to

(1) Compensation owners of closely held corporations, partners, sole proprietors, or members of the immediate families thereof, or to persons who are contractually committed to acquire a substantial financial interest in the contractor's enterprise. Determination should be made that such compensation is reasonable for the actual personal services rendered rather than a distribution of profits.

(2) Any change in a contractor's compensation policy resulting in a substantial increase in the contractor's level of compensation, particularly when it is concurrent with an increase in the ratio of Government contracts to other business, or any change in the treatment of allowability of specific types of compensation due to changes in Government policy.

(3) Compensation in lieu of salary for services rendered by partners and sole proprietors will be allowed to the extent that it is reasonable and does not constitute a distribution of profits.

(f) Limitations on certain forms of compensation. In addition to the general requirements in paragraphs (a) through (e) of this section, certain forms of compensation are subject to further requirements as specified in paragraphs (g) through (o) of this section.

(g) Salaries and wages. Salaries and wages for current services include gross compensation paid to employees in the form of cash, products, or services, and are to be treated as allowable. However, premiums for overtime in excess of statutory requirements, extra-pay shifts, and multishift work are to be treated as allowable to the extent approved by the contracting officer.

Incentive compensation

con

(h) Bonuses and incentive compensation. and cash bonuses based on production, cost reduction or efficient performance; suggestion awards; and safety awards are to be treated as allowable to the extent that the contractor's overall compensation plan is determined to be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the contractor and the employees before the services were rendered, or pursuant to an established plan followed by the contractor so sistently as to imply, in effect, an agreement to make such payment (but see $9-15.5006). In determining reasonableness, it will be necessary to take into account not only bonuses and incentive compensation payments charged directly to the contract but also payments charged indirectly to the contract through overhead. Bonuses, awards, and incentive compensation, when any of them are deferred, are to be treated as allowable to the extent provided in paragraph (k) of this section.

(1) Bonuses and incentive compensation paid to employees other than those whose pay is directly reimbursed will not be made allowable in onsite construction, architect-engineer, and operating contracts where home office general and administrative expense is unallowable.

(2) Employer contributions to incentive compensation plans for the purpose of establishing a reserve for the payment of incentive compensation for services performed in the future are unallowable.

(i) Bonuses and incentive compensation paid in stock. Costs of bonuses and incentive compensation paid in the stock of the contractor or of an affiliate are to be treated as allowable to the extent set forth in paragraph (h) of this section (including the incorporation of the principles of paragraph (k) of this section for deferred bonuses and incentive compensation), subject to the following additional requirements:

(1) Valuation placed on the stock transferred shall be the fair market value at the time of transfer, determined upon the most objective basis available; and

(2) Accruals for the cost of stock prior to the issuance of such stock to the employees shall be subject to adjustment according to the possibilities that the employees will not receive such stock and their interest in the accruals will be forfeited.

Such costs otherwise allowable are to be made subject to adjustment according to the principles set forth in paragraph (k)(3) of this section. (But see $9-15.5006.)

(j) Stock options. The cost of options to employees to purchase stock of the contractor or of an affiliate is to be made unallowable.

(k) Deferred compensation.

(1) As used herein, deferred compensation includes all remuneration, in whatever form, for which the employee is not paid until after the lapse of a stated period of years or the occurrence of other events as provided in the plans, except that it does not include normal end of accounting period accruals. It includes (i) contributions to pension, annuity, stock bonuses, and profit-sharing plans, (ii) contributions to disability, withdrawal, insurance, survivorship, and similar benefit plans, and (iii) other deferred compensation, whether paid in cash or in stock.

(2) Deferred compensation is to be treated as allowable to the extent that (i) except for past service pension and retirements

costs, it is for services rendered during the contract period; (ii) it represents, together with all other compensation, a reasonable overall compensation plan; (iii) it is paid pursuant to an agreement entered into in good faith between the contractor and employees before the services are rendered, or pursuant to an established plan followed by the contractor so consistently as to imply, in effect, an agreement to make such payments; and (iv) for a plan which is subject to approval by the Internal Revenue Service, it falls within the criteria and standards of the Internal Revenue Code and the regulations of the Internal Revenue Service. (But see $9-15.5006.)

(3) For determining the allowable cost of deferred compensation, contractual provision shall be made for appropriate adjustments for credits or gains, including those arising out of both normal and abnormal employee turnover, or any other contingencies that can result in a forfeiture by employees of such deferred compensation. Adjustments shall be made only for forfeitures which directly or indirectly inure to the benefit of the contractor; forfeitures which inure to the benefit of other employees covered by a deferred compensation plan with no reduction in the contractor's costs will not normally give rise to adjustment in contract costs. Adjustments for normal employee turnover shall be based on the contractor's experience and on foreseeable prospects, and shall be reflected in the amount of cost currently allowable. Such adjustments will be unnecessary to the

extent that the contractor can demonstrate that his contributions take into account normal forfeitures. Adjustments for possible future abnormal forfeitures shall be effected according to the following rules:

(i) Abnormal forfeitures that are foreseeable and which can be currently evaluated with reasonable accuracy, by actuarial or other sound computation, shall be reflected by an adjustment of current costs otherwise allowable; and

(ii) Abnormal forfeitures, not within subdivision (i) of this subparagraph may be made the subject of agreement between the Government and the contractor either as to an equitable adjustment or a method of determining such adjustment.

(4) In determining whether deferred compensation is for services rendered during the contract period or is for future services, consideration shall be given to conditions imposed upon eventual payment, such as, requirements of continued employment, consultation after retirement, and covenants not to compete.

(1) Fringe benefits. Fringe benefits are allowances and services provided by the contractor to his employees as compensation in addition to regular wages and salaries. Subject to the determination

that total compensation is reasonable (see $9-15.5010-14(c)), costs of fringe benefits such as pay for vacations, holidays, sick leave, military leave, employee insurance, pension, and retirement plans, and supplemental unemployment benefit plans are to be treated as allowable, provided such fringe benefits meet the following conditions:

(1) The benefits contribute to the performance of contract work and are appropriate for reimbursement from public funds; (2) Such benefit plans as exist in the contractor's private operations that are inconsistent with ERDA published requirements are appropriately modified or disallowed.

(3) Employee benefit plans especially established to meet the particular needs of the contract are in conformity with published ERDA policy and standards;

(4) Appropriate controls under the contract are established to assure that employees on contract work are treated no more or no less favorably than employees in the contractor's private operation except to the extent that subparagraphs (2) and (3) of this paragraph apply;

(5) To the fullest extent possible, definite limitations or terminal points are established for each of the various benefit plans, 80 that ERDA's full liability with respect thereto is established under the contract; and

(6) ERDA has access to all information necessary to complete understanding of the means of computing or determining the extent of the benefits afforded under the various benefit plans.

It is the policy of the ERDA to require the use of less than first-class air accommodations for all cost-reimbursed travel, except when less than first-class accommodations are not reasonably available to meet necessary mission requirements. For example, less than first-class accommodations are considered not reasonably available where less than first-class accommodations would:

(a) Require circuitous routing,

(c) Greatly increase the duration of the flight,

(d) Result in additional costs which would offset the transportation savings,

(e) Offer accommodations which are not reasonably adequate for the medical needs of the traveler.

The difference in cost between first-class air accommodations and less than first-class accommodations is an unallowable cost except as provided for in this section.

$9-15.5010-16 Page charges in scientific journals.

It is a policy of the ERDA to permit ERDA contractors to budget for and pay page charges for scientific journal publication as a necessary part of research costs, in all cases where:

(a) The research papers report work supported by the Government.

(b) The charges are levied impartially on all research papers published by the journal, whether by non-Government or by Government authors.

(c) Payment of such charges is in no sense a condition for acceptance of manuscripts by the journal.

(d) The journals involved are not operated for profit.

(e) The author does not receive an emolument from the journal for the research paper.

$9-15.5010-17 Special funds in the construction industry.

Costs of special "funds," financed by employer contributions, in the construction industry for such purposes as methods and materials research, public and industry relations, market development, disaster relief, etc., are unallowable except as specifically provided in the contract.

$9-15.5010-18 Employee morale, health, welfare,

and food service and dormitory costs.

(a) Employee morale, health, and welfare activities are those services or benefits provided by the contractor to its employees to improve working conditions, employer-employee relations, employee