(2) Processing costs are used in many cases as the basis for allocating general and administrative expense. If the major indirect costs attributable to material--such as purchasing, receiving, inspecting or testing, internal handling (to stockrooms and to jobs directly from stockrooms), storing, inventorying, controlling, and issuing materials--are either included in indirect manufacturing costs or segregated and treated separately as material burden or materialhandling expense, it will probably be more equitable to exclude material cost from, than to include it in, the base for allocating general and administrative expense. However, exclusion of material cost from the base for allocation of general and administrative expense where the administrative costs attributable to materials are accounted for as general and administrative expenses might well be subject to the criticism that costs. which contribute to the generation of general and administrative expenses are not included in the base for their allocation.

(3) Direct labor cost alone is sometimes used as the basis for allocating general and administrative expenses. However, in many cases use of this method would be inappropriate since it fails to recognize that processing costs other than direct labor and also, to some extent at least, material costs serve to generate and to benefit from the incurrence of general and administrative expense. The propriety of this method would be subject to serious questions in a situation where the cost patttern of a particular job (i.e., the portion of the cost representing labor, other processing costs, and material) differs significantly from the normal cost pattern of the contractor's total work.

(c) Allocation of home office expenses of multiplant organizations. In the case of a multiplant organization there will be, in addition to the general and administrative expenses of the individual plants, overall company general and administrative expenses. These latter expenses require distribution or apportionment to all of the company's plants and other activities on an equitable basis or bases. Generally, these overall company expenses are not distributed to the company's various activities as a single pool of expense. Rather, individual classifications of expense or categories of similar types of expenses are spread separately on varied bases--such as number of employees, total payrolls, total manufacturing costs, services rendered, time devoted, and allocations based on the results of detailed studies and analyses in prior years. The total activities of an organization may include, in addition to manufacturing, separate and distinct operations (such as sale and distribution of standard commercial products of the company's own manufacture, merchandising of products made by and purchased from other manufacurers, and investment activities) so varied and dissimilar as to render extremely difficult the problem of determining the proper factors to serve as common

denominators for the fair and equitable allocation of the overall company expenses. Moreover, each expenditure within a given expense classification probably does not benefit all activities in the same way and to the same extent as does any other expenditure in the same expense classification. The foregoing serves to emphasize that the relationship of company general and administrative expenses to individual plants and other activities is not susceptible of precise evaluation. The objective must be, as to the particular classification or categories of such expense, a basis of apportionment which accomplishes its reasonable and equitable, though admittedly only approximately correct, distribution to the company's various activities, particularly those in which work for ERDA is performed.

$9-15.5010 Application of basic

principles to particular situations.

This guide contains examples of the application of the policy and principles outlined in Subpart 9-15.50 to particular situations.

If a contractor does work for ERDA at two or more plants, offices, or departments, the indirect costs of each plant, office, or department will be applied only to the work of the particular plant, office or department. Separate treatment of plants, offices, and departments for accounting purposes is always important; this importance is further accentuated if one of them is furnished with ERDA equipment. Similarly, where a contractor that operates more than one plant, office, or department does work for ERDA at only one particular location, only the costs applicable to the particular location involved should be considered in costing the ERDA work. The costs related to the other plants, offices, or departments which do not perform services in connection with the ERDA contract, are inapplicable to the work under the ERDA contract.

Where a contractor conducts operational activities both at its plant and at field locations, the apportionment to the field work of indirect operating costs incurred at the plant should be confined to only those expenses which are actually applicable to the field work. For example, indirect labor, idle time of direct labor, and other indirect costs applicable only to the contractor's operational activities at the plant location should not be apportioned to field work. Moreover, if the indirect operating expenses applicable to field work as well as work at the plant are apportioned on the basis of direct labor, direct labor at the field location should, for purposes of the

apportionment at least, be distinguished from indirect labor at that location on a basis paralleling the classification of labor as between direct labor and indirect labor at the plant location. Similarly, if idle time of personnel normally treated as direct labor is involved at the field location, such idle time should be excluded from direct labor for purposes of distributing indirect operating costs incurred at the plant that are applicable to the field work. Also, if the field operation's direct labor cost involves wage or salary increments for services abroad or in isolated areas, such increments should be excluded from the direct labor cost base for purposes of distributing applicable indirect operating costs.

If the Government furnishes the contractor, or the contractor acquires at Government expense, Government-owned equipment with which to do all or a significant amount of the work under the ERDA contract, on which equipment the Government is bearing the expenses of depreciation, maintenance, insurance, and taxes, appropriate procedures must be established to avoid apportioning to ERDA work performed with ERDA-owned equipment a share of the expenses of depreciation, maintenance, insurance, and taxes on the contractor's equipment not used to perform such work. If the Government-owned equipment is placed in a segregated area, that area should be accounted for as a separate department. If the Government-owned equipment is not placed in a separate area, other steps must be taken to avoid what would amount to a double equipment burden on work performed with the Government-owned facilities. Such work should be so accounted for as to be relieved of charges for expenses related to contractor's equipment not used in its performance.

$9-15.5010-4 Contractor's costs covering plant and equipment.

Charges relating to contractor-owned plant and equipment should be restricted to the applicable costs, such as depreciation, maintenance, insurance, and taxes and should not be on a rental basis. (Compensation in excess of cost is covered by the fixed fee.) Rentals of plant and equipment owned by third parties are normally allowable if the rates are reasonable in the light of the type, value, and condition of the property involved and option and other provisions of the lease agreement. However, where the plant and equipment used by the contractor is rented by the contractor under a sale and lease-back agreement, only the normal costs (such as depreciation, maintenance, insurance, and taxes) that would have been incurred if the contractor had retained legal title to the facilities should be allowed. Allowances for plant and equipment rented under agreements that are not arms-length transactions should be similarly restrictive.

$9-15.5010-5 Overtime, shift, and holiday premiums.

(a) Overtime, shift, and holiday premiums are allowable only to the extent provided in the contract or approved by the contracting officer. The amount of such premiums charged to an ERDA contract shall be equitable in relation to the amount of such costs charged to other work currently performed in the contractor's plant and the factors which necessitate this incurrence of the cost. When the necessity for overtime, shift, and holiday work arises from inadequacy of the contractor's plant or department to perform its total workload on a purely straight-time basis, inclusions in overhead for apportionment to all work of the plant or department, as the case may be, appears appropriate. When particular work, ERDA or other, is being specially expedited to a point that its fair share of the contractor's purely straight-time efforts on a single-shift basis will not get the particular job completed within the time desired, direct charging of the related premiums appears appropriate.

(b) When premiums for overtime, shift, and holiday work are charged direct to the work concerned, if the operating overhead of the plant or related department is distributed on the basis of direct labor (cost or hours), the premiums should be excluded from the direct labor base for purposes of the overhead distribution. That is, the direct labor base should be, as appropriate, direct labor straighttime costs or direct labor hours actually worked. While the premiums for authorized overtime, shift, and holiday work are acceptable as reimbursable costs, it is generally recognized that direct labor hours worked on an overtime, shift, or holiday basis should participate in indirect costs to the same extent as hours worked on a straight-time

basis.

$9-15.5010-6

Outside technical and professional consultants.

Technical and professional consultants, as used here, refers to private individuals acting in their own behalf who make their services available on a fee or per diem basis. It does not refer to employees of firms acting in the firm's behalf whose services may be made available by the firm on, for example, a fixed rate basis. Consultant arrangements may permit bringing to contract work the services of outstanding specialists who would not be available on a full-time basis, or whose employment on a full-time basis would not be economically feasible. Costs of such outside consultant services are normally allowable (however, see §9-50.704-13(e)(26); 9-50.704-14(e)(24); 9-50,704-15(b); and 9-50.704-16(e)(22) of this chapter regarding compensation of an individual who is employed by another contractor and concurrently performing work on a full-time annual basis under an ERDA cost-type contract): Provided, That, the services are essential to and will make a material contribution to the performance of contract work; the services may be performed more economically or more

successfully by a consultant than by the contractor's regular personnel; the fee or per diem charged is reasonable; and when approved by the contracting officer. If the cost of such services is charged directly to the ERDA contract, the cost of like items properly chargeable only to other work of the contractor must be eliminated from indirect costs allocable to the ERDA contract (see $9-15.5009-1).

$9-15.5010-7 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 an ERDA contract, care must be taken, as performance of the ERDA 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.

$9-15.5010-8 Severance 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