generally acceptable accounting principles, shall generally be acceptable. However, the method used by the contractor may require examination when:

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

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

(3) Indirect cost groupings developed for a contractor's primary location are applied to offsite locations. Separate cost groupings for costs allocable to offsite locations may be necessary to permit equitable distribution of costs on the basis of the benefits accruing to the several cost objectives.

(e) A base period for allocation of indirect costs is the cost accounting period during which such costs are incurred and accumulated for distribution to work performed in that period. The criteria and guidance set forth in Cost Accounting Standard (CAS) 406, Cost Accounting Period, for selection of the cost accounting periods to be used for allocation of indirect costs, are incorporated in their entirety for application to fully CAS covered contracts. For contractors not having contracts subject to the Cost Accounting Standards and for those having contracts subject to modified CAS coverage, normally the base period will be the contractor's fiscal year; however, use of a period shorter than the contractor's fiscal year may be appropriate (1) for contracts for which performance involves only a minor portion of the fiscal year, or (2) where it is general practice in the industry to use a shorter period. In any event, the base period or periods used shall avoid creating inequities in the allocation of indirect costs. When a contract is performed over an extended period, as many base periods will be used as are required to represent the period of contract performance.

(f) Special care should be exercised in applying the principles in para

graphs (b), (c), and (d) of this section when Government-owned contractor operated (GOCO) plants are involved. The distribution of corporate, division, or branch office general and administration expenses to such plants when they operate with little or no dependence on corporate administrative activities, may require more precise cost groupings, detailed accounts screening, and carefully developed distribution bases.

[29 FR 10285, July 24, 1964, as amended at 33 FR 5452, Apr. 6, 1968; 34 FR 18164, Nov. 13, 1969; 39 FR 43075, Dec. 10, 1974; 45 FR 47686, July 16, 1980]

§ 1-15.204 Application of principles and procedures.

(a) Deviations from the cost principles in this Subpart 1-15.2 shall be processed in accordance with the procedures in § 1-1.009.

(b) Costs shall be allowed to the extent that they are reasonable (see § 1-15.201-3), allocable (see § 1-15.2014), and determined to be allowable in view of the other factors set forth in §§ 1-15.201-2 and 1-15.205. These criteria apply to all of the selected items of cost which follow, notwithstanding that particular guidance is provided in connection with certain specific items for emphasis or clarity.

(c) Costs incurred as reimbursements or payments to a subcontractor under a cost-reimbursement, fixed-price incentive, or price redeterminable type subcontract of any tier above the first firm fixed-price or fixed-price escalation subcontract are allowable to the extent that allowance is consistent with the subpart of this Part 1-15 which is appropriate to the subcontract involved. Thus, if the subcontract is for supplies, such costs are allowable to the extent that the subcontractor's costs would be allowable if this Subpart 1-15.2 were incorporated in the subcontract; if the subcontract is for construction, such costs are allowable to the extent that the subcontractor's costs would be allowable if Subpart 1-15.4 of this Part 1-15 were incorporated in the subcontract. Similarly, costs incurred as payments under firm fixed-price or fixed-price escalation subcontracts or modifica

tions thereto, when costs analysis was performed pursuant to § 1-3.807-10(b) shall be allowable only to the extent that the price was negotiated in accordance with the principles in § 115.106.

(d) Selected items of cost are treated in § 1-15.205. However, § 1-15.205 does not cover every element of cost and every situation that might arise in a particular case. Failure to treat any item of cost in § 1-15.205 is not intended to imply that it is either allowable or unallowable. With respect to all items, whether or not specifically covered, determination of allowability shall be based on the principles and standards set forth in this subpart and, when appropriate, the treatment of similar or related selected items.

[45 FR 47686, July 16, 1980]

§1-15.205 Selected costs.

§1-15.205-1 Advertising costs.

(a) Advertising costs mean the costs of media advertising and directly associated costs. Media advertising includes magazines, newspapers, radio and television programs, direct mail, trade papers, outdoor advertising, dealer cards and window displays, conventions, exhibits, free goods and samples, and the like.

(b) The only advertising costs allowable are those which are solely for (1) the recruitment of personnel required for the performance by the contractor of obligations arising under the contract, when considered in conjunction with all other recruitment costs, as set forth in § 1-15.205-33; (2) the procurement of scarce items for the performance of the contract; or (3) the disposal of scrap or surplus materials acquired in the performance of the contract. Costs of this nature, if incurred for more than one Government contract or for both Government work and other work of the contractor, are allowable to the extent that the principles in §§ 1-15.201-3, 1-15.201-4, and 1-15.203 are observed.

(c) Advertising costs other than those specified in paragraph (b) of this section are not allowable. Unallowable advertising costs include those related to sales promotion. Such advertising involves direct payment

for the use of time or space to promote the sale of products, either directly by stimulating interest in a product or product line, or indirectly by disseminating messages calling favorable attention to the advertiser for purposes of enhancing its overall image to sell its products. In both instances, the advertiser has control over the form and content of what will appear, the medium in which it will appear, and when it will appear.

[29 FR 10285, July 24, 1964, as amended at 34 FR 18164, Nov. 13, 1969; 45 FR 47686, July 16, 1980]

§ 1-15.205-2 Bad debts.

Bad debts, including losses (whether actual or estimated) arising from uncollectible customers' accounts and other claims, and any directly associated costs such as collection costs and legal costs, are unallowable.

[48 FR 9006, Mar. 3, 1983]

§ 1-15.205-3 Bidding costs.

Bidding costs are the costs of preparing bids or proposals on potential Government and non-Government contracts or projects, including the development of engineering data and cost data necessary to support the contractor's bids or proposals. Bidding costs of the current accounting period of both successful and unsuccessful bids and proposals normally will be treated as allowable indirect costs, in which event no bidding costs of past accounting periods shall be allowable in the current period to the Government contract. However, if the contractor's established practice is to treat bidding costs by some other method, the results obtained may be accepted only if found to be reasonable and equitable.

§ 1-15.205-4 Bonding costs.

(a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds.

(b) Costs of bonding required pursuant to the terms of the contract are allowable.

(c) Costs of bonding required by the contractor in the general conduct of his business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances.

§ 1-15.205-5 Civil defense costs.

(a) Civil defense costs are those incurred in planning for, and the protection of life and property against, the possible effects of enemy attack. Reasonable costs of civil defense measures (including costs in excess of normal plant protection costs, first-aid training and supplies, fire fighting training and equipment, posting of additional exit notices and directions, and other approved civil defense measures) undertaken on the contractor's premises pursuant to suggestions or requirements of civil defense authorities are allowable when allocated to all work of the contractor.

(b) Costs of capital assets under (a) above are allowable through depreciation in accordance with § 1-15.205-9.

(c) Contributions to local civil defense funds and projects are unallowable.

§ 1-15.205-6 Compensation for personal services.

(a) General. (1) 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 to the contractor during the period of contract performance (except as otherwise provided in paragraph (f) of this § 1-15.205-6). 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, contributions to pension, annuity, and management employee incentive compensation plans, allowances for off-site pay, incentive pay, location allowances, hardship pay, and cost of living differential. When personal services are performed in a foreign country, compen

sation may also include an overseas differential, which may properly consider all expenses associated with foreign employment such as housing; cost of living adjustments; transportation; bonuses; and additional Federal, State, local, or foreign income taxes resulting from foreign assignment and other related expenses. Although the aforementioned additional taxes may be considered in establishing an overseas differential, any increased compensation calculated directly on the basis of an employee's specific increase in income taxes is unallowable. Except as otherwise specifically provided in this § 1-15.205-6, compensation costs are allowable to the extent that the total compensation of individual employees is reasonable for the services rendered and they are not in excess of those costs which are deductible under the Internal Revenue Code and regulations thereunder. Differential allowances for additional Federal, State, or local income taxes resulting from domestic assignments are unallowable.

(2) Compensation is reasonable to the extent that the total amount paid or accrued is commensurate with compensation paid under the contractor's established policy and conforms generally to compensation paid by other firms of the same size, in the same industry, or in the same geographic area, for similar services. In the administration of this principle, it is recognized that not every compensation case need be subjected in detail to the above tests. Such tests need to be applied only to those cases in which a general review reveals amounts or types of compensation which appear unreasonable or otherwise out of line. However, certain conditions give rise to the need for special consideration and possible limitation as to allowability for contract cost purposes where amounts appear excessive. Among such conditions are the following:

(i) Compensation to 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.

(ii) Due consideration has been given to whether there are unusual conditions pertaining to the Government

stantial increase in the contractor's level of compensation, particularly when it was 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.

(iii) The contractor's business is such that his compensation levels are not subject to the restraints normally occurring in the conduct of competitive business.

(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.

con

(4) Notwithstanding any other provisions of this § 1-15.205–6, costs of compensation are not allowable to the extent that they result from provisions of labor-management agreements that, as applied to work in the performance of Government tracts, are determined to be unreasonable either because they are unwarranted by the character and circumstances of the work or because they are discriminatory against the Government. The application of the provisions of a labor-management agreement designed to apply to a given set of circumstances and conditions of em

ployment (for example, work involving extremely hazardous activities or work not requiring recurrent use of overtime) is unwarranted when applied to a Government contract involving significantly different circumstances and conditions of employment (for example, work involving less hazardous activities or work continually requiring use of overtime). It is discriminatory against the Government if it results in individual personnel compensation (in whatever form or name) in excess of that being paid for similar non-Government work under comparable circumstances. Disallowance of costs will not be made under paragraph (a)(4) of this section unless:

(i) The contractor has been permitted an opportunity to justify the costs; and

hardships, or hazard on the contractor's employees, for which compensation that might otherwise appear unreasonable is required to attract and hold necessary personnel.

(5) In addition to the general requirements set forth in paragraphs (a) (1) through (4) of this § 1-15.205–6, certain forms of compensation are subject to further requirementrs as specified in paragraphs (b) through (k) of this § 1-15.205-6.

(b) Salaries and wages. Salaries and wages for current services include gross compensation paid to employees in the form of cash, products, or servmiums for overtime, extra-pay shifts, ices, and are allowable. However, preand multi-shift work are allowable to the extent approved pursuant to § 112.102-4 or permitted pursuant to § 112.102-5.

(c) Cash bonuses and incentive compensation. Incentive compensation for management employees, cash bonuses, suggestion awards, safety awards, and incentive compensation based on pro

duction, cost reduction, or efficient performance, are allowable to the extent that the overall compensation 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 consistently as to imply, in effect, an agreement to make such payment. (But see § 1-15.107.) Bonuses, awards, and incentive compensation when any of them are deferred are allowable to the extent provided in (f) below.

(d) 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 allowable to the extent set forth in paragraph (c) of this section (including the incorporation of the principles in paragraph (f) of this section for deferred bonuses and incentive compensation), subject to the following additional requirements:

(1) Valuation placed on the stock transferred shall be 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 the stock to the employees shall be subject to adjustment according to the possibilities that the employees will not receive the stock and their interest in the accruals will be forfeited.

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

(f) 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 (including early retirement), annuity, stock bonus, 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 allowable only to the extent that:

(i) It is reasonable in amount when considered together with all other compensation paid to the employee;

and

(ii) It is paid under an agreement entered into in good faith between the contractor and employees before the services are rendered, or under a plan established and consistently applied thereafter by the contractor.

(3) Pension plans and other types of deferred compensation not covered by Cost Accounting Standard (CAS) 415 (Accounting for the Cost of Deferred Compensation) are allowable to the extent that they comply with paragraph (f)(2) of this § 1-15.205-6 and:

(i) They are deductible for the same fiscal year for Federal income tax purposes under section 404 (excluding subsection (a)(5)) of the Internal Revenue Code of 1954, as amended, and the regulations of the Internal Revenue Service, provided that:

(A) Normal costs of pension plans incurred subsequent to the effective date of this paragraph, not funded in the year incurred, and pension costs or adjustments of previous years (past service) allocable to the current accounting period but not funded in that period shall not be allowable in subsequent years (except that a payment made to a fund by the time set for filing of the Federal income tax return for any taxable year shall be considered to have been made during that taxable year). However, any portion of pension cost computed for a cost accounting period that is deferred pursuant to a waiver granted under the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) as set forth in CAS 412.50(c)(3) will be allowable in the future accounting period(s) in which the funding takes place. The allowability of these deferred contributions will be limited to the amounts that would have been allowed had the funding been made in the year the costs were incurred;

(B) Under contracts not subject to Cost Accounting Standards, abnormal forfeitures due to significant reduction in the Contractor's level of employment 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 costs otherwise allowable. When abnormal forfeitures were not taken into account previously, appropriate credit shall be given to the Government in accordance with § 1-15.201-5;

(C) Any amount paid or funded and deductible in any year under section 404 (excluding section 404(a)(5)) of the Internal Revenue Code of 1954, as amended, prior to the time it becomes allowable under this paragraph 115.205-6(f)(3)(i) shall be applied to future years, in order of time, as if actually paid and deductible in these years;

(D) Increased normal and past service costs, caused by a delay in funding the actuarial liability beyond 30 days after each quarter of the year to which the costs are assignable are unallowable. If a composite rate is used to allocate pension liability between the segments of a company and if, be