CONTRACT COST PRINCIPLES AND PROCEDURES

contract situations. Thus, as to any given contract, the reasonableness and allocability of certain items of cost may be difficult to determine, particularly in connection with firms or separate divisions thereof which may not be subject to effective competitive restraints. In order to avoid possible subsequent disallowance or dispute based on unreasonableness or nonallocability, it is desirable that contractors seek advance agreement with the Government as to the treatment to be accorded those special or unusual costs. Such agreements may also be initiated by the Government. Advance agreements may be negotiated either before or during a contract but should be negotiated before incurrence of the cost covered by the agreement. Any such agreement must be in writing, shall be executed by both contracting parties, and shall be incorporated in the present and future contracts to which it is applicable.

(b) The contracting officer is not authorized by this paragraph to agree to a treatment of costs inconsistent with Parts 2 through 5. For example, an advance agreement may not provide that, notwithstanding 15-205.17, interest shall be allowable.

(c) An advance agreement entered into in accordance with this paragraph shall contain a suitable statement of its intended applicability and duration. The absence of an advance agreement on any element of cost will not, in itself, affect the reasonableness or allocability of that element.

(d) Advance agreements may be negotiated to affect only a single contract, a group of contracts, or may be broad enough to affect all the contracts of a procuring activity, an agency, or the entire Department of Defense. An advance agreement which affects only one contract, or class of contract from a single buying office, shall be negotiated by the procuring contracting officer (PCO), his authorized representative, or an ACO when delegated this authority by the PCO. The proposed agreement shall be coordinated between the ACO and the PCO prior to execution.

(e) Advance agreements, other than those negotiated by the PCO in accordance with (d) above, shall be negotiated by the cognizant ACO or the assigned Corporate Administrative Contracting Officer (CACO) (see 20-900) except when this responsibility is currently assigned in the master list published annually in a Defense Procurement Circular for Tri-Service Departmental negotiation. Agreements at corporate level with contractors other than those assigned for Tri-Service negotiations, and for which a CACO has not been established, shall be negotiated by an ACO determined by majority vote among the Departments concerned in general accordance with the procedures set forth in 20–903(b).

(f) Prior to undertaking negotiation of an advance agreement under (e) above, the cognizant negotiator shall (i) determine whether there are other DOD or non-DOD departments or agencies that have a significant unliquidated dollar balance in contracts with the same contractor, (ii) inform any such department or agency of the cost item(s) or other matters to be negotiated, and (iii) invite the department or agency to participate in pre-negotiation discussions, or in the subsequent negotiations as appropriate. The results of the negotiation will be binding upon all military departments. At the completion of the negotiation, the sponsor will prepare and distribute copies of the fully executed agreement to the military departments' procuring activities and Defense Contract Audit Agency.

CONTRACT COST PRINCIPLES AND PROCEDURES

(g) Examples of cost on which advance agreements may be particularly important are:

(i) compensation for personal services including but not limited to allowances for off-site pay, incentive pay, location allowances, hardship pay and cost of living differential;

(ii) use charge for fully depreciated assets;

(iii) deferred maintenance costs;

(iv) precontract costs;

(v) independent research and development costs;

(vi) royalties;

(vii) selling and distribution costs;

(viii) travel costs, as related to special or mass personnel movements;

(ix) idle facilities and idle capacity;

(x) automatic data processing equipment;

(xi) bid and proposal costs; and

(xii) severance pay to employees on support service contracts.

15-108 Grants and Contracts With State and Local Governments. Part 7 of this Section provides principles and standards for determining costs applicable to grants and contracts with State and local governments. They are designed to provide the basis for a uniform approach to the problem of determining costs and to promote efficiency and better relationships between grantees and the Government. These cost principles apply to all programs that involve grants and contracts with State and local governments. They do not apply to grants and contracts with:

(i) publicly financed educational institutions subject to Part 3 of this Section; or

(ii) publicly owned hospitals and other providers of medical care subject to requirements promulgated by the sponsoring Government agencies. Any other exceptions will be approved by the Bureau of the Budget in particular cases when adequate justification is presented. 15-109 Definitions. As used in this Section XV (except for Part 3), the words and phrases defined in this paragraph shall have the meanings set forth below.

(a) Profit Center The smallest organizationally independent segment of a company which has been charged by management with profit and loss responsibilities.

(b) Accumulating Costs The collecting of cost data in an organized manner, such as through a system of accounts.

(c) Actual Costs

Amounts determined on the basis of costs incurred, as distinguished from forecasted costs. Includes standard costs properly adjusted for applicable variances.

(d) Allocate - To assign an item of cost, or a group of items of cost, to one or more cost objectives. This term includes both direct assignment of cost and the reassignment of a share from an indirect cost pool.

(e) Cost Objective - A function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects, etc.

CONTRACT COST PRINCIPLES AND PROCEDURES

all profit centers, consideration should be given to the corporate CWAS in determining the reasonableness of such locally incurred costs.

(7) The CWAS rating for the company shall be used in testing the reasonableness of corporate type expenses which are allocated to the profit centers. If the contractor has intermediate management organizations, such as Groups, he shall develop a CWAS rating for such intermediate management organizations, which rating shall be applicable to the expenses allocated by such intermediate organizations to the profit centers.

(8) Indirect costs incurred in cost centers which are applied to specific contracts without relation to total profit center operations may be eliminated by the ACO from the application of CWAS.

15-201.4 Definition of Allocability. A cost is allocable if it is assignable or chargeable to une or more cost objectives (see 15–109(e)) in accordance with the relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it—

(i) is incurred specifically for the contract;

(ii) benefits both the contract and other work, or both Government work and other work, and can be distributed to them in reasonable proportion to the benefits received; or

(iii) is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown. 15-201.5 Credits. The applicable portion of any income, rebate, allowance, and other credit relating to any allowable cost, received by or accruing to the contractor, shall be credited to the Government either as a cost reduction or by cash refund, as appropriate.

15-202 Direct Costs.

(a) A direct cost is any cost which can be identified specifically with a particular final cost objective. (See 15–109(f).) No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective. Costs identified specifically with the contract are direct costs of the contract and are to be charged directly thereto. Costs identified specifically with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

(b) Any direct cost of minor dollar amount may be treated as an indirect cost for reasons of practicality where the accounting treatment for such cost is consistently applied to all final cost objectives, provided that such treatment produces results which are substantially the same as the results which would have been obtained if such costs had been treated as a direct cost.

15-203 Indirect Costs.

(a) An indirect cost (see 15–109(i)) is one which, because of its incurrence for common or joint objectives, is not readily subject to treatment as a direct cost. Any direct cost of minor dollar amount may be treated as an indirect cost for reasons of practicality under the circumstances set forth in 15-202(b). After direct costs have been determined and charged directly to the contract or other work as appropriate, indirect costs are those remaining to be allocated to the

CONTRACT COST PRINCIPLES AND PROCEDURES

several cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective.

(b) Indirect costs shall be accumulated by logical cost groupings with due consideration of the reasons for incurring the costs. Each grouping should be determined so as to permit distribution of the grouping on the basis of the benefits accruing to the several cost objectives. Commonly, manufacturing overhead, selling expenses, and general and administrative expenses are separately grouped. Similarly, the particular case may require subdivisions of these groupings, e.g., building occupancy costs might be separable from those of personnel administration within the manufacturing overhead group. The number and composition of the groupings should be governed by practical considerations and should be such as not to complicate unduly the allocation where substantially the same results are achieved through less precise methods.

(c) Each cost grouping shall be distributed to the appropriate cost objectives. This necessitates the selection of a distribution base common to all cost objectives to which the grouping is to be allocated. The base should be selected so as to permit allocation of the grouping on the basis of the benefits accruing to the several cost objectives. This principle for selection is not to be applied so rigidly as to complicate unduly the allocation where substantially the same results are achieved through less precise methods. Once an appropriate base for the distribution of indirect costs has been accepted, such base shall not be fragmented by the removal of individual elements. Consequently, all items properly includable in an indirect cost base should bear a pro-rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost of sales base is deemed appropriate for the distribution of G&A, all items chargeable to cost of sales, whether allowable or unallowable, shall be included in the base and bear their pro-rata share of G&A costs.

(d) The method of allocation of indirect costs must be based on the particular circumstances involved. The method shall be in accordance with Standards promulgated by the Cost Accounting Standards Board, if applicable to the contract. Otherwise, the method shall be in accordance with generally accepted accounting principles. When Cost Accounting Standards Board Standards are not applicable to the contract, the contractor's established practices, if in accordance with generally acceptable accounting principles, shall generally be acceptable. However, the method used by the contractor may require examination when

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

(ii) any significant change occurs in the nature of the business, the ex-
tent of subcontracting, fixed asset improvement programs, the inven-
tories, the volume of sales and production, manufacturing processes,
the contractor's products, or other relevant circumstances; or
(iii) indirect cost groupings developed for a contractor's primary location
are applied to off-site locations. Separate cost groupings for costs al-
locable to off-site locations may be necessary to permit equitable dis-
tribution of costs on the basis of the benefits accruing to the several
cost objectives.

CONTRACT COST PRINCIPLES AND PROCEDURES

(e) A base period for allocation of indirect costs is the period during which such costs are incurred and accumulated for distribution to work performed in that period. Normally, the base period will be the contractor's fiscal year; however, use of a shorter period may be appropriate in case of (i) contracts whose performance involves only a minor portion of the fiscal year, or (ii) where it is general practice in the industry to use a shorter period. In any event the base period or periods shall be so selected as to avoid inequities in the allocation of costs. When the contract is performed over an extended period of time, as many such base periods will be used as will be required to represent the period of contract performance.

(f) Special care should be exercised in applying the principles in (b), (c), and (d) above 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.

15-204 Application of Principles and Procedures.

(a) Deviations from the cost principles in this Part 2 shall be processed in accordance with the procedures in 1–109.3.

(b) Costs shall be allowed to the extent that they are reasonable (see 15-201.3), allocable (see 15-201.4), and determined to be allowable in view of the other factors set forth in 15–201.2 and 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 Part of this Section XV 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 Part 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 Part 4 of this Section XV were incorporated in the subcontract. Similarly, costs incurred as payments under firm fixed-price or fixed price escalation subcontracts or modifications thereto, when cost analysis was performed pursuant to 3-807.10(b), shall be allowable only to the extent that the price was negotiated in accordance with the principles in 15-106.

(d) Selected items of cost are treated in 15-205. However, 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 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 Part and, where appropriate, the treatment of similar or related selected items.