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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 clea 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;

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

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(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 Direct and indirect costs.

$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 80 that such results are achieved. (See $9-15.5005-5.)

$9-15.5007-2 Treatment of indirect costs.

(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 appropriate, particularly where there is a significant change in the nature or volume of activity, to determine whether the method or methods of allocation previously used continue to be equitable. The ultimate objective in allocating indirect costs is to charge fair shares of the various expenses concerned to the ERDA contract work. The appropriate method or methods of allocation are dependent upon the particular circumstances and conditions; hence, no general rules can be stated as to particular methods or bases of allocating indirect costs applicable and appropriate in all cases. One method may be determined to be appropriate for allocating certain indirect costs but not others, in which case a different method or methods must be established which will equitably allocate the other indirect costs. This means that it may be necessary to establish separate pools of indirect costs for particular items of expense and to use separate methods of allocation for each pool in order to establish equitable results.

$9-15.5007-3

Company general and administrative expenses.

Although the ERDA generally compensates operating, construction and on-site architect-engineer contractors through fee for company general and administrative expenses (see $9-15.5005-2), it allows such company general and administrative expenses under off-site architectengineer, supply, and research contracts with commercial contractors performing the work in their own facilities. Contractor's general and administrative expenses may, however, be included for reimbursement under ERDA off-site architect-engineer, supply, and research contracts only to the extent that they are established, after careful examination, to be allowable in nature and properly allocable to the work. Work performed in a contractor's own facilities under an operating or construction contract may likewise be allowed to bear the properly allocable portion of allowable company general and administrative expense.

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$9-15.5008-3 Contractor's cost accounting system.

Where a fixed price contract with price redetermination provisions (including the incentive type) is involved, it should be determined at the inception of the contract that the contractor's accounting system is maintained in accordance with generally accepted accounting principles and practices and will equitably reflect the costs of contract performance. This may be done either on the basis of a survey of the accounting system, previous experience with the contractor, or by such other means as may be considered satisfactory to the contracting officer.

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For purposes of allowability, indirect costs, like direct costs, are subject to the requirements of $9-15.5005.3 with respect to the general basis for determination of costs.

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The nature of some types of cost, possible significant in amount, and their relationship to the contractor's work may be such as to necessitate their treatment as indirect costs. However, in order to secure the most accurate and equitable results, the various types of cost normally treated as indirect costs by the contractor under its regular accounting procedures should be examined to determine which types should, for purposes of reimbursement under the ERDA contract, be treated as direct costs. Such action should be taken whenever the increased accuracy that results is sufficiently material to justify the expenditure of the additional time, effort, and expense entailed. Where a type of cost is charged direct to the ERDA contract, no item of similar character which on the same basis is properly chargeable only to other work should be included in indirect costs apportioned to the ERDA contract. Treatment of items of cost as direct charges, consistently as to both the ERDA contract and the contractor's other work, should be employed to the fullest extent practicable, correspondingly reducing the volume of costs to be treated as indirect costs that require distribution by arbitrary methods which are not precise and accurate and therefore, at best, produce only approximate results.

$9-15.5009-2 Appropriate departmentalization.

Appropriate departmentalization for cost-reimbursement purposes should be effected between different kinds of productive activity, such as:

(a) Between manufacturing involving substantial expenses of machinery depreciation, machinery operation and maintenance, space, electric energy, tools, etc., and research generating relatively small overhead costs;

(b) Between heavy manufacturing requiring expensive equipment and power machinery, and light manufacturing which by comparison is practically a hand operation;

(c) Between research work requiring an elaborate layout of laboratory facilities and equipment, and research involving primarily the application of mental effort and requiring little or no equipment.

The objective and result should be to burden manufacturing work, or different kinds of manufacturing work, and research work, or different kinds of research work, each with the indirect costs properly applicable to the respective kind of work. If a nondepartmentized plant or individual department is so constituted that the indirect costs, rather than relating fairly proportionately to all work in the plant or department, particularly to the work under the ERDA contract, relate more to some work than to other work, consideration should be given to further department ization. The costing refinement may be made on a quasi-department basis from data furnished by the existing accounting system or developed on as reasonable an analysis as the facts and circumstances permit. The further department ization should preferably be incorporated into the contractor's own accounting system.

$9-15.5009-3 Distribution of service

department costs to production departments.

The total indirect costs of each productive department include an appropriate share of the costs incurred by the nonproductive or socalled service departments, such as the maintenance department, the power plant department, stores handling department, and tool room department. The basis used to distribute the costs of each individual service department should result in equitable allocation of the service department costs to the productive departments, particularly those productive departments in which work under the ERDA contract is performed. In the case of each service department the distribution method used should be appropriate in the circumstances, whether it be based on number of workers, floor space occupied, measurable services, total labor costs, total labor hours, some other basis, or a combination of methods.

9-15.5009-4 Distribution of indirect costs of

productive departments to work done.

In order to distribute the indirect costs of a productive department to the work done in the particular department, it is necessary that the apportionment be based on a factor which is common to all work performed in the particular department and which closely approximates the extent to which the services represented by the indirect costs of the department are utilized in performing the work done on the individual contracts and work orders. The variety and complexity of production work makes it difficult to determine the most appropriate and equitable common denominator for distributing a department's indirect costs to the department's work. Since, insofar as the use

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