necessarily incurred in the normal conduct of a contractor's or subcontractor's business may be allowed.

(s) Excess material. (1) Excess material refers to material, in usable condition, which is left over after a contract or subcontract is completed and resulting mainly from overpurchases, overproduction, overdrawn stores, or as a result of changes and extras. Excess material should not be confused with scrap which is such material as is produced during the course of construction or manufacture and which has only scrap value. (See paragraph (pp) of

this section.)

(2) Material which has been charged to the cost of performing a contract or subcontract and is found in excess of actual requirements and has not been incorporated in the work shall be credited, at the reasonable value thereof, to the cost of performing the contract or subcontract to which it was originally charged.

(3) If such materials credited to cost are reissued for use in performing a contract or subcontract the materials should be charged into costs at amounts not in excess of the value agreed upon as the reasonable credit.

(t) Excess profits. Excess profits paid or repayable to the United States under any contract, whether under the Merchant Marine Act or otherwise, shall not be treated as a deduction or used in any way as a factor in the determination of profit under any other contract.

(u) Expense and income-nonoperating.

Expense and income-nonoperating (including such items as Income from Investments, Interest, and Royalties, individually commented upon under their respective captions) ordinarily may not be taken into account in determining recapturable profit. Their inclusion in exceptional cases will be subject to the specific approval of the Administration.

(v) Fees, legal, accounting, and other professional. (1) Fees, Legal, Accounting, and other Professional, for services required in the performance of a contract or subcontract are allowable to the extent deemed reasonable by the Administration.

(2) Generally speaking, legal and accounting fees in connection with the prosecution of claims against the United States, including income tax matters, are not allowable costs. In cases, however, where such fees are incurred and

result in successful adjudication or negotiation of the validity of a claim by a contractor or subcontractor, reasonable expenditures may be taken into account in connection with such contracts or related subcontracts with the Board or the Administration.

(w) Fees of transfer agents and registrars. (1) Fees of Transfer Agents and Registrars of stock or other securities and of trustees under mortgage or similar indentures, regularly employed in and necessary to the normal operation of the business, may be allowed as overhead costs, if reasonable in amount.

(2) Fees for the same purposes, Covering the organization or reorganization of a corporation, shall not be allowed.

(x) Fines and penalties. Fines and penalties incurred for violation of law are not allowable in costs of performing a contract or subcontract.

(y) Fuel, lube oil, and fresh water on board vessel on date of delivery. Any quantity of fuel, lube oil, or fresh water remaining aboard on the date the vessel is delivered and accepted which is not covered by a contract specification requiring it to be aboard shall be inventoried and evaluated on the basis of prices at which purchased. The value of the inventory shall be credited to vessel construction costs and billed to the Administration which will pay for any reasonable quantities remaining in excess of construction and trial run needs. This procedure automatically excludes from vessel costs the value of the inventory of the items mentioned.

(z) Guarantee period expenses. Expenses incurred during the guarantee period, for the reconstruction of items determined by the Administration to be the contractor's or subcontractor's responsibility, are allowable as costs of performance of the contract or subcontract.

(aa) Income from investments. Income from investments shall not be taken into account in determining recapturable profit.

(bb) Inspection services. The reasonable cost of inspection services, such as those normally rendered by the American Bureau of Shipping, may be allowed in determining recapturable profit.

(cc) Insurance. (1) Monies paid into State funds for compensation insurance, and net premiums paid or accrued for payment to insurance companies for insurance of risks not found by the Administration to be unusual or excessive

-coverage or inconsistent with reasonable and prudent business practice are allowable items of cost.

(2) If the contractor or subcontractor assumes its own insurable risks (1) for compensation payable to employees for injuries received in the performance of their duties, or (ii) for unemployment risks in States where insurance is required, or (iii) for other risks not found by the Administration to be excessive or unusual coverage or inconsistent with reasonable and prudent business practice, there may be allowed in costs the charges set up for such self-insurance under a system of accounting regularly and consistently employed by the contractor or subcontractor, at rates not exceeding the lawful or approved rates of insurance companies for such insurance reduced by amounts representing the "acquisition cost” (i. e., commissions, fixed expenses and excess losses) in such companies and after giving effect to any credits for safety provisions, experience, etc., to which the contractor or subcontractor would be entitled in determining such rates, but losses actually sustained must be charged only to the reserves created by such self-insurance charges.

(3) If the contractor or subcontractor assumes its own insurable risks and does not record current charges to operations in the manner contemplated by subparagraph (2) of this paragraph, losses sustained from such risks during the performance of the contract or subcontract shall be allowable only by such means and to such extent as the Administration considers equitable under the circumstances attendant upon a specific

case.

(4) If the contractor or subcontractor assumes its own insurable risks and its practice with respect to charges therefor is not covered by the principles set forth in subparagraphs (1), (2) and (3) of this paragraph, the contractor or subcontractor shall submit the matter to the Administration for determination at the earliest practicable date after execution of the contract or subcontract, and such charges shall be taken into account in such manner as the Administration shall determine.

(5) Premiums covering insurance on the lives of corporate officers, partners, proprietors, or other executives or employees, where the contractor or the subcontractor is the beneficiary directly or indirectly, shall not be allowed in determining recapturable profit.

(6) Reasonable premiums and other reasonable costs of group insurance plans in existence on the date the contract or subcontract was awarded and consistently administered are allowable. No costs under group insurance plans effective after such date will be allowed unless the plan is specifically approved by the Administration.

(dd) Interest. (1) Interest received, paid, or accrued for receipt or payment will not be taken into account in determining profit except that reasonable amounts of interest on bank loans of a contractor for construction, reconditioning or reconstruction of a ship obtained for the purpose of discounting bills or for current working funds, which loans mature not later than six months after the date of delivery of the last vessel covered by the contract, may be allowed to the extent attributable to the contract: Provided, That interest on such loans shall not be allowed unless the contractor shall show to the satisfaction of the Administration the necessity for such loans.

(2) Similarly, interest on bank loans of other types of contractors and subcontractors (for example, suppliers of direct materials), when deemed by the Administration to be reasonable and for the purposes enumerated in the preceding subparagraph of this paragraph, shall be allowed to the extent attributable to performance under the contract or subcontract: Provided also, That such loans mature not later than six months after the date of timely delivery of the last material or timely performance of the last service, excluding provisions of the guarantee clause.

(ee) Intracompany and intercompany charges. (1) Intracompany transfers between plants or divisions must be made at cost, excluding any internal or intermediate profit.

(2) Transactions with subsidiary, affiliated or controlled companies covering material purchases or transfers, services, expense allocations or any other type of charge must be disclosed fully. The net allowable cost of intercompany transactions may not exceed the cost of comparable goods or services from alternative outside sources.

(ff) Launching expense-ceremonial. The following is prescribed as a general guide, in connection with vessels constructed by the Administration for Government use, to the nature of expenses incidental to launching ceremonies

which will be regarded as not excessive and, consequently, chargeable to performance costs.

(1) In particular instances where a budget or a program for launching ceremonies has been approved by the Administration, or where special instructions with respect thereto have been issued by the Administration, such budget, program, or instructions will govern.

(2) In other cases, expenses not deemed to be excessive would include such items as the erection of launching platform and decorations, erection and use of public address system, christening champagne and preparation of bottle, but would not include expenses of reception, banquets, transportation and entertainment of guests, sponsor's gift and other incidental expenses. In general, traveling and hotel expenses of the sponsor and escort, and cost of invitations are unallowable unless otherwise designated by the Administration in specific instances.

(gg) Liquidated damages. Liquidated damages paid by a contractor or subcontractor for failure to meet contract or subcontract requirements are not allowable costs of performance.

(hh) Losses or profits under other contracts and subcontracts. In the determination of excess profit under the provisions of contracts executed under the authority of the Merchant Marine Act, 1936, as amended, and under subcontracts related thereto, such contracts and subcontracts, completed in a taxable year, shall be grouped for the determination of excess profit: Provided, however, That there shall not be grouped with any such contracts or subcontracts any contracts authorized under acts other than the Merchant Marine Act, 1936, as amended, or any subcontracts thereunder. In the determination of excess profit under the provisions of contracts executed under the authority of acts other than the Merchant Marine Act, 1936, as amended, such contracts and related subcontracts may be grouped only when the provisions of the respective contracts and subcontracts so stipulate.

(ii) Maintenance and repair costs. Maintenance and repair costs which are of such a nature and extent as under generally accepted accounting practice are chargeable to depreciation reserve or capitalized may not be taken into account except through proper charges for depreciation. Job orders for such major plant and equipment maintenance or re

pairs should be submitted to the Administration before such work is undertaken or while it is in progress, for a determination as to whether or not the costs may properly be charged to current operations. Major plant and equipment maintenance or repair expenditures, the orders for which are not so submitted before or while the work is in progress, will be deemed to be capital expenditures or chargeable to depreciation reserve unless it shall be shown otherwise to the satisfaction of the Administration.

(jj) Material operations - departmental. In cases where a contractor or subcontractor manufactures for stores. or for direct charge to a contract or subcontract items such as rivets, paint, acetylene, etc., such items may be charged upon a fixed price basis, provided that proper adjustments approved by the Administration are made to such charges at reasonably frequent accounting intervals so as to reflect their actual cost.

(kk) Organization and reorganization expenses. Costs incident to the formation or refinancing of corporations, partnerships, or proprietorships such as the issuance of capital stock, bonds or other securities, taxes on the issue or transfer of securities, discounts on securities sold, bankers' commissions, or other like financial costs, legal and accounting fees involved in developing organizations or reorganizations, shall not be allowed in determining recapturable profit.

(11) Pension and retirement payments. Pension and retirement payments to employees and payments made into trust funds for pension and retirement purposes: Provided, That such trust funds are alienated from the contractor's ownership, may be allowed in the determination of recapturable profit. The Administration shall, in every case, be satisfied that the payments are reasonable in amount and are consistently and equitably distributed.

(mm) Reserves. Charges resulting in the creation or increase of reserves for general contingencies or other reserves which are not properly chargeable to current operations shall not be allowed.

(nn) Royalties. (1) Income from royalties shall not be taken into account in determining recapturable profit under contracts or subcontracts.

(2) In some cases, royalty expense in connection with material or equipment furnished under a contract or subcontract is not properly chargeable inas

much as the Government may have a royalty-free license for such material or equipment. Under the Royalty Adjustment Act of 1942, the Government has negotiated a number of agreements providing for the waiver of, or reduction in, royalties. As some agreements are in force and others may be executed, all royalty agreements should be referred to the Administration.

(00) Salaries. (1) Contracts, and subcontracts thereunder, ordinarily limit the per annum rate of salary for the purpose of determining profit. The limitation applies to the full time of an individual. Accordingly, when an individual devotes only a portion of his time to a contractor or subcontractor, the limitation will be reduced proportionately.

(2) "Salary" is construed in its broadest sense to include a bonus, director's fee, and all other forms of compensation. Charges or accruals for salaries, year-end bonuses, vacation pay, or other compensation, not actually paid at the date of completion of a contract or subcontract must be approved by the Administration as to allowability.

(pp) Scrap.

Scrap is such material

as is produced during the course of construction or manufacture and having only scrap value and should not be confused with excess material (see paragraph (s) of this section). Scrap must be credited at the price obtained when sold, or at the current market price if used by the contractor or subcontractor or held for sale beyond the period of the contract or subcontract. If practicable, the credit should be given to the job from which the scrap was derived, otherwise credit should be given through distributable overhead at reasonably frequent intervals.

(qq) Selling expenses. (1) Generally, expenses incurred for the distribution of the products of a contractor through usual trade and business channels and methods are not regarded as allowable costs under contracts for the reason that such expenses are not incident to or necessary in doing business with the Government.

(2) Ordinary selling expenses should not be confused with technical, consulting and other services of the application and adaptation of products to the uses and requirements of the customer. Manufacturers' employees attached to sales departments, who are primarily technicians and product service engineers,

render services that are as important and essential when products are sold to the Government as when they are sold to other customers.

(3) Special premiums, bonuses, commissions, etc., paid in connection with negotiations for or the procurement of a contract are not allowable in determining the cost of performing the contract.

(4) Selling expenses which represent the cost of marketing an article, as distinguished from the cost of producing an article, are not to be considered a part of the cost of performing a contract.

(5) Reasonable selling expenses consistent with the normal and usual practice of a subcontractor may be allowed in determining the cost of performing a subcontract.

(rr) Taxes. (1) Income and excess profit taxes and surtaxes, Federal, State and other, are not allowed as contract or subcontract performance costs; such taxes merely represent a payment of a part of the net profits to the Government.

(2) Franchise and excise taxes, property taxes (except taxes on property held in reserve or for investment, or for other extraneous purposes), social security taxes and the like (not including payments deducted from or chargeable to employees, including corporate officers) are allowable cost items. In those cases where a State franchise tax is in lieu of a State income tax, the portion thereof deemed to be paid for the exercise of the right to do business and the portion thereof deemed to be a tax on income shall be determined by the Administration.

(3) Taxes for which exemptions are available are not allowable costs.

(ss) Towing. Where the contractor or subcontractor uses its own tugs or other floating equipment in the performance of a contract or subcontract, reasonable charges therefor are allowable.

(tt) Travel expenses. (1) The actual costs of authorized business trips such as transportation, maintenance, communication and other necessary business costs of the traveler during his period of travel may be allowed to the extent such costs are shown to the Administration to be reasonable and equitably charged to a contract or subcontract.

(2) The Administration may accept in lieu of such actual costs a reasonable allowance agreed upon by the traveler prior to his departure if such allowance

is deemed to be warranted by the circumstances, conditions, and nature of the assignment involved.

(uu) Unclaimed wages. Unclaimed wages charged to contracts and subcontracts shall be adjusted by an allowance for future claims against unclaimed moneys and the remainder shall be ratably credited to the cost of performing the contracts and subcontracts. The allowance and the credit must be satisfactory to the Administration.

Exces

(vv) Unreasonable charges. sive or unreasonable payments, as for example, exorbitant compensation to anyone, expenditures for the personal benefit of officers of the contractor or subcontractor, payments in excess of reasonable market values of any kind including payments to affiliates and payments to individuals who are associated with the contractor or subcontractor through directorship or employment, whether in cash, stock, or other property, shall not be allowed as costs in determining recapturable profit.

(ww) Welfare expense-employee. Welfare expense-employee is allowable as a part of overhead, subject to proper distribution, provided the contractor or subcontractor shall, if required, show the reasonableness thereof to the satisfaction of the Administration.

A contractor for the construction, reconditioning or reconstruction of a ship shall file with the Administration a notarized Shipbuilder's Report of Profit with respect to each contract, in the form prescribed from time to time by the Administration (see accompanying Form MA-250), within 90 days after the expiration of the guarantee period prescribed by the contract, unless the time for filing such report be extended by the Administration. Other contractors shall file on the form prescribed from time to time by the Administration (see accompanying Form MA-251)1 as soon as possible after the completion of the contract or the expiration of the guarantee period but in no event later than 90 days after the date upon which the contractor is required to file Federal income tax returns

1 Filed as part of the original document with the Office of the Federal Register; requests for copies should be addressed to the Coast Directors or Maritime Administration, Department of Commerce, Washington, D.C. 20235.

Each subcontractor whose subcontract is subject to a profit-limiting provision shall file with the Administration as soon as possible after the completion of the subcontract or the expiration of the guarantee period, but in no event later than 90 days after the date upon which it is required to file its Federal income tax return (or as extended), a report, notarized, with respect to each such subcontract completed by it within the income taxable year, setting forth in the form. prescribed from time to time by the Administration (see accompanying Form MA-252) the total contract price, the total cost of performing the subcontract, the amount of overhead charged to such cost and such other information as indicated upon the report form.

§ 285.63 Transmittal.

All reports made by a contractor for the construction, reconditioning or reconstruction of a ship or other contractor or by a subcontractor, should be mailed to the Maritime Administration, Department of Commerce, Washington, D.C. § 285.64 Revision of report forms.

The Administration may from time to time revise the form of reports required in this part. Contractors and subcontractors should obtain current forms from the Administration.