cause of differences in the timing of the funding by segments, an inequity exists, allowable normal cost and past service costs will be limited to that particular segment's calculation of pension costs as provided in CAS 413.50(c)(5). Determination of unallowable costs shall be made in accordance with the actuarial method used in calculating the normal and past service costs;

(E) The allowability of the cost of indemnification of the Pension Benefit Guaranty Corporation (PBGC), under section 4062 or 4064 of the Employee Retirement Income Security Act of 1974 (ERISA), because of the termination of an employee deferred compensation plan will be considered on a case-by-case basis; provided that if insurance was required by the PBGC under section 4023 of ERISA, it was obtained by the contractor and the indemnification payment is not recoverable thereunder. Consideration under the foregoing circumstances will be primarily for the purpose of appraising the extent to which the indemnification payment is allocable to Government work; and if a beneficial or other equitable relationship exists, the Government will participate, provisions of §§ 1-15.205-16(a)(3) and 115.205-16(b) notwithstanding, in the indemnification payment to the extent of its fair share; or

(ii) They are deductible in the same fiscal year for Federal income tax purposes under section 404(a)(5) of the Internal Revenue Code of 1954, as amended, and the regulations of the Internal Revenue Service, except that the costs of unfunded pension and retirement benefits paid directly to, or on behalf of, former employees shall be allowable only to the extent the contractor demonstrates that the costs, together with any pension and retirement costs allowed under paragraph (f)(3)(i) of this § 1-15.205-6 do not exceed the amount that would be allowable under paragraph (f)(3)(i) of this § 1-15.205-6 if the contractor were providing for equivalent benefits on an actuarial basis in the current period. Amounts paid to employees under payas-you-go plans as an inducement for early retirement should be treated as supplemental pension plans under this

provision. To be allowable, these costs must be incurred under a well defined plan which the contractor consistently follows thereafter. The scale of payments to the retired employees should be reasonable, the costs should be computed in accordance with this provision, and the costs should be allocated according to the contractor's system of accounting for pension costs; and

(iii) They comply with the provisions of CAS 412 (Composition and Measurement of Pension Costs) and CAS 413 (Adjustment and Allocation of Pension Cost), which are incorporated herein in their entirety; and when any of the contractor's contracts are subject to Cost Accounting Standards, these provisions will apply commencing with the contractor's fiscal year as prescribed by the terms of § 412.80 of CAS 412 and § 413.80 of CAS 413. The amount of deferred compensation costs which may be allowed shall not, however, exceed the amount determined under the provisions of the standards, subject to the cost limitations and exclusions set forth in paragraphs (f)(3)(i) and (ii) of this § 115.205-6.

(4) Deferred compensation covered by CAS 415 is not subject to the limitations of the Internal Revenue Code and regulations thereunder, but is allowable to the extent that it complies with paragraph (f)(2) of this § 115.205-6 and:

(i) It complies with the provisions of CAS 415 (Accounting for the Cost of Deferred Compensation), which are incorporated herein in their entirety; and when any of the contractor's contracts are subject to Cost Accounting Standards Board standards, these provisions will be applicable commencing with the contractor's fiscal year as prescribed by the terms of § 415.80 of CAS 415. The amount of deferred compensation cost which may be allowed shall not, however, exceed the amount determined under the provisions of CAS 415, except that the cost of options to employees to purchase stock of the contractor or of an affiliate is unallowable; and

(ii) Deferred compensation payments to employees under awards made prior to the effective date of

CAS 415 are allowable to the extent they would have been allowable under the provisions of this § 1-15.205-6 effective prior to the date of this revision.

(g) Fringe benefits. Fringe benefits are allowances and services provided by the contractor to its employees as compensation in addition to regular wages and salaries. The cost of fringe benefits, including, but not limited to, the cost of vacations, sick leave, holidays, military leave, employee insurance, and supplemental unemployment benefit plans is allowable if reasonable and consistent with the following:

(1) On contracts subject to full CAS coverage, the costs of compensated personal absence must be measured and allocated in accordance with CAS 408 (Accounting for the Cost of Compensated Personal Absence). For all fringe benefits not addressed by the provisions of CAS 408, the criteria in (2), below, apply.

(2) On contracts not subject to full CAS coverage, the cost of all fringe benefits are allowable to the extent that they are required by law, employer-employee agreement, or an established policy of the contractor.

(h) Severance pay. See § 1-15.205-39. (i) Training and education expenses. See § 1-15.205-44.

(j) Unallowable costs. Costs which are unallowable under other paragraphs of this Subpart 1-15.2 shall not be allowable under this § 1-15.205-6 solely on the basis that they constitute personal compensation.

(k) Backpay resulting from violations of Federal labor laws. Backpay may result from a negotiated settlement, order, or court decree which resolves a violation of Federal labor laws. Such backpay falls into two categories: One requiring the contractor to pay employees additional compensation for work performed for which they were underpaid, and the other resulting from other violations such as when the employee was improperly discharged, discriminated against, or other circumstances for which the backpay was not additional compensation for work performed. Backpay resulting from underpaid work is compensation for the work performed and

is allowable. All other backpay is unallowable.

[29 FR 10285, July 24, 1964, as amended at 40 FR 14914, Apr. 3, 1975; 40 FR 18996, May 1, 1975; 45 FR 10787, Feb. 19, 1980]

§ 1-15.205-7 Contingencies.

(a) A contingency is a possible future event or condition arising from presently known or unknown causes, the outcome of which is indeterminable at a present time.

(b) In historical costing, contingencies are not normally present since such costing deals with costs which have been incurred and recorded on the contractor's books. Accordingly, contingencies are generally unallowable for historical costing purposes. However, in some cases, as for example, terminations, a contingency factor may be recognized which is applicable to a past period to give recognition to minor unsettled factors in the interest of expeditious settlement.

(c) In connection with estimates of future costs, contingencies fall into two categories:

(1) Those which may raise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy; e.g., anticipated costs of rejects and defective work; in such situations where they exist, contingencies of this category are to be included in the estimates of future cost so as to provide the best estimate of performance costs; and

(2) Those which may arise from presently known or unknown conditions, the effect of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government; e.g., results of pending litigation, and other general business risks. Contingencies of this category are to be excluded from cost estimates under the several items of cost, but should be disclosed separately including the basis upon which the contingency is computed in order to facilitate the negotiation of appropriate contractual coverage (see, for example, §§ 1-15.205-16, 1-15.205-20, and 1-15.205-39).

§ 1-15.205-8 Contributions and donations. Contributions and donations are unallowable.

§ 1-15.205-9 Depreciation.

(a) Depreciation is a charge to current operations which distributes the cost of a tangible capital asset, less estimated residual value, over the estimated useful life of the asset in a systematic and logical manner. It does not involve a process of valuation. Useful life has reference to the prospective period of economic usefulness in the particular contractor's operations as distinguished from physical life and shall be evidenced by the actual or estimated retirement and replacement practice of the contractor.

(b) Contractors having contracts subject to Cost Accounting Standard (CAS) 409 (Depreciation of Tangible Capital Assets) must adhere to the provisions of the Standard for all fully CAS-covered contracts, and may elect to adopt the Standard for other contracts. All provisions of CAS 409 are applicable if the election is made. When CAS 409 is applicable, its provisions supersede any conflicting provisions of this cost principle. Once electing to adopt CAS 409 for uncovered contracts, contractors must continue to follow its provisions until notification is received of final acceptance of all deliverable items on all open negotiated Government contracts. The principles which follow are applicable to those contracts to which CAS 409 is not applied.

(c) Normal depreciation on a contractor's plant, equipment, and other capital facilities is an allowable element of contract cost provided the contractor is able to demonstrate that such costs are reasonable and properly allocable to the contract. Subject to paragraphs (d) through (i) of this section:

(1) Depreciation will ordinarily be considered reasonable if the contractor follows depreciation policies and procedures which:

(i) Are consistent with the policies and procedures the contractor follows in the same cost center in connection with business other than Government business;

(ii) Are reflected in the contractor's books of account and financial statements; and

(iii) Are used by the contractor for Federal income tax purposes, and are acceptable for such purposes.

(2) When the depreciation reflected on a contractor's books of account and financial statements differs from that used and acceptable for Federal income tax purposes, reimbursement shall be based upon the cost of the asset to the contractor, amortized over the estimated useful life of the property, using depreciation method (straight line, sum of the years' digits, etc.) acceptable for income tax purposes. Allowable depreciation shall not exceed the amounts used for book and statement purposes and shall be determined in a manner consistent with the depreciation policies and procedures followed in the same cost center in connection with the contractor's business other than Government business. (3) Depreciation for reimbursement purposes in the case of tax-exempt organizations shall be determined on the basis outlined in paragraph (c)(2) of this section.

(d) Special considerations are required for assets acquired before the effective date of this principle where, on the effective date of this principle, the undepreciated balance of such assets, resulting from depreciation policies and procedures used previously for Government contracts and subcontracts, is different from the undepreciated balance of such assets on the books and financial statements. Generally, the undepreciated balance for contract cost purposes shall be depreciated over the remaining life using the methods and lives followed for book purposes. The aggregate depreciation on any asset allowable after the effective date of this § 1-15.205-9 shall not exceed the cost basis of the asset less any depreciation allowed or allowable under prior procurement regulations.

(e) Depreciation should usually be allocated to the contract and other work as an indirect cost. The amount of depreciation allowed in any accounting period may, consistent with the basic objectives set forth in paragraph (a) of this § 1-15.205-9, vary

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with volume of production or use of multishift operations.

(f) No depreciation, rental, or use charge shall be allowed on property acquired at no cost from the Government by the contractor or by any division, subsidiary, or affiliate of the contractor under a common control.

(g) The depreciation on any item which meets the criteria for allowance at a "price" in accordance with

§ 1-15.205-22(e) may be based on such price, provided the same depreciation policies and procedures are used for costing purposes for all business of the using division, subsidiary, or organization under comm control.

(h) No depreciation or rental shall be allowed on property fully depreciated by the contractor or by any division, subsidiary, or affiliate of the contractor under a common control; however, a reasonable charge for the use of fully depreciated property may be agreed upon and allowed (see § 115.107). In determining this charge, consideration should be given to cost, total estimated useful life at time of negotiation, effect of any increased maintenance charges or decreased efficiency due to age, and the amount of depreciation, if any, previously charged to Government contracts and subcontracts.

(i) For depreciation on idle facilities and idle capacity, see § 1-15.205-12.

[34 FR 18164, Nov. 13, 1969, as amended at 45 FR 47686, July 16, 1980]

§ 1-15.205-10 Employee morale, health, welfare, food service, and dormitory costs and credits.

(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 morale, and employee performance. Such activities include house publications, health or first-aid clinics, recreation, employee counseling services, and, for the purpose of this § 1-15.205-10, food and dormitory services. Food and dormitory services include operating or furnishing facilities for cafeterias, dining rooms, canteens, lunch wagons, vending machines, living accommodations or similar types of services for the contrac

tor's employees at or near the contractor's facilities.

(b) Except as limited by paragraph (c) of this section, the aggregate of costs incurred on account of all activities mentioned in paragraph (a) of this section, less income generated by all such activities, is allowable to the extent that the net amount is reasonable.

(c) Losses from the operation of food and dormitory services may be included as costs incurred under paragraph (b) of this section only if the contractor's objective is to operate such services on a break-even basis. Losses sustained because food services or lodging accommodations are furnished without charge or at prices or rates which obviously would not be conducive to accomplishment of the above objective are not allowable, except as otherwise provided in this paragraph (c) of this section. A loss may be allowed to the extent the contractor can demonstrate that unusual circumstances exist (e.g., (1) where the contractor must provide food or dormitory services at remote locations where adequate commercial facilities are not reasonably available, or (2) where it is necessary to operate a facility at a lower volume than the facility could economically support) where, even with efficient management, operation of the services on a break-even basis would require charging inordinately high prices or prices or rates higher than those charged by commercial establishments offering the same services in the same geographical areas. Cost of food and dormitory services shall include an allocable share of indirect expenses pertaining to these activities.

(d) In those situations where the contractor has an arrangement authorizing an employee association to provide or operate a service such as vending machines in the contractor's plant, and retain the profits derived therefrom, such profits shall be treated in the same manner as if the contractor were providing the service (see paragraph (e) of this section).

(e) Contributions by the contractor to an employee organization, including funds set over from vending machine receipts or similar sources, may be included as costs incurred under para

graph (b) of this section, only to the extent that the contractor demonstrates that an equivalent amount of the costs incurred by the employee organization would be allowable if incurred by the contractor directly.

[33 FR 5452, Apr. 6, 1968]

§ 1-15.205-11 Entertainment costs.

Costs of amusement; diversion; social activities; and any directly associated costs such as meals, lodging, rentals, transportation, and gratuities, are unallowable (but see § 1-15.205-10 and § 1-15.205-43).

[48 FR 9006, Mar. 3, 1983]

§ 1-15.205-12 Idle facilities and idle capacity.

(a) As used in this section, the words and phrases defined in this paragraph (a) shall have the meanings set forth below.

(1) "Facilities" means plant or any portion thereof (inclusive of land integral to the operation); equipment individually or collectively; or any other tangible capital asset, wherever located, and whether owned or leased by the contractor.

(2) "Idle facilities" means completely unused facilities that are excess to the contractor's current needs (see paragraph (c) of this § 1-15.205-12).

(3) "Idle capacity" means the unused capacity of partially used facilities. It is the difference between that which a facility could achieve under 100 percent operating time on a one-shift basis less operating interruptions resulting from time lost for repairs, setups, unsatisfactory materials, and other normal delays, and the extent to which the facility was actually used to meet demands during the accounting period. A multiple shift basis may be used for evaluation purposes if it can be shown that this amount of usage could normally be expected for the type of facility involved.

(4) "Cost of idle facilities or idle capacity" means costs such as maintenance, repair, housing, rent, and other related costs, e.g., property taxes, insurance, and depreciation.

(b) The costs of idle facilities are unallowable except to the extent that:

(1) They are necessary to meet fluctuations in workload; or

(2) Although not necessary to meet fluctuations in workload, they were necessary when acquired and are now idle because of changes in program requirements, contractor efforts to produce more economically, reorganization, termination, or other causes which could not have been reasonably foreseen.

Under the exception stated in paragraph (2) of this paragraph (b), costs of idle facilities are allowable for a reasonable period of time, ordinarily not to exceed one year, depending upon the initiative taken to use, lease, or dispose of such facilities (see § 115.205-42(b) and (e)).

(c) The costs of idle capacity are normal costs of doing business and are a factor in the normal fluctuations of usage or overhead rates from period to period. Such costs are allowable, provided the capacity is reasonably anticipated to be necessary or was originally reasonable and is not subject to reduction or elimination by subletting, renting, or sale, in accordance with sound business, economics, or security practices. Widespread idle capacity throughout an entire plant or among a group of assets having substantially the same function may be idle facilities.

(d) Any costs to be paid directly by the Government for idle facilities or idle capacity reserved for defense mobilization production shall be the subject of a separate agreement.

[33 FR 5453, Apr. 6, 1968]