୮

CONTRACT COST PRINCIPLES AND PROCEDURES

(iii) costs of canceling an unexpired lease under (a)(iv) shall not exceed 3 times the monthly rental.

Costs of the type covered in (a)(iii), (a)(iv) and (a)(vii) above are allowable only in connection with the relocation of existing employees.

(d) (CWAS-NA) Costs of the type covered in (a) (v) and (vi) and (a)(viii) above are not allowable. Costs of the type covered in (a)(iii) and (iv) above are not allowable for newly recruited employees.

(e) (CWAS-NA) Payments for employee income taxes incident to reimbursed relocation costs are unallowable.

15-205.26 Patent Costs.

(a) (CWAS) Costs of (i) preparing disclosures, reports, and other documents required by the contract and of searching the art to the extent necessary to make such invention disclosures; (ii) preparing documents and any other patent costs, in connection with the filing and prosecution of a United States patent application where title or royalty free license is required by Government contract to be conveyed to the Government; and (iii) general counseling services relating to patent matters, such as advice on patent laws, regulations, clauses, and employee agreements, are allowable. (But see 15-205.31.)

(b) (CWAS-NA) Costs of preparing disclosures, reports and other documents and of searching the art to the extent necessary to make invention disclosures, if not required by the contract, are unallowable. Costs in connection with (i) filing and prosecuting any foreign patent application, or (ii) any United States patent application with respect to which the contract does not require conveying title or a royalty free license to the Government, are unallowable. (Also see 15-205.36.)

15-205.27 Pension Plans. See 15-205.6.

15-205.28 Plant Protection Costs. (CWAS) Costs of items such as (i) wages, uniforms and equipment of personnel engaged in plant protection, (ii) depreciation on plant protection capital assets, and (iii) necessary expenses to comply with military security requirements, are allowable.

15-205.29 Plant Reconversion Costs. (CWAS-NA) 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 military contract work, fair wear and tear excepted. Reconversion costs are unallowable except for the cost of removing Government property and the restoration or rehabilitation costs caused by such removal. However, in special circumstances where equity so dictates, additional costs may be allowed to the extent agreed upon before the costs are incurred. Whenever such costs are given consideration, care should be exercised to avoid duplication through allowance as contingencies, as additional profit or fee, or in other contracts.

15-205.30 Precontract Costs. (CWAS-NA) 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. (But sec 15-107.)

15-205.31 Professional and Consultant Service Costs-Legal, Accounting, Engineering, and Other.

CONTRACT COST PRINCIPLES AND PROCEDURES

(a) (CWAS) Costs of professional and consultant services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor are allowable, subject to (b), (c), and (d) below when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Government (but see 15–205.26).

(b) (CWAS) In determining the allowability of costs in a particular case, no single factor or any special combination of factors is necessarily determinative. However, the following factors among others may be relevant:

(i) the nature and scope of the service rendered in relation to the service required;

(ii) the necessity of contracting for the service considering the contractor's capability in the particular area;

(iii) the past pattern of such costs, particularly in the years prior to the award of Government contracts;

(iv) the impact of Government contracts on the contractor's business (i.e.. what new problems have arisen);

(v) whether the proportion of Government work to the contractor's total business is such as to influence the contractor in favor of incurring the cost, particularly where the services rendered are not of a continuing nature and have little relationship to work under Government contracts.

(vi) whether the service can be performed more economically by employment rather than by contracting;

(vii) the qualifications of the individual or concern rendering the service and the customary fees charged, especially on non-government contracts;

(viii) adequacy of the contractual agreement for the service (e.g., description of the service; estimate of time required, rate of compensation; termination provisions).

(c) (CWAS) In addition to (b) above, retainer fees to be allowable must be supported by evidence of bona fide services available or rendered.

(d) (CWAS-NA) Costs of legal, accounting, and consulting services, and related costs, incurred in connection with organization and reorganization, defense of antitrust suits, and the prosecution of claims against the Government, are unallowable. Costs of legal, accounting, and consulting services, and related costs, incurred in connection with patent infringement litigation, are unallowable unless otherwise provided for in the contract. (Also see 15-205.23.)

15-205.32 Gains and Losses on Disposition of Depreciable Property or Other Capital Assets. (CWAS-NA)

(a) Gains and losses from the sale, retirement or other disposition (but see 15-205.16) of depreciable property, for purposes of computing contract costs, shall be included in the year in which they occur as credits or charges to the cost grouping(s) in which the depreciation or amortization applicable to such assets was included (but see (e) below).

(b) Two methods of computing gains and losses are provided in (c) and (d) below. Contractors have the option to use either of the methods except that once the method in (d) is elected for use, that method shall be used thereafter.

CONTRACT COST PRINCIPLES AND PROCEDURES

(b) (CWAS) Special care should be exercised in determining reasonableness where the royalties may have been arrived at as a result of less than arm's length bargaining; e.g.:

(i) royalties paid to persons, including corporations, affiliated with the

contractor;

(ii) royalties paid to unaffiliated parties, including corporations, under an agreement entered into in contemplation that a Government contract would be awarded; or

(iii) royalties paid under an agreement entered into after the award of the

contract.

(c) (CWAS) In any case involving a patent formerly owned by the contractor, the amount of royalty allowed should not exceed the cost which would have been allowed had the contractor retained title thereto.

(d) See 15-107, regarding advance understandings. 15-205.37 Selling Costs.

(a) Selling costs arise in the marketing of the contractor's products and include costs of sales promotions, negotiation, liaison between Government representatives and contractor's personnel, and other related activities.

(b) (CWAS) Selling costs are allowable to the extent they are reasonable and are allocable to Government business (but see 15-107 and 15-205.1). Allocability of selling costs will be determined in the light of reasonable benefit to the Government arising from such activities as technical, consulting, demonstration, and other services which are for purposes such as application or adaptation of the contractor's products to Government use.

(c) (CWAS-NA) Notwithstanding (b) above, salesmen's or agents' compensation, fees, commissions, percentages, or brokerage fees, which are contingent upon the award of contracts, are allowable only when paid to bona fide employees or bona fide established commercial or selling agencies maintained by the contractor for the purpose of securing business.

15-205.38 Service and Warranty Costs. (CWAS) Such costs include those arising from fulfillment of any contractual obligation of a contractor to provide services such as installation, training, correcting defects in the products, replacing defective parts, inaking refunds in the case of inadequate performance, etc. When not inconsistent with the terms of the contract, such service and warranty costs are allowable. However, care should be exercised to avoid duplication of the allowance as an element of both estimated product cost and risk.

15-205.39 Severance Pay.

(a) (CWAS) Severance pay, also commonly referred to as dismissal wages, is a payment in addition to regular salaries and wages, by contractors to workers whose employment is being terminated. Costs of severance pay are allowable only to the extent that, in each case, it is required by (i) law, (ii) employer-employee agreement, (ii) established policy that constitutes, in effect, an implied agreement on the contractor's part, or (iv) circumstance of the particular employment. (b) Costs of severance payments are divided into two categories as follows: (i) actual normal turnover severance payments shall be allocated to all work performed in the contractor's plant; or, where the contractor provides for accrual of pay for normal severances such method will

APPENDIX 3

DEFENSE PROCUREMENT CIRCULAR No. 74-1, AUGUST 26, 1974

ITEM IX-ALLOWABILITY OF AGENT'S FEES AND COMMISSIONS ON FOREIGN MILITARY SALES (FMS)

(Formerly Item VIII of DPC No. 117)

The recent increase in dollar value of FMS and the criticism by some major FMS customers of the amount of fees or commissions of sales agents have highlighted potential problems associated with the implementation of 6-705.3. Of particular concern are instances when, because of the very large value of FMS contracts involved, the application of a set commission rate can result in an excessive fee considering the benefit of the agent's activity.

Policies in 6–705.3 state that prices of normal defense contracts for an item are not automatically applicable to FMS contracts for the same item and that costs of doing business with a foreign government are recognized in pricing FMS contracts. Among the common costs of doing business with foreign governments are agent's fees/commissions for sales.

The following policy guidance is provided to supplement 6–705.3 in determining the applicability and reasonableness of agent's fees/commissions:

a. When a contracting officer is requested to obtain price and availability data from a contractor to support the tendering of a Letter of Offer, he shall require the contractor to identify the amount of any agent's fees/commissions or unusual costs of doing business with a foreign government. The contractor shall also be required to identify any unusual provisions or requested ASPR deviations (e.g., special termination clauses or non-standard progress payment schedule), that may be proposed for the contract which could affect the prices quoted.

b. In negotiating contracts for FMS items when the contractor has included costs for agent's fees/commissions, the contracting officer shall:

(i) Require the contractor to submit a "Contractor's Statement of Contingent or Other Fees" (SF 119).

(ii) Determine under 1-505 whether a "bona fide" agency relationship exists. (In accordance with 15-205.37 (c), agent's fees/commissions are allowable only when paid to bona fide employees or bona fide established commission or selling agencies maintained by the contractor for the purpose of securing business.)

c. Even though a bona fide agency relationship is determined to exist, the agent's fees/commissions will only be allowed to the extent reasonable. The basic test of reasonableness is an assessment of the services provided compared to the amount of the fee. A comparison should be made of the proposed fee/ commission with recent payment for comparable services under non-FMS, commercial sales of the same or similar items, or agent's fees/commissions allowed on previous FMS sales of comparable scope and dollar amounts. Consideration should be given to whether the sale is the initial or follow-on sale because the effort for follow-on sales of additional quantities, spares and support equipment would not normally be as great as the effort for the initial sale. Agent's fees/ commissions are prohibited for follow-on spares provided under DoD Supply Sup port Arrangements.

d. If the contracting officer cannot establish reasonableness of proposed agent's fees/commissions based on the price comparison in paragraph c above, the contractor shall be required to provide in a DD Form 633, a cost breakdown of the amount of any agent's fees/commissions related to the services rendered.

e. HPA approval is required on proposed FMS contracts when the agent's fee/commission exceeds $1 million.

APPENDIX 4

DEFENSE PROCUREMENT CIRCULAR No. 75-1, JULY 30, 1975

POTENTIAL APPLICATION OF THE SERVICE CONTRACT ACT
(FIXED PRICE)

a. The contractor warrants that the prices set forth in this contract do not include any allowance for any contingency to cover increased costs for which adjustment is provided under this clause.

b. In the event that during the performance of this contract it is determined by appropriate authority that the provisions of the Service Contract Act are applicable to any of the work covered by this contract, the Contracting Office may unilaterally implement such determination by requiring payment of the appropriate wage and fringe benefit scale, and the contractor agrees to comply with such implementation. In the event that compliance with the Contracting Officer's direction results in any increase or decrease in the labor rates paid under this contract, the contractor agrees to promptly enter into negotiations to reflect such increase or decrease. Such contract adjustment shall be limited to increases or decreases in wages or fringe benefits affected by the above determination, and the concomitant increases or decreases in social security and unemployment taxes and workmen's compensation insurance, but shall not otherwise include any amount for general and administrative costs, overhead, or profits.

c. Within thirty days of receipt of the applicable wage and fringe benefit scale, the contractor will submit a proposal for any contract price change to the Contracting Officer. With the submission of his proposal for adjustment, the contractor shall also submit, if requested by the Government, all necessary and pertinent data used by him in preparing the proposal upon which he received the original award of this contract. The Contracting Officer or his authorized representative shall, until the expiration of three (3) years after final payment under this contract, have access to and the right to examine any directly pertinent books, documents, papers and records of the contractor.

d. This clause shall be deemed to constitute the exclusive contractual remedy of the contractor for adjustment arising out of the decision to apply the Service Contract Act to the work covered by this contract. Failure of the parties to reach an understanding as to such adjustment shall be considered a dispute subject to the Disputes Clause of the contract.

ITEM IX-ALLOWABILITY OF AGENT'S FEES AND COMMISSIONS ON FOREIGN MILITARY SALES (FMS)

(Formerly Item VIII of DPC 117 and Item IX of DPC 74-1)

The recent increase in dollar value of FMS and the criticism by some major FMS customers of the amount of fees or commissions of sales agents have highlighted potential problems associated with the implementation of 6-705.3. Of particular concern are instances when, because of the very large value of FMS contracts involved, the application of a set commission rate can result in an excessive fee considering the benefit of the agent's activity.

Policies in 6-705.3 state that prices of normal defense contracts for an item are not automatically applicable to FMS contracts for the same item and that costs of doing business with a foreign government are recognized in pricing FMS contracts. Among the common costs of doing business with foreign governments are agent's fees/commissions for sales.

The following policy guidance is provided to supplement 6-705.3 in determining the applicability and reasonableness of agent's fees/commissions:

a. When a contracting officer is requested to obtain price and availability data from a contractor to support the tendering of a Letter of Offer, he shall require