$9-15.5005-3 General basis for determination of costs.

The total reimbursable cost of an ERDA cost-type contract is the sum of the allowable direct costs necessary or incident to the performance of the contract, plus the properly allocable portion of the allowable indirect costs, less applicable income and other credits. In determining allowability and reimbursability of costs, there shall be considered also:

(a) Reasonableness, including the exercise of prudent business judgment;

(b) Application of generally accepted accounting principles and practices appropriate to identify and measure costs of performing the contract in accordance with this subpart;

(c) All exclusions of and limitations on types and amounts of items of cost set forth in the contract; and

(d) Approvals by the contracting officer required under the contract terms. (For examples of allowable and unallowable costs see $9-50.704-13 through 9-50.704-16.)

$9-15.5005-4 Cost determination based on audit.

(a) The amount reimbursable under cost-type contracts shall be determined in accordance with the terms of the respective contracts on the basis of audit. In the event that the contractual terms differ or are inconsistent (see §9-15.5003 for approval of deviations) with the principles stated herein the contractual terms control. The audit is performed directly by ERDA (or by the cognizant Federal agency pursuant to arrangements made by the ERDA) in the case of cost-type contracts. Contracting officers shall assure that cost-type prime contractors as sume the responsibility for audit of subcontractors (and provide for the audit of lower tier subcontractors by the subcontractor immediately preceding in the contractual chain) except as noted in this paragraph. Exceptions may be made to this general principle of subcontractors being audited by the next higher-tier contractor, where the latter is interrelated with the subcontractor involved, does not have the necessary audit facilities or for other reasons is not in a position to perform the subcontract audit in a manner satisfactory to to the ERDA. In the event of such exception, the subcontract audit responsibility shall rest with the successively higher-tier contractor (or ultimately ERDA), but responsibility for determining the costs reimbursable to the subcontractor remains with the next higher-tier contractor on the basis of such audit.

(b) Audit by other Federal agencies: Where the amount of costtype work to be performed for ERDA in a particular facility is less

tnan tnat being performed at the same facility for other Federal agencies, arrangements may be made to have the cognizant agency perform the audit of the ERDA contract or subcontract. These arrange

ments shall be made administratively between ERDA and the other agency involved, and wherever possible shall provide for the cognizant agency to audit against the ERDA cost principles. In no case, however, shall the arrangements preclude determination by the ERDA contracting officer of the allowable and unallowable costs in accordance with ERDA cost principles set forth in §9-50.704-13 through 9-50.704-16. Steps appropriate in the light of the magnitude and nature of the costs shall be taken by the contracting officer to ascertain that the audit results properly reflect the application of ERDA cost principles (particularly as to types and amounts of items of cost including incidence, allocability, and equitable distribution thereof).

$9-15.5005-5 Contractor's system of accounting.

(a) (1) Careful ERDA study of the contractor's usual accounting procedures shall be made prior to arriving at an understanding with the contractor as to the accounting system to be employed by the contractor during the period of contract performance.

(2) The contractor's customary accounting practices are usually accepted if they conform to generally accepted accounting principles, produce equitable results, are consistently applied, are not in conflict with the provisions of this subpart, are conducive to accurate costing of the contract work, and produce reports required by the ERDA.

(b) It is ERDA's policy to discourage firm contractual provisions relating to the contractor's accounting system (including methods for computing indirect costs) which preclude appropriate retrospective modification. No firm contractual provision shall be included in the contract where there is no previous Government contracting experience with the contractor's methods of operation and accounting. Contracting officers may, however, include firm contractual provisions when there is a comprehensive understanding of the contractor's methods of operation and accounting as a result of Government contracting experience in dealing with the contractor and the contracting officer makes a determination, based on an ERDA study thereof, that the contractor's accounting procedures are likely to produce equitable results in the future as in the past. Such firm contractual provisions shall be subject to adjustment retroactively at the request of either party to the contract when the method of overhead determination has become inequitable as a result of

cost

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

or

(2) Any significant change occurring in the nature of the business, the extent of subcontracting, fixed asset improvement program, the inventories, the volume of sales and production, manufacturing of sales and production, manufacturing processes, the contractor's products, or other relevant circumstances.

$9-15.5006

Advance understandings on particular cost items.

It is important that agreement between ERDA and its contractors be reached in advance of the incurrence of costs in categories where reasonableness or allocability are difficult to determine in order to avoid possible subsequent disallowance or dispute. Any such agreement should be incorporated in cost-type contracts and should govern the cost treatment covered thereby. But the absence of such agreement on any element of cost will not, in itself, serve to make that element either allowable or unallowable. Examples of costs on which advance agreements may be particularly important are:

(i) Employee compensation, travel including relocation costs, and other personnel costs. ERDA utilizes two basic methods of achieving and recording understandings with contractors as to the allowability of employee compensation, travel, and other personnel costs: Negotiation of a personnel appendix to the contract which sets forth the policies, programs, and schedules which are accepted as the basis for determining the allowability of costs; or reviewing and reaching agreement on established policies, programs, and schedules (and any changes there to during the contract term) applicable to the contractor's private operations which are acceptable for contract work and which will be consistently followed throughout the contractor's organization. Generally, a personnel appendix to the contract is utilized in contracts for work in Government-owned facilities, and in other contract situations when one or more of the following circumstances exist: When policies, programs, and schedules are established

90-136 O= 77-25

specifically for contract work; when the contractor's work is predominantly or exclusively made up of negotiated Government contract work; when contract work is so different from the organization's private work that existing established policies, programs, and schedules cannot reasonably be extended to and consistently applied on contract work; or, when established policies, programs, and schedules proposed for contract work are not sufficiently definitive to permit a clear advance mutual understanding of allowable costs and to provide a basis for audit. Managers of Field Offices are authorized to select the alternative method of achieving and recording advance understanding that they find most appropriate after considering the facts of the particular contract situation. In the case of contracts with an estimated annual expenditure of less than $250,000 for performance of work not located at Government-owned facilities, Managers of Field Offices may waive advance understandings in the area of compensation, travel, and other personnel costs where they believe that the circumstance does not warrant their use. Employee compensation, travel, and other personnel costs as used in this paragraph include:

(1) Compensation for personal services, including wages and salaries, bonuses and incentives, premium payments, pay for time not worked, and supplementary compensation and benefits, such as pension and retirement, group insurance, severance pay plans, and other forms of compensation covered by $9-15.5010-14;

costs;

(2) Morale, health, welfare, and food service and dormitory

(3) Training and education costs; and

(4) Employee travel costs, including travel on official business, relocation of employees, foreign travel, travel of executive officers, and special or mass personnel movement.

$9-15.5007-1 Explanation of direct costs and indirect costs.

(a) The classification of an item of cost as a direct cost or as an indirect cost has reference to the manner in which the particular cost is charged to or lodged against the products manufactured, work done, or services performed. In general, direct costs are those which are identified as having been incurred specifically for or on account of a particular product (or lots of similar products), work order, job, or contract. Materials, labor, or expenses which relate specifically and solely to the manufacture of a particular product or to the

performance of a distinct job or work are broad examples of direct

costs.

(b) Indirect costs are comprised of items of material, labor, and expenses which benefit not only a particular product or a specific unit of work but also other production or work and are so related to the particular product or specific task that the amount of the cost which should properly be lodged against it cannot be precisely determined, at least without effort entirely disproportionate to the increased accuracy achieved. There is no universal rule that under every accounting system certain items of cost shall be treated as direct or as indirect costs. It is essential, however, that within the accounting system of any given organization each item of cost be consistently treated in the same manner. Also, since indirect costs must ultimately be lodged against the various products, work orders, jobs or contract which benefit from their incurrence, it is necessary to establish ways or means of apportioning or distributing these indirect costs equitable to all work concerned. Since the means of accomplishing this distribution of indirect costs are necessarily somewhat arbitrary and not precisely correct, accuracy is best attained by treating as direct costs all items of cost which are susceptible of such handling and by limiting to the greatest practical extent the number of items of cost which are treated as indirect costs. The contractor's accounting system should be examined and modified SO that such results are achieved. (See $9-15.5005-5.)

(a) The contractor's indirect costs, which must be appropriately identified and supported by adequate documentation, must be carefully examined with the objective of excluding for reimbursement purposes all types of indirect costs that are either unallowable in nature (see list of examples in standard cost articles §9-50.704-13 through 9-50.704-16) or not properly allocable to performance of work under the ERDA contract. It may be that only a portion of a given pool of indirect costs will fail to meet these tests and require such exclusion. After excluding all such expenses, the remaining indirect costs require allocation by an acceptable method or methods that result in equitable charges to the ERDA contract. Any item or items of indirect cost that are so excluded in whole or in part shall include an amount for absorption of their appropriate share of other related indirect and administrative expenses. Some examples of indirect costs that

should include a fair share of other indirect and administrative expenses are: research and development costs, selling expenses, and bidding and proposal costs.

(b) The methods of allocation of indirect costs shall be determined in accordance with the policy and procedure outlined in $9-15.5005-5(b). Careful reviews shall be made from time to time as