have had the approval of the Internal Revenue Service, had the organization been subject to the Internal Revenue Code of 1954, as amended.

(5) The contractor must use the same approved method of depreciation for costing his contract work as for costing his other work at the same facility.

(6) The method of depreciation shall produce equitable and reasonable results. (b) Depreciation of the following is unallowable:

(1) Idle or excess facilities (machinery and equipment), other than reasonable standby facilities;

(2) Assets fully amortized or depreciated on the contractor's books;

(3) Unrealized appreciation of values of assets; and

(4) Accelerated amortization under Certificates of Necessity or other system in excess of normal depreciation, as computed under paragraph (a) of this section.

(c) In entering into contracts involving the use of "special facilities" under section 161 of the Atomic Energy Act of 1954, as amended (section 7 of Public Law 85-681 approved Aug. 19, 1958), the percentage of the total cost of such special facilities devoted to contract performance and chargeable to the DOE should not exceed the ratio between the period of contract deliveries and the anticipated useful life of such facilities.

89-50.1510-12 (Reserved).

§9-50.1510-13 (Reserved).

89-50.1510-14 Compensation for personal services.

(a) Definition. Compensation for personal services includes all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees of the contractor during the period of contract performance. It includes, but is not limited to, salaries, wages, directors' and executive committee members' fees, bonuses (including stock bonuses), incentive awards, employee stock options, employee insurance, fringe benefits, and contributions to pension, annuity, management-employee incentive compensation plans, and location allowances.

(b) Allowability. For operating and on-site service contracts (as defined in §9-50.001), onsite construction, on-site architect-engineer contracts, and other contract situations where deemed appropriate (see §9-50.1506), allowable costs for compensation for personal services will be set forth in a personnel appendix in the contract. This personnel appendix shall be negotiated using the principles and policies of FPR subpart 1-15.2 as modified, implemented and supplemented by this subpart 9-50.1510-14, and other pertinent parts of the DOE-PR. For other contracting situations, except as otherwise specifically provided in this §9-50.1510-14, costs of compensation for personal services are to be treated as allowable to the extent that:

(1) Compensation paid in accordance with policies, programs, and procedures that effectively relate individual compensation to the individual's contribution to the performance of contract work, result in internally consistent treatment of employees in like situations, and effectively relate compensation paid within the organization to that paid for similar services outside the organization;

and

(2) Total compensation of individual employees is reasonable for the services rendered;

(3) Costs are not in excess of those costs which are allowable by the Internal Revenue Code and regulations thereunder.

(c) Reasonableness. Compensation is reasonable to the extent that the total amount paic or accrued is comparable to compensation paid for similar work in the private competitive economy in the labor market in which the contractor competes. The application of this basic standard of reasonableness may vary according to the contract situation.

(1) When the contractor is substantially engaged in private competitive business, compensation paid employees on private work will usually be an acceptable standard of comparison for evaluating the reasonableness of compensation paid employees performing similar work under DOE contracts, provided that sufficient information is available to the DOE to permit a determination that compensation is, in fact, consistent.

(2) In other contract situations, information on compensation paid elsewhere in the labor market(s) for similar work, usually as measured by compensation surveys found acceptable by the DOE, will be the standard of comparison for evaluating the reasonableness of compensation paid employees engaged in work under DOE contracts.

(3) The standard of comparison (i.e., subparagraph (1) or (2) of this paragraph) for a particular contract situation is determined by the Contracting Officer after consideration of such factors as the extent and nature of the organization's private competitive business; extent to which contract work would be physically and organizationally integrated with private work; and the contractor's systems for determining, evaluating, and controlling compensation levels. (4) It is DOE policy that contractors justify the reasonableness of proposed compensation costs and provide to the Contracting Officer any supporting information he deems necessary to his evaluation of reasonableness.

(d) Review and approval of compensation paid individual employees. In determining the reasonableness of compensation, the compensation of each individual contractor employee normally need not be subjected to review and approval. Generally, the compensation paid individual employees should be left to the judgement of contractors subject to the limitations of DOE-approved compensation policies, programs, classification systems, and schedules, and amounts of money authorized for wage and salary increases for groups of employees. However, in the case of operating and on-site contracts, all compensation due an individual of $40,000 2 or more shall require the Contracting Officer's or designee's review and approval. In addition, in the case of operating and on-site contracts, it will often be necessary that employee compensation be subjected to review and approval on an individual basis at a level below $40,000, when the Contracting Officer finds it appropriate for the particular situation. The contract shall specifically provide for the approval by the Contracting Officer of the cost of compensating an individual contractor employee above the level determined by the Contracting Officer, if a total of 50 percent or more of such compensation is reimbursed under DOE cost-type contracts. For purposes of determining the level for individual review and approval, total compensation as used in this paragraph includes only the employee's base salary and bonus or incentive compensation. As in the case of other personnel and compensation costs, it is intended that Contracting Officer review and approval of individual compensation normally will be prior to incurrence of costs.

(e) Special consideration in determining allowability. Certain conditions require special consideration and possible limitation as to allowability for contract cost purposes where amounts appear excessive. Among such conditions are the following:

(1) Compensation to owners of closely held corporations, partners, sole proprietors, or members of the immediate families thereof, or to persons who are contractually committed to acquire a substantial financial interest in the contractor's enterprise. Determination should be made that such compensation is reasonable for the actual personal services rendered rather than a distribution of profits.

(2) Any change in a contractor's compensation policy resulting in a substantial increase in the contractor's level of compensation, particularly when it is concurrent with an increase in the ratio of Government contracts to other business, or any change in the treatment of allowability of specific types of compensation due to changes in Government policy.

(3) Compensation in lieu of salary for services rendered by partners and sole proprietors will be allowed to the extent that it is reasonable and does not constitute a distribution of profits. (f) Limitations on certain forms of compensation. In addition to the general requirements in paragraphs (a) through (e) of this section, certain forms of compensation are subject to further requirements, as specified in paragraphs (g) through (0) of this section.

(g) Salaries and wages. Salaries and wages for current services include gross compensation paid to employees in the form of cash, products, or services, and are to be treated as allowable. However, premiums for overtime in excess of statutory requirements, extra-pay shifts, and multishift work are to be treated as allowable to the extent approved by the Contracting Officer.

(h) Bonuses and incentive compensation. Incentive compensation and cash bonuses based on production, cost reduction or efficient performance, suggestion awards, and safety awards are to be treated as allowable, to the extent that the contractor's overall compensation plan is determined to be reasonable and such costs are paid or accrued, pursuant to an agreement entered into in good faith between the contractor and the employees before the services were rendered, or pursuant to an established plan followed by the contractor so consistently as to imply, in effect, an agreement to make such payment (but see §9-50.1506). In determining reasonableness, it will be necessary to take into account, not only bonuses and incentive compensation payments charged directly to the contract, but also payments charged indirectly to the contract through overhead. Bonuses, awards, and incentive compensation, when any of them are deferred, are to be treated as allowable to the extent provided in paragraph (k) of this section.

(1) Bonuses and incentive compensation paid to employees other than those whose pay is directly reimbursed will not be made allowable in on-site construction, on-site architectengineer, and operating contracts, where home office general and administrative expense is unallowable.

(2) Employer contributions to incentive compensation plans for the purpose of establishing a reserve for the payment of incentive compensation for services performed in the future are unallowable.

(i) Bonuses and incentive compensation paid in stock. Costs of bonuses and incentive compensation paid in the stock of the contractor or of an affiliate are to be treated as allowable, to the extent set forth in paragraph (h) of this section (including the incorporation of the principles of paragraph (k) of this section for deferred bonuses and incentive compensation), subject to the following additional requirements:

(1) Valuation placed on the stock transferred shall be the fair market value at the time of transfer, determined upon the most objective basis available; and

(2) Accruals for the cost of stock prior to the issuance of such stock to the employees shall be subject to adjustment, according to the possibilities that the employees will not receive such stock and their interest in the accruals will be forfeited. Such costs otherwise allowable are to be made subject to adjustment, according to the principles set forth in paragraph (k)(3) of this section. (But see §9-50.1506.)

(j) Stock options. The cost of options to employees to purchase stock of the contractor or of an affiliate is to be made unallowable.

(k) Deferred compensation.

(1) As used herein, deferred compensation includes all remuneration, in whatever form, for which the employee is not paid until after the lapse of a stated period of years, or the occurrence of other events as provided in the plans, except that it does not include normal end