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 payment s 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 should 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 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.

(e) The subject of severance pay with reference to educational

institutions is discussed in FPR 1-15.309-36.

$9-15.5010-9 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.

$9-15.5010-10 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.

$9-15.5010-11 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;

books;

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

(3) Unrealized appreciation of values of assets;

(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 ERDA should not exceed the ratio between the period of contract deliveries and the anticipated useful life of such facilities.

$9-15.5010-14 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, and management employee incentive compensation plans.

(b) Allowability. Except as otherwise specifically provided in this $9-15.5010-14, costs of compensation for personal services are to be treated as allowable to the extent that:

(1) Compensation is 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;

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

(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 paid 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 ERDA contracts provided that sufficient information is available to the ERDA to permit a determination that compensation is, in fact, consistent.

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(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 ERDA, will be the standard of comparison for evaluating the reasonableness of compensation paid employees engaged in work under ERDA 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 ERDA 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 judgment of contractors subject to the limitations of ERDA-approved compensation policies, programs, classification systems, and schedules, and amounts of money authorized for wage and salary increases for groups of employees. However, all cases of individual total compensation of $35,000 or more shall require review and approval on an individual basis. In addition, it will often be necessary that employee compensation be subjected to review and approval on an individual basis at a level below $35,000 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 (or $35,000) if a total of 50 percent or more of such compensation is reimbursed under ERDA 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: