**BONNEVILLE PURCHASING INSTRUCTIONS**

APPENDIX 13-A

CONTRACT COST PRINCIPLES FOR\
COMMERCIAL ORGANIZATIONS

# TABLE OF CONTENTS

SECTION 1 ADVANCE AGREEMENTS. [3](#section-1-advance-agreements.)

SECTION 2 CONTRACTS WITH COMMERCIAL ORGANIZATIONS
[3](#section-2-contracts-with-commercial-organizations)

SECTION 3 CONSTRUCTION AND ARCHITECT-ENGINEER CONTRACTS.
[4](#section-3-construction-and-architect-engineer-contracts.)

SECTION 4 COMPOSITION OF TOTAL COST.
[4](#section-4-composition-of-total-cost.)

4.1 Determination of Allowability. [4](#determination-of-allowability.)

4.2 Determining Reasonableness. [4](#determining-reasonableness.)

4.3 Determination of Allocability. [4](#determination-of-allocability.)

4.4 Credits. [4](#credits.)

SECTION 5 DIRECT COSTS. [4](#section-5-direct-costs.)

SECTION 6 INDIRECT COSTS. [4](#section-6-indirect-costs.)

SECTION 7 APPLICATION OF PRINCIPLES AND PROCEDURES.
[4](#section-7-application-of-principles-and-procedures.)

SECTION 8 SELECTED COSTS. [4](#section-8-selected-costs.)

8.1 Public Relations and Advertising Costs.
[4](#public-relations-and-advertising-costs.)

8.2 Automatic Data Processing Equipment Leasing Costs.
[4](#automatic-data-processing-equipment-leasing-costs.)

8.3 Bad Debts. [4](#bad-debts.)

8.4 Bonding Costs. [4](#bonding-costs.)

8.5 Civil Defense Costs. [4](#civil-defense-costs.)

8.6 Compensation for Personal Services.
[4](#compensation-for-personal-services.)

8.7 Contingencies. [4](#contingencies.)

8.8 Contributions or Donations. [4](#contributions-or-donations.)

8.9 Reserved. [4](#reserved.)

8.10 Cost of Money. [4](#cost-of-money.)

8.11 Depreciation. [4](#depreciation.)

8.12 Economic Planning Costs. [4](#economic-planning-costs.)

8.13 Employee Morale and Similar Costs.
[4](#employee-morale-and-similar-costs.)

8.14 Entertainment Costs. [4](#entertainment-costs.)

8.15 Fines, Penalties, and Mischarging Costs.
[4](#fines-penalties-and-mischarging-costs.)

8.16 Gains and Losses on Disposition of Depreciable Property.
[4](#gains-and-losses-on-disposition-of-depreciable-property.)

8.17 Idle Facilities and Idle Capacity Costs.
[4](#idle-facilities-and-idle-capacity-costs.)

8.18 Independent R and D Bid and Proposal Costs.
[4](#independent-r-and-d-bid-and-proposal-costs.)

8.19 Insurance and Indemnification. [4](#insurance-and-indemnification.)

8.20 Interest and Other Financial Costs.
[4](#interest-and-other-financial-costs.)

8.21 Labor Relations Costs. [4](#labor-relations-costs.)

8.22 Lobbying and Political Activity Costs.
[4](#lobbying-and-political-activity-costs.)

8.23 Losses on Other Contracts. [4](#losses-on-other-contracts.)

8.24 Maintenance and Repair Costs. [4](#maintenance-and-repair-costs.)

8.25 Manufacturing and Production Engineering Costs.
[4](#manufacturing-and-production-engineering-costs.)

8.26 Material Costs. [4](#material-costs.)

8.27 Organization Costs. [4](#organization-costs.)

8.28 Other Business Expenses. [4](#other-business-expenses.)

8.29 Plant Protection Costs. [4](#plant-protection-costs.)

8.30 Patent Costs. [4](#patent-costs.)

8.31 Reserved. [4](#reserved.-1)

8.32 Precontract Costs. [4](#precontract-costs.)

8.33 Professional and Consultant Service Costs.
[4](#professional-and-consultant-service-costs.)

8.34 Recruitment Costs. [4](#recruitment-costs.)

8.35 Relocation Costs. [4](#relocation-costs.)

8.36 Rental Costs. [4](#rental-costs.)

8.37 Royalties and Other Costs for Use of Patents.
[4](#royalties-and-other-costs-for-use-of-patents.)

8.38 Selling Costs. [4](#selling-costs.)

8.39 Service and Warranty Costs. [4](#service-and-warranty-costs.)

8.40 Special Tooling and Special Test Equipment Costs.
[4](#special-tooling-and-special-test-equipment-costs.)

8.41 Taxes. [4](#taxes.)

8.42 Termination Costs. [4](#termination-costs.)

8.43 Trade, Business, Technical, and Professional Activity Costs.
[4](#trade-business-technical-and-professional-activity-costs.)

8.44 Training and Education Costs. [4](#training-and-education-costs.)

8.45 Transportation Costs. [4](#transportation-costs.)

8.46 Travel Costs. [4](#travel-costs.)

8.47 Defense of Fraud Proceedings. [4](#defense-of-fraud-proceedings.)

8.48 Deferred Research and Development Costs.
[4](#deferred-research-and-development-costs.)

8.49 Goodwill. [4](#goodwill.)

8.50 Reserved. [4](#reserved.-2)

8.51 Costs of Alcoholic Beverages. [4](#costs-of-alcoholic-beverages.)

### SECTION 1 ADVANCE AGREEMENTS.

\(a\) The extent of allowability of the costs covered in this Section
applies broadly to many accounting systems in varying contract
situations. Thus, the reasonableness and allocability of certain costs
may be difficult to determine, particularly for firms or their divisions
that may not be under effective competitive restraints. To avoid
possible subsequent disallowance or dispute based on unreasonableness or
nonallocability, COs and contractors should seek advance agreement on
the treatment of special or unusual costs. However, an advance agreement
is not an absolute requirement, and the absence of an advance agreement
on any cost will not, in itself, affect the reasonableness or
allocability of that cost.

\(b\) Advance agreements may be negotiated either before or during a
contract but should be negotiated before incurrence of the costs
involved. The agreements must be in writing, executed by both
contracting parties, and incorporated into applicable current and future
contracts. An advance agreement shall contain a statement of its
applicability and duration.

\(c\) The CO is not authorized to agree to a treatment of costs
inconsistent with this Appendix. For example, an advance agreement may
not provide that, notwithstanding 8.20, interest is allowable.

\(d\) Advance agreements may be negotiated with a particular contractor
for a single contract or a group of contracts.

### SECTION 2 CONTRACTS WITH COMMERCIAL ORGANIZATIONS

This category includes all contracts and contract modifications for
supplies, services, or experimental, developmental, or research work
negotiated on the basis of cost with organizations other than
educational institutions, State and local governments and nonprofit
organizations.

\(a\) The cost principles and procedures in this Appendix shall be used
in pricing contracts and contract modifications with commercial
organizations whenever cost analysis is performed.

\(b\) In addition, the CO shall incorporate these cost principles and
procedures by reference in contracts with commercial organizations as
the basis for -

\(1\) Determining reimbursable costs under cost-reimbursement contracts
and cost-reimbursement subcontracts under these contracts performed by
commercial organizations, and the cost-reimbursement portion of
time-and-materials contracts, except when material is priced on a basis
other than at cost;

\(2\) Negotiating indirect cost rates;

\(3\) Proposing, negotiating or determining costs under terminated
contracts;

\(4\) Price revision of fixed-price incentive contracts;

\(5\) Price redetermination of price redetermination contracts; and

\(6\) Pricing changes and other contract modifications.

### SECTION 3 CONSTRUCTION AND ARCHITECT-ENGINEER CONTRACTS.

Except as otherwise provided in this paragraph, the allowability of
costs for construction and architect-engineer contracts shall be
determined in accordance with this Appendix.

\(a\) Because of widely varying factors such as the nature, size,
duration, and location of the construction site, advance agreements
under Section 1 for such items as home office overhead, partners\'
compensation, employment of consultants, and equipment usage costs are
particularly important in construction and architect-engineer contracts.
When appropriate they serve to express the parties\' understanding and
to avoid subsequent disputes or disallowances.

\(b\) \"Construction equipment,\" as used in this section, means
equipment (including marine equipment) in sound workable condition,
either owned or controlled by the contractor, or by the subcontractor at
any tier, or obtained from a commercial rental source, and furnished for
its use under BPA contracts.

\(1\) Allowable ownership and operating costs shall be determined as
follows:

\(A\) Actual cost data shall be used when such data can be determined
for both ownership and operating costs for each piece of equipment, or
groups of similar serial or series equipment, from the contractor\'s
accounting records. When such costs cannot be so determined, BPA may
specify the use of a particular schedule of predetermined rates or any
part thereof to determine ownership and operating costs of construction
equipment (see subdivisions (b)(1)(B) and (1)(C) below). However, costs
otherwise unallowable under this Section shall not become allowable
through the use of any schedule (see 1(c)). For example, schedules need
to be adjusted for contract costing purposes if they are based on
replacement cost, include unallowable interest costs, or use improper
cost of money rates or computations. COs should review the computations
and factors included within the specified schedule and ensure that
unallowable or unacceptably computed factors are not included in cost
submissions.

\(B\) Predetermined schedules of construction equipment use rates (e.g.,
the Construction Equipment Ownership and Operating Expense Schedule,
published by the U.S. Army Corps of Engineers, industry-sponsored
construction equipment cost guides, or commercially published schedules
of construction equipment use cost) provide average ownership and
operating rates for construction equipment. The allowance for operating
costs may include costs for such items as fuel, filters, oil, and
grease; servicing, repairs, and maintenance; and tire wear and repair.
Costs of labor, mobilization, demobilization, overhead and profit are
generally not reflected in schedules, and separate consideration may be
necessary.

\(C\) When a schedule of predetermined use rates for construction
equipment is used to determine direct costs, all costs of equipment that
are included in the cost allowances provided by the schedule shall be
identified and eliminated from the contractor\'s other direct and
indirect costs charged to the contract. If the contractor\'s accounting
system provides for site or home office overhead allocations, all costs
which are included in the equipment allowances may need to be included
in any cost input base before computing the contractor\'s overhead rate.
In periods of suspension of work pursuant to a contract clause, the
allowance for equipment ownership shall not exceed an amount for standby
cost as determined by the schedule or contract provision.

\(2\) Reasonable costs of renting construction equipment are allowable
(but see paragraph (c) below).

\(A\) Costs such as maintenance and minor or running repairs incident to
operating such rented equipment, that are not included in the rental
rate, are allowable.

\(B\) Costs incident to major repair and overhaul of rental equipment
are unallowable.

\(C\) The allowability of charges for construction equipment rented from
any division, subsidiary, or organization under common control, will be
determined in accordance with 8.36(b)(3).

\(c\) Costs incurred at the job site incident to performing the work,
such as the cost of superintendence, timekeeping and clerical work,
engineering, utility cost, supplies, material handling, restoration and
cleanup, etc., are allowable as direct or indirect costs, provided the
accounting practice used is in accordance with the contractor\'s
established and consistently followed cost accounting practices for all
work.

\(d\) Rental and any other costs, less any applicable credits incurred
in acquiring the temporary use of land, structures, and facilities are
allowable. Costs, less any applicable credits, incurred in constructing
or fabricating structures and facilities of a temporary nature are
allowable.

### SECTION 4 COMPOSITION OF TOTAL COST.

The total cost of a contract is the sum of the allowable direct and
indirect costs allocable to the contract, incurred or to be incurred,
less any allocable credits, plus any allocable cost of money (see 8.10).
Any generally accepted method of determining or estimating costs that is
equitable and is consistently applied may be used to ascertain total
costs.

#### 4.1 Determination of Allowability.

The following factors shall be considered in determining whether a cost
is allowable:

\(a\) Reasonableness.

\(b\) Allocability.

\(c\) Generally accepted accounting principles and practices appropriate
to the particular circumstances.

\(d\) Terms of the contract.

\(e\) Any limitations set forth in this Appendix.

#### 4.2 Determining Reasonableness.

\(a\) A cost is reasonable if, in its nature and amount, it does not
exceed that which would be incurred by a prudent person in the conduct
of competitive business. Reasonableness of specific costs must be
examined with particular care in connection with firms or their separate
divisions that may not be subject to effective competitive restraints.
No presumption of reasonableness shall be attached to the incurrence of
costs by a contractor. If an initial review of the facts results in a
challenge of a specific cost by the CO or the CO\'s representative, the
burden of proof shall be upon the contractor to establish that such cost
is reasonable.

\(b\) What is reasonable depends upon a variety of considerations and
circumstances, including \--

\(1\) Whether it is the type of cost generally recognized as ordinary
and necessary for the conduct of the contractor\'s business or contract
performance;

\(2\) Generally accepted sound business practices, arm\'s-length
bargaining, and Federal and State laws and regulations.

\(3\) The contractor\'s responsibilities to BPA, other customers, the
owners of the business, employees, and the public at large; and

\(4\) Any significant deviations from the contractor\'s established
practices.

#### 4.3 Determination of Allocability.

A cost is allocable if it is assignable or chargeable to one or more
cost objectives on the basis of relative benefits received or other
equitable relationship. Subject to the foregoing, a cost is allocable to
the contract if it \--

\(a\) Is incurred specifically for the contract;

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

\(c\) Is necessary to the overall operation of the business, although a
direct relationship to any particular cost objective cannot be shown.

#### 4.4 Credits.

The applicable portion of any income, rebate, allowance, or other credit
relating to any allowable cost and received by or accruing to the
contractor shall be credited to BPA either as a cost reduction or by
cash refund.

### SECTION 5 DIRECT COSTS.

\(a\) A direct cost is any cost that can be identified specifically with
a specific final cost objective. No cost shall be allocated as a direct
cost to a final cost objective, if the same cost is allocated as an
indirect cost and has been included in any indirect final cost
objective. Costs identified specifically with the contract are direct
costs of the contract and are to be charged directly to the contract.
All costs specifically identified with other final cost objectives of
the contractor are direct costs of those cost objectives.

\(b\) For reasons of practicality, any direct cost of minor dollar
amount may be treated as an indirect cost if the accounting treatment
\--

\(1\) Is consistently applied to all final cost objectives; and

\(2\) Produces substantially the same results as treating the cost as a
direct cost.

### SECTION 6 INDIRECT COSTS.

\(a\) An indirect cost is any cost not directly identified with a
specific, single, final cost objective, but instead is identified with
two or more final cost objectives or an intermediate cost objective. It
is not subject to treatment as a direct cost. After direct costs have
been determined and charged directly to the contract or other work,
indirect costs are those remaining to be allocated to the several cost
objectives. An indirect cost shall not be allocated to a final cost
objective 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 such 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. This
necessitates the selection of a distribution base common to all cost
objectives to which the grouping is to be allocated. When substantially
the same results can be achieved through less precise methods, the
number and composition of cost groupings should be governed by practical
considerations and should not unduly complicate the allocation.

\(c\) Once an appropriate base for the distribution of indirect costs
has been accepted, it shall not be fragmented by the removal of
individual elements. 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
input base is used for the distribution of general and administrative
(G&A) costs, all items that would properly be part of the cost input
base, whether allowable or unallowable, shall be included in the base
and bear their pro rata share of G&A costs.

\(d\) The contractor\'s method of allocating indirect costs shall be in
accordance with generally accepted accounting principles which are
consistently applied. The method may require examination when \--

\(1\) Substantial differences occur between the cost patterns of work
under the contract and the contractor\'s other work;

\(2\) Significant changes occur in the nature of the business, the
extent of subcontracting, fixed-asset improvement programs, inventories,
the volume of sales and production, manufacturing processes, the
contractor\'s other products, or other relevant circumstances; or

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

### SECTION 7 APPLICATION OF PRINCIPLES AND PROCEDURES.

\(a\) Costs shall be allowed to the extent they are reasonable,
allocable, and determined to be allowable under this Appendix. These
criteria apply to all of the selected items that follow, even if
particular guidance is provided for certain items for emphasis or
clarity.

\(b\) Costs incurred as reimbursements or payments to a subcontractor
under a cost-reimbursement or fixed-price incentive type subcontract are
allowable to the extent consistent with this Appendix. Costs incurred as
payments under firm fixed-price subcontracts or fixed-price subcontracts
with economic price adjustment provisions or modifications thereto, when
cost analysis was performed, shall be allowable only to the extent that
the price was negotiated in accordance with this Appendix.

\(c\) Section 8 does not cover every element of cost. Failure to include
any item of cost does not imply that it is either allowable or
unallowable. The determination of allowability shall be based on the
principles and standards in this subsection and the treatment of similar
or related selected items. When more than one subsection in Section 8 is
relevant to a contractor cost, the cost shall be apportioned among the
applicable subsections, and the determination of allowability of each
portion shall be based on the guidance contained in the applicable
subsection. When a cost to which more than one subsection in Section 8
is relevant cannot be apportioned, the determination of allowability
shall be based on the guidance contained in the subsection that most
specifically deals with, or best captures the essential nature of, the
cost at issue.

\(d\) Deviations from the cost principles in this subsection shall be
processed in accordance with the procedures in BPI subpart 1.7.

### SECTION 8 SELECTED COSTS.

#### 8.1 Public Relations and Advertising Costs.

\(a\) \"Public relations\" means all functions and activities dedicated
to\--

\(1\) Maintaining, protecting, and enhancing the image of a concern or
its products; or

\(2\) Maintaining or promoting reciprocal understanding and favorable
relations with the public at large, or any segment of the public. The
term \"public relations\" includes activities associated with areas such
as advertising, customer relations, etc.

\(b\) \"Advertising\" means the use of media to promote the sale of
products or services and to accomplish the activities referred to in
paragraph (d) of this subsection, regardless of the medium employed,
when the advertiser has control over the form and content of what will
appear, the media in which it will appear, and when it will appear.
Advertising media include but are not limited to conventions, exhibits,
free goods, samples, magazines, newspapers, trade papers, direct mail,
dealer cards, window displays, outdoor advertising, radio and
television.

\(c\) Public relations and advertising costs include the costs of media
time and space, and purchased services performed by outside
organizations, as well as the applicable portion of salaries, travel,
and fringe benefits of employees engaged in the functions and activities
identified in paragraphs (a) and (b) of this subsection.

\(d\) The only advertising costs that are allowable are those
specifically required by contract, or that arise from requirements of
BPA contracts and that are exclusively for\--

\(1\) Recruiting personnel required for performing contractual
obligations, when considered in conjunction with all other recruitment
costs (but see 8.34);

\(2\) Acquiring scarce items for contract performance; or

\(3\) Disposing of scrap or surplus materials acquired for contract
performance.

\(e\) Allowable public relations costs include the following:

\(1\) Costs specifically required by contract.

\(2\) Costs of\--

\(i\) Responding to inquiries on company policies and activities;

\(ii\) Communicating with the public, press, stockholders, creditors,
and customers; and

\(iii\) Conducting general liaison with news media and Government public
relations officers, to the extent that such activities are limited to
communication and liaison necessary to keep the public informed on
matters of public concern, such as notice of contract awards, plant
closings or openings, employee layoffs or rehires, financial
information, etc.

\(3\) Costs of participation in community service activities (e.g.,
blood bank drives, charity drives, savings bond drives, disaster
assistance, etc.).

\(4\) Costs of plant tours and open houses (but see subparagraph (f)(5)
of this subsection).

\(f\) Unallowable public relations and advertising costs include the
following:

\(1\) All advertising costs other than those specified in paragraph (d)
of this subsection.

\(2\) Costs of air shows and other special events or trade shows which
do not include a significant effort to promote the export of products
normally sold to the U.S. Government.

\(3\) Costs of sponsoring meetings, symposia, seminars, and other
special events when the principal purpose of the event is other than
dissemination of technical information or stimulation of production.

\(4\) Costs of ceremonies, such as corporate celebrations and new
product announcements.

\(5\) Costs of promotional material, motion pictures, videotapes,
brochures, handouts, magazines, and other media that are designed to
call favorable attention to the contractor and its activities.

\(6\) Costs of souvenirs, models, imprinted clothing, buttons, and other
mementos provided to customers or the public.

\(7\) Costs of memberships in civic and community organizations.

#### 8.2 Automatic Data Processing Equipment Leasing Costs.

\(a\) This subsection applies to all contractor-leased automatic data
processing equipment (ADPE) (except as components of an end item to be
delivered to BPA acquired under operating leases, as defined in
Statement of Financial Accounting Standard No. 13 (FAS-13), Accounting
for Leases, issued by the Financial Accounting Standards Board.
Compliance with 8.11(M) requires that ADPE acquired by means of capital
leases, as defined in FAS-13, shall be treated as purchased assets.
Allowability of costs related to contractor-owned ADPE is governed by
other provisions of this subsection.

(b)(1) If the contractor leases ADPE but cannot demonstrate, on the
basis of facts existing at the time of the decision to lease or continue
leasing (and documented in accordance with paragraph (d) below) that
leasing will result in less cost to BPA over the anticipated useful life
(see paragraph (c) below), then rental costs are allowable only up to
the amount that would be allowed had the contractor purchased the ADPE.

\(2\) The costs of leasing ADPE are allowable to the extent that the
contractor can annually demonstrate in accordance with paragraph (d)
below (whether or not the term of lease is renewed or otherwise
extended) that these costs meet the following criteria:

\(i\) The costs are reasonable and necessary for the conduct of the
contractor\'s business in light of factors such as the contractor\'s
requirements for ADPE, costs of comparable facilities, the various types
of leases available, and the provisions of the rental agreement.

\(ii\) The costs do not give rise to a material equity in the facilities
but represent charges only for the current use of the equipment,
including incidental service costs such as maintenance, insurance, and
applicable taxes.

\(iii\) The CO\'s approval was obtained for the leasing arrangement (see
subparagraph (d)(3) below) when the total cost of leasing the ADPE

\(A\) is to be allocated to one or more Government contracts which
require the negotiation or determination of costs, or

\(B\) in a single plant, division, or cost center exceeds \$500,000 a
year and 50 percent or more of the total leasing cost is to be allocated
to one or more Government contracts which require the negotiation or
determination of costs.

\(3\) Rental costs under a sale and leaseback arrangement are allowable
only up to the amount that would have been allowed had the contractor
retained title to the ADPE.

\(4\) Allowable rental costs of ADPE leased from any division,
subsidiary, or organization under a common control are limited to the
cost of ownership (excluding interest or other costs unallowable under
this Section 8, and including the cost of money \[see 8.10\]). When
there is an established practice of leasing the same or similar
equipment to unaffiliated lessees, rental costs shall be allowed under
subparagraphs (b)(1) and (2) above, except that the purchase price and
costs of ownership shall be determined under 8.26(e).

(c)(1) An estimate of the anticipated useful life of the ADPE may
present the application life (utility in a given function),
technological life (utility before becoming obsolete in whole or in
part), or physical life (utility before wearing out). Each case must be
evaluated individually. In estimating anticipated useful life, the
contractor may use the application life if it can be demonstrated that
the ADPE has utility only in a given function and the duration of the
function can be determined. Technological life may be used if the
contractor can demonstrate that existing ADPE must be replaced because
of \--

\(i\) Specific program objectives or contract requirements that cannot
be accomplished with the existing ADPE;

\(ii\) Cost reductions that will produce identifiable savings in
production or overhead costs;

\(iii\) Increase in workload volume that cannot be accomplished
efficiently by modifying or augmenting existing ADPE; or

\(iv\) Consistent pattern of capacity operation (2 1/2 - 3 shifts) on
existing ADPE.

\(2\) Technological advances will not justify replacing existing ADPE
before the end of its physical life if it will be able to satisfy future
requirements or demands.

\(3\) In estimating the least cost to BPA for useful life, the
cumulative costs that would be allowed if the contractor owned the ADPE
should be compared with cumulative costs that would be allowed under any
of the various types of leasing arrangements available.

(d)(1) Except as provided in subparagraph (3) below, the contractor\'s
justification, under paragraph (b) above, of the leasing decisions shall
consist of the following supporting data, prepared before purchase:

\(i\) Analysis of use of existing ADPE.

\(ii\) Application of the criteria in paragraph (b) above.

\(iii\) Specific objectives or requirements, generally in the form of a
data system study and specification.

\(iv\) Solicitation of proposals, based on the data system
specification, from qualified sources.

\(v\) Proposals received in response to the solicitation and reasons for
selection of the equipment chosen and for the decision to lease.

\(2\) Except as provided in subparagraph (3) below, the contractor\'s
annual justification, under subparagraph (b)(2) above, of the decision
to retain or change existing ADPE capability and the need to continue
leasing shall consist of current data as specified in (d)(1)(i) through
(iii) above.

\(3\) If the contractor\'s prospective ADPE lease cost meets the
threshold in 8.2(b)(2)(iii) above, the contractor shall furnish data in
support of the initial decision to lease (see subparagraph (b)(1)
above). If the total cost of leasing ADPE in a single plant, division,
or cost center exceeds \$500,000 per year and 50 percent or more of the
total leasing cost is allocated to BPA contracts which require the
negotiating or determining costs, the contractor shall furnish data
supporting the annual justification for retaining or changing existing
ADPE capability and the need to continue leasing shall also be furnished
(see subparagraph (b)(2) above).

#### 8.3 Bad Debts.

Bad debts, including actual or estimated losses arising from
uncollectable accounts receivable due from customers and other claims,
related collection costs, and related legal costs are unallowable.

#### 8.4 Bonding Costs.

\(a\) Bonding costs arise when BPA 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 its 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.

#### 8.5 Civil Defense Costs.

\(a\) Civil defense costs are those incurred in planning for, and
protecting life and property against, the possible effects of enemy
attack. 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 acquired for civil defense purposes are
allowable through depreciation (see 8.11).

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

#### 8.6 Compensation for Personal Services.

\(a\) General. Compensation for personal services includes all
remuneration paid currently or accrued, in whatever form and whether
paid immediately or deferred, 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 for severance pay costs in paragraph (g) below and
for pension costs in paragraph (j) below). It includes, but is not
limited to, salaries; wages; directors\' and executive committee
members\' fees; bonuses (including stock bonuses); incentive awards;
employee stock options, stock appreciation rights, employee stock
options, and stock appreciation rights; employee stock ownership plans;
employee insurance; fringe benefits; contributions to pension, other
post retirement benefits, annuity and employee incentive compensation
plans; and allowances for off-site pay, incentive pay, location
allowances, hardship pay, severance pay, and cost-of-living
differential. Compensation for personal services is allowable subject to
the following general criteria and additional requirements contained in
other Sections of this cost principle:

\(1\) Compensation for personal services must be for work performed by
the employee in the current year and must not represent a retroactive
adjustment of prior years\' salaries or wages (but see 8.6(g), (h), (j),
(k), (m), and (o) below).

\(2\) The compensation in total must be reasonable for the work
performed; however, specific restrictions on individual compensation
elements must be observed where they are prescribed.

\(3\) The compensation must be based upon and conform to the terms and
conditions of the contractor\'s established compensation plan or
practice followed so consistently as to imply, in effect, an agreement
to make the payment.

\(4\) No presumption of allowability will exist where the contractor
introduces major revisions of existing compensation plans or new plans
and the contractor\--

\(i\) Has not notified the CO of the changes, either before their
implementation or within a reasonable period after their implementation,
and

\(ii\) Has not provided BPA, either before implementation or within a
reasonable period after it, an opportunity to review the allowability of
the changes.

\(5\) Costs that are unallowable under other paragraphs of this Appendix
shall not be allowable under this subsection 8.6 solely on the basis
that they constitute compensation for personal services. (See 8.34(c))

\(b\) Reasonableness.

\(1\) The compensation for personal services paid or accrued to each
employee must be reasonable for the work performed. Compensation will be
considered reasonable if each of the allowable elements making up the
employee\'s compensation package is reasonable. In determining the
reasonableness of individual elements for particular employees or
classes of employees, consideration should be given to all potentially
relevant facts. Facts which may be relevant include general conformity
with the compensation practices of other firms of the same size, the
compensation practices of other firms in the same industry, the
compensation practices of other firms in the same geographic area, the
compensation practices of firms engaged in predominantly non-Government
work, and the cost of comparable services obtainable from outside
sources. While all of the above factors, as well as any other relevant
ones, should be considered, their relative significance will vary
according to circumstances. For example, in the case of secretarial
salaries, conformity with the compensation paid by other firms in the
same geographic area would likely be a more significant criterion than
conformity with the compensation paid by other firms in the same
industry wherever located. The tests for reasonableness of
labor-management agreements are set forth in paragraph (c) of this
subsection. In addition to the provisions of section 4.2 of this
appendix, in testing the reasonableness of individual elements for
particular employees or job classes of employees, consideration should
be given to factors determined to be relevant by the CO. In
administering this principle, it is recognized that not every
compensation case need be subjected in detail to the above or other
tests. The tests need be applied only when a general review reveals
amounts or types of compensation that appear unreasonable or
unjustified. Based on an initial review of the facts, COs or their
representatives may challenge the reasonableness of any individual
element or the sum of the individual elements of compensation paid or
accrued to particular employees or classes of employees. In such cases,
there is no presumption of reasonableness and, upon challenge, the
contractor must demonstrate the reasonableness of the compensation item
in question. In doing so, the contractor may introduce, and the CO will
consider, not only any circumstances surrounding the compensation item
challenged, but also the magnitude of other compensation elements which
may be lower than would be considered reasonable in themselves. For
example, a contractor, if challenged on the amount of base salaries for
management, could counter by showing lower-than-normal end-of-year
management bonuses. However, the contractor\'s right to introduce
offsetting compensation elements into consideration is subject to the
following limitations:

\(i\) Offsets will be considered only between the allowable elements of
an employee\'s (or a class of employees\') compensation package. For
example, excessive management salaries cannot be offset against
lower-than-normal secretarial salaries.

\(ii\) Offsets will be considered only between the allowable portion of
the following compensation elements of employees or classes of
employees:

\(A\) Wages and salaries.

\(B\) Incentive bonuses.

\(C\) Deferred compensation.

\(D\) Pension and savings plan benefits.

\(E\) Health insurance benefits.

\(F\) Life insurance benefits.

\(G\) Compensated personal absence benefits.

However, any of the above elements or portions thereof, whose amount is
not measurable, shall not be introduced or considered as an offset item.

\(iii\) In considering offsets, the magnitude of the compensation
elements in question must be taken into account. An executive bonus that
is excessive by \$100,000 is not fully offset by a base salary that is
low by only \$25,000. In determining the magnitude of compensation
elements, the timing of receipt by the employee must be considered. For
example, a bonus of \$100,000 in the current period will be considered
as of greater value than a deferred compensation arrangement to make the
same payment in some future period.

\(2\) Compensation costs under certain conditions give rise to the need
for special consideration. Among such conditions are the following:

\(i\) Compensation to (A) owners of closely held corporations, partners,
sole proprietors, or members of their immediate families, or (B) persons
who are contractually committed to acquire a substantial financial
interest in the contractor\'s enterprise. Determination should be made
that salaries are reasonable for the personal services rendered rather
than being a distribution of profits. 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. For closely held corporations, compensation costs covered by
this subdivision shall not be recognized in amounts exceeding those
costs that are deductible as compensation under the Internal Revenue
Code and regulations under it.

\(ii\) Any change in a contractor\'s compensation policy that results in
a substantial 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. COs or their representatives should normally
challenge increased costs where major revisions of existing compensation
plans or new plans are introduced by the contractor, and the
contractor\--

\(A\) Has not notified the CO of the changes either before their
implementation or within a reasonable period after their implementation;
and

\(B\) Has not provided BPA, either before implementation or within a
reasonable period after it, an opportunity to review the reasonableness
of the changes.

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

\(iv\) The contractor incurs costs for compensation in excess of the
amounts which are deductible under the Internal Revenue Code and
regulations issued under it.

\(c\) Labor-management agreements. If cost of compensation established
under "arm's length" negotiated labor-management agreements is otherwise
allowable, the costs are reasonable if, as applied to work in performing
Government contracts, it is not determined to be unwarranted by the
character and circumstances of the work or 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 employment (e.g., 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
(e.g., work involving less-hazardous activities or work continually
requiring use of overtime). It is discriminatory against the Government
if it results in employee 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
this paragraph (c) unless\--

\(1\) The contractor has been permitted an opportunity to justify the
costs; and

\(2\) Due consideration has been given to whether unusual conditions
pertain to Government contract work, imposing burdens, hardships, or
hazards on the contractor\'s employees, for which compensation that
might otherwise appear unreasonable is required to attract and hold
necessary personnel.

\(d\) Form of payment.

\(1\) Compensation for personal services includes compensation paid or
to be paid in the future to employees in the form of cash, corporate
securities, such as stocks, bonds, and other financial instruments (see
paragraph (d)(2) of this subsection regarding valuation), or other
assets, products, or services.

\(2\) When compensation is paid with securities of the contractor or of
an affiliate, the following additional restrictions apply:

\(i\) Valuation placed on the securities shall be the fair market value
on the measurement date (i.e., the first date the number of shares
awarded is known) determined upon the most objective basis available.

\(ii\) Accruals for the cost of securities before issuing the securities
to the employees shall be subject to adjustment according to the
possibilities that the employees will not receive the securities and
that their interest in the accruals will be forfeited.

\(e\) Domestic and foreign differential pay.

\(1\) When personal services are performed in a foreign country,
compensation may also include a differential that may properly consider
all expenses associated with foreign employment such as housing; cost of
living adjustments; transportation; bonuses; additional Federal, State,
local or foreign income taxes resulting from foreign assignment; and
other related expenses.

\(2\) Differential allowances for additional Federal, state, or local
income taxes resulting from domestic assignments are unallowable.

\(f\) Bonuses and incentive compensation.

\(1\) Incentive compensation for management employees, cash bonuses,
suggestion awards, safety awards, and incentive compensation based on
production, cost reduction, or efficient performance are allowable
provided the awards are paid or accrued under an agreement entered into
in good faith between the contractor and the employees before the
services are rendered or pursuant to an established plan or policy
followed by the contractor so consistently as to imply, in effect, an
agreement to make such payment and the basis for the award is supported.

\(2\) When the bonus and incentive compensation payments are deferred,
the costs are subject to the requirements of subparagraph (f)(1) above
and of paragraph (k) below.

\(g\) Severance pay.

\(1\) 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 involuntarily terminated. Payments for
early retirement incentive plans are covered in subparagraph (j)(7)
below.

\(2\) Severance pay, to be allowable, must meet the general allowability
criteria in subdivision (g)(2)(i) below, and, depending upon whether the
severance is normal or abnormal, criteria in subdivision (g)(2)(ii) for
normal severance pay or subdivision (g)(2)(iii) for abnormal severance
pay also apply.

\(i\) Severance pay is allowable only to the extent that, in each case,
it is required by (A) law, (B) employer-employee agreement, (C)
established policy that constitutes, in effect, an implied agreement on
the contractor\'s part, or (D) circumstances of the particular
employment. Payments made in the event of employment with a replacement
contractor where continuity of employment with credit for prior length
of service is preserved under substantially equal conditions of
employment, or continued employment by the contractor at another
facility, subsidiary, affiliate, or parent company of the contractor are
not severance pay and are unallowable.

\(ii\) 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, that method will be
acceptable if the amount of the accrual is reasonable in light of
payments actually made for normal severances over a representative past
period and if amounts accrued are allocated to all work performed in the
contractor\'s plant.

\(iii\) Abnormal or mass severance pay is of such a conjectural nature
that measurement of costs by means of an accrual will not achieve equity
to both parties. Thus, accruals for this purpose are not allowable.
However, the Government recognizes its obligation to participate, to the
extent of its fair share, in any specific payment. Thus, allowability
will considered on a case-by-case basis.

\(h\) Back pay.

\(1\) Back pay resulting from violations of Federal labor laws or the
Civil Rights Act of 1964. Back pay may result from a negotiated
settlement, order, or court decree that resolves a violation of Federal
labor laws or the Civil Rights Act of 1964. Such back pay 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 back pay was not additional compensation for work performed.
Back pay resulting from underpaid work is compensation for the work
performed and is allowable. All other back pay resulting from violation
of Federal labor laws or the Civil Rights Act of 1964 is unallowable.

\(2\) Other back pay. Back pay may also result from payments to
employees (union and non-union) for the difference in their past and
current wage rates for working without a contract or labor agreement
during labor management negotiations. Such back pay is allowable. Back
pay to nonunion employees based upon results of union agreement
negotiations is allowable only if (i) a formal agreement or
understanding exists between management and the employees concerning
these payments, or (ii) an established policy or practice exists and is
followed by the contractor so consistently as to imply, in effect, an
agreement to make such payment.

\(i\) Compensation based on changes in the prices of corporate
securities or corporate security ownership, such as stock options, stock
appreciation rights, phantom stock plans, and junior stock conversions.

\(A\) Any compensation which is calculated, or valued, based on changes
in the price of corporate securities is unallowable.

\(B\) Any compensation represented by dividend payments or which is
calculated based on dividend payments is unallowable.

\(C\) If a contractor pays an employee in lieu of the employee receiving
or exercising a right, option, or benefit which would have been
unallowable under this paragraph (i), such payments are also
unallowable.

\(j\) Pension costs.

\(1\) A pension plan is a deferred compensation plan that is established
and maintained by one or more employers to provide systematically for
paying benefits to plan participants after their retirement, provided
that the benefits are paid for life or are payable for life at the
option of the employee. Additional benefits such as permanent and total
disability and death payments and survivorship payments to beneficiaries
of deceased employees may be treated as pension costs, provided the
benefits are an integral part of the pension plan and meet all the
criteria pertaining to pension costs.

\(2\) Pension plans are normally segregated into two types of plans:
defined benefit or defined contribution pension plans. The cost of all
defined benefit pension plans shall be measured, allocated, and
accounted for in compliance with the provisions of 48 CFR 9904.412,
Composition and Measurement of Pension Costs, and 48 CFR 9904.413,
Adjustment and Allocation of Pension Cost. The costs of all defined
contribution pension plans shall be measured, allocated, and accounted
for in accordance with the provisions of 48 CFR 9904.412. Pension costs
are allowable subject to the referenced standards and the cost
limitations and exclusions set forth below in subparagraphs (j)(2)(i)
and (j)(3) through (8) of this subsection.

\(i\) Except for unfunded pension plans to be allowable in the current
year, pension costs must be funded by the time set for filing the
Federal income tax return or any extension thereof. Pension costs
assigned to the current year, but not funded by the tax return time,
shall not be allowable in any subsequent year.

\(ii\) Pension payments must be reasonable in amount and be paid
pursuant to (A) an agreement entered into in good faith between the
contractor and employees before the work or services are performed, and
(B) the terms and conditions of the established plan. The cost of
changes in pension plans which are discriminatory to the Government or
are not intended to be applied consistently for all employees under
similar circumstances in the future are not allowable.

\(iii\) Except as provided for early retirement benefits in subparagraph
(j)(7) below, one-time-only pension supplements not available to all
participants of the basic plan are not allowable as pension costs unless
the supplemental benefits represent a separate pension plan and the
benefits are payable for life at the option of the employee.

\(iv\) Increases in payments to previously retired plan participants
covering cost-of-living adjustments are allowable if paid in accordance
with a policy or practice consistently followed.

\(3\) Defined benefit pension plans. This subparagraph covers pension
plans in which the benefits to be paid or the basis for determining such
benefits are established in advance and the contributions are intended
to provide the stated benefits. The cost limitations and exclusions
pertaining to defined benefit plans are as follows:

(i)(A) Except for unfunded pension plans, normal costs of pension plans
not funded in the year incurred, and all other components of pension
costs assignable to the current accounting period but not funded during
it, shall not be allowable in subsequent years (except that a payment
made to fund by the time set for filing the Federal income tax return or
any extension thereof is considered to have been made during such
taxable year). However, any part of a pension cost that is computed for
a cost accounting period that is deferred pursuant to a waiver granted
under the provisions of the Employee\'s Retirement Income Security Act
of 1974 (ERISA) will be allowable in those future accounting periods in
which the funding does occur. The allowability of these deferred
contributions will be limited to the amounts that would have been
allowed had the funding occurred in the year the costs would have been
assigned except for the waiver.

\(B\) Reserved.

\(ii\) Any amount paid or funded before the time it becomes assignable
and allowable shall be applied to future years, in order of time, as if
actually paid and deductible in those years. The interest earned on such
premature funding, based on the valuation rate of return, may be
excluded from future years\' computations of pension costs.

\(iii\) Increased pension costs caused by delay in funding beyond 30
days after each quarter of the year to which they are assignable are
unallowable. If a composite rate is used for allocating pension costs
between the segments of a company and if, because of differences in the
timing of the funding by the segments, an inequity exists, allowable
pension costs for each segment will be limited to that particular
segment\'s calculation of pension costs. Determination of unallowable
costs shall be made in accordance with the actuarial method used in
calculating pension costs.

\(iv\) Allowability of the cost of indemnifying the Pension Benefit
Guaranty Corporation (PBGC) under ERISA Section 4062 or 4064 arising
from terminating an employee deferred compensation plan will be
considered on a case-by-case basis; provided that if insurance was
required by the PBGC under ERISA Section 4023, it was so obtained and
the indemnification payment is not recoverable under the insurance.
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. If a beneficial or other
equitable relationship exists, the Government will participate, despite
the requirements of 8.19(a)(3) and (b), in the indemnification payment
to the extent of its fair share.

\(iv\) Allowability of the cost of indemnifying the Pension Benefit
Guaranty Corporation (PBGC) under ERISA Section 4062 or 4064 arising
from terminating an employee deferred compensation plan will be
considered on a case-by-case basis; provided that if insurance was
required by the PBGC under ERISA Section 4023, it was so obtained and
the indemnification payment is not recoverable under the insurance.
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. If a beneficial or other
equitable relationship exists, the Government will participate, despite
the requirements of 8.19(a)(3) and (b), in an indemnification payment to
the extent of its fair share.

\(v\) Increased pension costs resulting from the withdrawal of assets
from a pension fund and transfer to another employee benefit plan fund
are unallowable except to the extent authorized by an advance agreement.
The advance agreement shall:

\(A\) State the amount of the Government\'s equitable share in the gross
amount withdrawn, and

\(B\) Provide that the Government receive a credit equal to the amount
of the Government\'s equitable share of the gross withdrawal. If a
transfer is made without such an agreement, paragraph (j)(4) of this
subsection will apply to the transfer as a constructive withdrawal and
receipt of funds by the contractor.

\(4\) Termination of defined benefit pension plans. When excess or
surplus assets revert to the contractor as a result of termination of a
defined pension plan, or such assets are constructively received by it
for any reason, the contractor shall make a refund or give a credit to
the Government for its equitable share of the gross amount withdrawn.
The Government\'s equitable share shall reflect the Government\'s
participation in pension costs through those contracts for which
certified cost or pricing data were submitted or which are subject to
this Appendix.

\(5\) Defined contribution pension plans. This subparagraph covers those
pension plans in which the contributions to be made are established in
advance and the level of benefits is determined by the contributions
made. It also covers profit sharing, savings plans, and other such plans
provided the plans fall within the definition of a pension plan in
subparagraph (j)(1) above.

\(i\) The pension cost assignable to a cost accounting period is the net
contribution required to be made for that period after taking into
account dividends and other credits, where applicable. However, any
portion of pension cost computed for a cost accounting period that is
deferred pursuant to a waiver granted under the provisions of ERISA will
be allowable in those future accounting periods when the funding does
occur. 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 would have been assigned except for the waiver.

\(ii\) Any amount paid or funded to the trust before the time it becomes
assignable and allowable shall be applied to future years, in order of
time, as if actually paid and deductible in such years.

\(iii\) The provisions of subdivision (j)(3)(iv) above concerning
payments to PBGC apply to defined contribution plans.

\(6\) Reserved.

\(7\) Early retirement incentive plans. An early retirement incentive
plan is a plan under which employees receive a bonus or incentive, over
and above the requirement of the basic pension plan, to retire early.
These plans normally are not applicable to all participants of the basic
plan and do not represent life income settlements, and as such would not
qualify as pension costs. However, for contract costing purposes, early
retirement incentive payments are allowable subject to the pension cost
criteria contained in subdivisions (j)(3)(i) through (iv), provided\--

\(i\) The costs are accounted for and allocated in accordance with the
contractor\'s system of accounting for pension costs;

\(ii\) The payments are made in accordance with the terms and conditions
of the contractor\'s plan;

\(iii\) The plan is applied only to active employees. The cost of
extending the plan to employees who retired or were terminated before
the adoption of the plan is unallowable; and

\(iv\) The total of the incentive payments to any employee may not
exceed the amount of the employee\'s annual salary for the previous
fiscal year before the employee\'s retirement.

\(8\) Employee stock ownership plans (ESOP)

\(i\) An ESOP is an individual stock bonus plan designed specifically to
invest in the stock of the employer corporation. The contractor\'s
contributions to an Employee Stock Ownership Trust (ESOT) may be in the
form of cash, stock, or property. Costs of ESOPs are allowable, subject
to the following conditions:

\(A\) Contributions by the contractor in any one year may not exceed 15
percent (25 percent when a money purchase plan is included) of salaries
and wages of employees participating in the plan in any particular year.

\(B\) The contribution rate (ratio of contribution to salaries and wages
of participating employees) may not exceed the last approved
contribution rate except when approved by the CO based upon
justification provided by the contractor. When no contribution was made
in the previous year for an existing ESOP, or when a new ESOP is first
established, and the contractor proposes to make a contribution in the
current year, the contribution rate shall be subject to the CO\'s
approval.

\(C\) When a plan or agreement exists wherein the liability for the
contribution can be compelled for a specific year, the expense
associated with that liability is assignable only to that period. Any
portion of the contribution not funded by the time set for filing of the
Federal income tax return for that year or any extension thereof shall
not be allowable in subsequent years.

\(D\) When a plan or agreement exists wherein the liability for the
contribution cannot be compelled, the amount contributed for any year is
assignable to that year, provided the amount is funded by the time set
for filing of the Federal income tax return for that year.

\(E\) When the contribution is in the form of stock, the value of the
stock contribution shall be limited to the fair market value of the
stock on the date that title is effectively transferred to the trust.
Cash contributions shall be allowable only when the contractor furnishes
evidence satisfactory to the CO demonstrating that stock purchases by
the ESOT are or will be at a fair market price; (e.g., makes
arrangements with the trust permitting the CO to examine purchases of
stock by the trust to determine that prices paid are at fair market
value.) When excessive prices are paid, the amount of the excess will be
credited to the same indirect cost pools that were charged for the ESOP
contributions in the year in which the stock purchase occurs. However,
when the trust purchases the stock with borrowed funds which will be
repaid over a period of years by cash contributions from the contractor
to the trust, the excess price over fair market value shall be credited
to the indirect cost pools pro rata over the period of years during
which the contractor contributes the cash used by the trust to repay the
loan. When the fair market value of unissued stock or stock of a closely
held corporation is not readily determinable, the valuation will be made
on a case-by-case basis, taking into consideration the guidelines for
valuation used by the IRS.

> \(ii\) Amounts contributed to an ESOP arising from either (A) an
> additional investment tax credit (see 1975 Tax Reduction
> Act\--TRASOP\'s); or (B) a payroll-based tax credit (see Economic
> Recovery Tax Act of 1981) are unallowable.
>
> \(iii\) The requirements of subdivision (j)(3)(ii) above are
> applicable to Employee Stock Ownership Plans.

\(k\) Deferred compensation.

\(1\) Deferred compensation is an award given by an employer to
compensate an employee in a future cost accounting period or periods for
services rendered in one or more cost accounting periods before the date
of receipt of compensation by the employee. Deferred compensation does
not include the amount of year-end accruals for salaries, wages, or
bonuses that are paid within a reasonable period of time after the end
of a cost accounting period. Subject to 8.6(a), deferred awards are
allowable when they are based on current or future services. Awards made
in periods subsequent to the period when the work being remunerated was
performed are not allowable.

\(2\) The costs of deferred awards shall be measured, allocated, and
accounted for in compliance with the provisions of 48 CFR 9904.415,
Accounting for the Cost of Deferred Compensation.

\(3\) Deferred compensation payments to employees under awards made
before the effective date of 48 CFR 9904.415 are allowable to the extent
they would have been allowable under prior regulations.

\(l\) Compensation incidental to business acquisitions. The following
costs are unallowable.

\(1\) Payments to employees under agreements in which they receive
special compensation, in excess of the contractor\'s normal severance
pay practice, if their employment terminates following a change in the
management control over, or ownership of, the contractor or a
substantial portion of its assets.

\(2\) Payments to employees under plans introduced in connection with a
change (whether actual or prospective) in the management control over,
or ownership of, the contractor or a substantial portion of its assets
in which those employees receive special compensation, which is
contingent upon the employee remaining with the contractor for a
specified period of time.

\(m\) Fringe benefits.

\(1\) Fringe benefits are allowances and services provided by the
contractor to its employees as compensation in addition to regular wages
and salaries. Fringe benefits include, but are not limited to, the cost
of vacations, sick leave, holidays, military leave, employee insurance,
and supplemental unemployment benefit plans. Except as provided
elsewhere in this Appendix, the costs of fringe benefits are allowable
to the extent that they are reasonable and are required by law,
employer-employee agreement, or an established policy of the contractor.

\(2\) That portion of the cost of company-furnished automobiles that
relates to personal use by employees (including transportation to and
from work) is unallowable regardless of whether the cost is reported as
taxable income to the employees (see 8.46(f)).

\(n\) Employee rebate and purchase discount plans. Rebates and purchase
discounts, in whatever form, granted to employees on products or
services produced by the contractor or affiliates are unallowable.

\(o\) Post-retirement benefits other than pensions (PRB).

\(1\) PRB covers all benefits, other than cash benefits and life
insurance benefits paid by pension plans, provided to employees, their
beneficiaries, and covered dependents during the period following the
employees\' retirement. Benefits encompassed include, but are not
limited to, post-retirement health care, life insurance provided outside
a pension plan, and other welfare benefits such as tuition assistance,
day care, legal services, and housing subsidies provided after
retirement.

\(2\) To be allowable, PRB costs must be reasonable and incurred
pursuant to law, employer-employee agreement, or an established policy
of the contractor. In addition, to be allowable, PRB costs must be
calculated in accordance with paragraphs (o)(2)(i), (ii), or (iii) of
this subparagraph.

\(i\) Cash basis. Cost recognized as benefits when they are actually
provided, must be paid to an insurer, provider, or other recipient for
current year benefits or premiums.

\(ii\) Terminal funding. If a contractor elects a terminal-funded plan,
it does not accrue PRB costs during the working lives of employees.
Instead, it accrues and pays the entire PRB liability to an insurer or
trustee in a lump sum upon the termination of employees (or upon
conversion to such a terminal-funded plan) to establish and maintain a
fund or reserve for the sole purpose of providing PRB to retirees. The
lump sum is allowable if amortized over a period of 15 years.

\(iii\) Accrual basis. Accrual costing other than terminal funding must
be measured and assigned according to Generally Accepted Accounting
Principles and be paid to an insurer or trustee to establish and
maintain a fund or reserve for the sole purpose of providing PRB to
retirees. The accrual must also be calculated in accordance with
generally accepted actuarial principles and practices as promulgated by
the Actuarial Standards Board.

\(3\) To be allowable, costs must be funded by the time set for filing
the Federal income tax return or any extension thereof. PRB costs
assigned to the current year, but not funded or otherwise liquidated by
the tax return time, shall not be allowable in any subsequent year.

\(4\) Increased PRB costs caused by delay in funding beyond 30 days
after each quarter of the year to which they are assignable are
unallowable.

\(5\) Costs of post-retirement benefits in subdivision (o)(2)(iii) of
this subsection attributable to past service (\"transaction
obligation\") as defined in Financial Accounting Standards Board
Statement 106, paragraph 110, are allowable, subject to the following
limitation: The allowable amount of such costs assignable to a
contractor fiscal year cannot exceed the amount of such costs which
would be assigned to that contractor fiscal year under the delayed
recognition methodology described in paragraphs 112 and 113 of Statement
106.

\(6\) The Government shall receive an equitable share of any amount of
previously-funded PRB costs which revert or inure to the contractor.
Such equitable share shall reflect the Government\'s previous
participation in PRB costs through those contracts for which certified
cost or pricing data were required or which were subject to this
Appendix.

#### 8.7 Contingencies.

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

\(b\) Costs for contingencies are generally unallowable for historical
costing purposes because such costing deals with costs incurred and
recorded on the contractor\'s books. A contingency factor may be
recognized when it is applicable to a past period (such as in a contract
termination action) to give recognition to minor unsettled factors in
the interest of expediting settlement.

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

\(1\) Those that may arise from presently known and existing conditions,
the effects of which are foreseeable within reasonable limits of
accuracy. Contingencies of this category are to be included in the
estimates of future cost.

\(2\) Those that may arise from presently known or unknown conditions,
the effect of which cannot be measured precisely enough to provide
equitable results to the contractor and to the Government. 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) to facilitate the
negotiation of appropriate contractual coverage.

#### 8.8 Contributions or Donations.

Contributions or donations, including cash, property and services,
regardless of recipient, are unallowable, except as provided in
8.1(e)(3).

#### 8.9 Reserved.

#### 8.10 Cost of Money.

\(a\) Policy. Facilities capital cost of money and cost of money as an
element of capital assets under construction are not allowable costs
under BPA contracts or intergovernmental contracts.

\(b\) Background. Facilities Capital Cost of Money is a concept which
was originally developed by the Cost Accounting Standards Board as CAS
414 and was applied by law to defense contractors. Allowing facilities
capital cost of money for this purpose was intended to reward a
contractor\'s investment in plant and equipment used to increase the
productivity of the firm, to encourage the use of modern manufacturing
technology, to broaden the nation\'s mobilization base, and to make the
performance of defense contracts more efficient. The cost of capital
committed to facilities is an imputed cost determined by applying a cost
of money rate to facilities capital. Allowing the recovery of these
costs was intended to create an incentive for contractors to invest in
cost-cutting machinery. The allowance of such costs was felt necessary
for defense contractors who had major investments in plant and equipment
designed for the production of supplies and equipment in support of the
Nation\'s defense programs. The cost principles were apparently not
intended to cover the costs of service contractors, nor to provide
recovery of the cost of money expended by contractors to obtain working
capital.

\(c\) BPA\'s supply contracts do not normally provide a substantial
volume of business for any particular contractor over an extended
period, and because contractors are not making major investments
primarily or exclusively in support of BPA contracts, allowing such
costs would be inappropriate. Contractors who do derive a substantial
portion of their activities from BPA recover their costs of capital
through profits and/or depreciation.

#### 8.11 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 refers
to the prospective period of economic usefulness in a particular
contractor\'s operations as distinguished from physical life; it is
evidenced by the actual or estimated retirement and replacement practice
of the contractor.

\(b\) Normal depreciation on a contractor\'s plant, equipment, and other
capital facilities is an allowable contract cost, if the contractor is
able to demonstrate that it is reasonable and allocable (but see
paragraph (h) below).

\(c\) Depreciation shall be considered reasonable if the contractor
follows policies and procedures that are \--

\(1\) Consistent with those followed in the same cost center for
business other than Government;

\(2\) Reflected in the contractor\'s books of accounts and financial
statements; and

\(3\) Both used and acceptable for Federal income tax purposes.

\(d\) When the depreciation reflected on a contractor\'s books of
accounts and financial statements differs from that used and acceptable
for Federal income tax purposes, reimbursement shall be based on the
asset cost amortized over the estimated useful life of the property
using depreciation methods 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 on
non-Government business.

\(e\) Depreciation for reimbursement purposes in the case of tax-exempt
organizations shall be determined on the basis described in paragraph
(d) immediately above.

\(f\) Special considerations are required for assets acquired before the
effective date of this cost principle if, on that date, the
undepreciated balance of these assets resulting from depreciation
policies and procedures used previously for Government contracts and
subcontracts is different from the undepreciated balance on the books
and financial statements. 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 of any
asset allowable after the effective date of this 8.11 shall not exceed
the cost basis of the asset less any depreciation allowed or allowable
under prior acquisition regulations.

\(g\) 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 in paragraph
(a) above, vary with volume of production or use of multi-shift
operations.

\(h\) 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 common
control.

\(i\) The depreciation on any item which meets the criteria for
allowance at a \"price\" under 8.26(e) may be based on that price,
provided the same policies and procedures are used for costing all
business of the using division, subsidiary, or organization under common
control.

\(j\) 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 common control. However, a reasonable
charge for using fully depreciated property may be agreed upon and
allowed. In determining the charge, consideration shall be given to
cost, total estimated useful life at the time of negotiations, effect of
any increased maintenance charges or decreased efficiency due to age,
and the amount of depreciation previously charged to Government
contracts or subcontracts.

\(k\) Capitalization of tangible assets applies to assets acquired by a
\"capital lease\" as defined in Statement of Financial Accounting
Standard No. 13 (FAS-13), Accounting for Leases, issued by the Financial
Accounting Standards Board (FASB). Compliance with 48 CFR 9904.404 and
FAS-13 requires that such leased assets (capital leases) be treated as
purchased assets; i.e., be capitalized and the capitalized value of such
assets be distributed over their useful lives as depreciation charges,
or over the leased life as amortization charges as appropriate. Assets
whose leases are classified as capital leases under FAS-13 are subject
to the requirements of 8.11, while assets acquired under leases
classified as operating leases are subject to the requirements on rental
costs in 8.36. The standards of financial accounting and reporting
prescribed by FAS-13 are incorporated into this principle and shall
govern its application, except as provided in subparagraphs (1), (2),
and (3) below.

\(1\) Rental costs under a sale and leaseback arrangement shall be
allowable up to the amount that would have been allowed had the
contractor retained title to the property.

\(2\) Capital leases for all real and personal property between related
parties are subject to the requirements of this subparagraph 8.11(k). If
it is determined that the terms of the lease have been significantly
affected by the fact that the lessee and lessor are related,
depreciation charges shall not be allowed in excess of those which would
have occurred if the lease contained terms consistent with those found
in a lease between unrelated parties.

\(3\) Assets acquired under leases that the contractor must capitalize
under FAS-13 shall not be treated as purchased assets for contract
purposes if the leases are covered by 8.36(b)(4).

\(l\) In the event of a write-down from carrying value to fair value as
a result of impairments caused by events or changes in circumstances,
allowable depreciation of the impaired assets shall be limited to the
amounts that would have been allowed had the assets not been written
down (see 8.16(g)). However, this does not preclude a change in
depreciation resulting from other causes such as permissible changes in
estimates of service life, consumption of services, or residual value.

#### 8.12 Economic Planning Costs.

\(a\) This category includes costs of generalized long-range management
planning that is concerned with the future overall development of the
contractor\'s business and that may take into account the eventual
possibility of economic dislocations or fundamental alterations in those
markets in which the contractor currently does business. Economic
planning costs do not include organization or reorganization costs
covered by 8.27.

\(b\) Economic planning costs are allowable as indirect costs to be
properly allocated.

\(c\) Research and development and engineering costs designed to lead to
new products for sale to the general public are not allowable under this
provision (see 8.9).

#### 8.13 Employee Morale and Similar Costs.

\(a\) Aggregate costs incurred for activities designed to improve
working conditions, employer-employee relations, employee morale, and
employee performance (less income generated by these activities) are
allowable, except as limited by paragraph (b) (c), and (d) immediately
below, and to the extent that the net amount is reasonable. Some
examples are house publications, health clinics, wellness/fitness
centers, employee counseling services, and food and dormitory services,
which include operating or furnishing facilities for cafeterias, dining
rooms, canteens, lunch wagons, vending machines, living accommodations,
or similar types of services for the contractor\'s employees at or near
the contractor\'s facilities.

\(b\) Costs of gifts are unallowable. (Gifts do not include awards for
performance made pursuant to 8.6(f) or awards made in recognition of
employee achievements pursuant to an established contractor plan or
policy.)

\(c\) Costs of recreation are unallowable, except for the costs of
employees\' participation in company sponsored sports teams or employee
organizations designed to improve company loyalty, team work, or
physical fitness.

\(d\) Losses from operating food and dormitory services may be included
as costs 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 the accomplishment of the above
objective are not allowable. A loss may be allowed, however, to the
extent that 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 charged but unproductive labor
costs would be excessive but for the services provided or where
cessation or reduction of food or dormitory operations will not
otherwise yield net cost savings) such that even with efficient
management, operating 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. Costs of food and dormitory services shall
include an allocable share of indirect expenses pertaining to these
activities.

\(e\) When 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, such profits shall be
treated in the same manner as if the contractor were providing the
service (but see paragraph (f) immediately below).

\(f\) Contributions by the contractor to an employee organization,
including funds from vending machine receipts or similar sources, may be
included as costs incurred under paragraph (a) above only to the extent
that the contractor demonstrates that an equivalent amount of the costs
incurred by the employee organization would be allowable if directly
incurred by the contractor.

#### 8.14 Entertainment Costs.

Costs of amusement, diversion, social activities, and any directly
associated costs such as tickets to shows or sports events, meals,
lodging, rentals, transportation, and gratuities are unallowable (but
see 8.1 and 8.13). Costs of membership in social, dining, or country
clubs or other organizations having the same purposes are also
unallowable, regardless of whether the cost is reported as taxable
income to the employees.

#### 8.15 Fines, Penalties, and Mischarging Costs.

\(a\) Costs of fines and penalties resulting from violations of, or
failure of the contractor to comply with, Federal, State, local or
foreign laws and regulations are unallowable except when incurred as a
result of compliance with specific terms and conditions of the contract
or written instructions from the CO.

\(b\) Costs incurred in connection with, or related to, the mischarging
of costs on Government contracts are unallowable when the costs are
caused by, or result from, alteration or destruction of records, or
other false or improper charging or recording of costs. Such costs
include those incurred to measure or otherwise determine the magnitude
of the improper charging, and costs incurred to remedy or correct the
mischarging, such as the costs to rescreen and reconstruct records.

#### 8.16 Gains and Losses on Disposition of Depreciable Property.

\(a\) Gains and losses from the sale, retirement, or other disposition
(but see 8.19) of depreciable property 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 those assets was included
(but see paragraph (d) below). However, no gain or loss shall be
recognized as a result of the transfer of assets in a business
combination.

\(b\) Gains and losses on disposition of tangible capital assets,
including those acquired under capital leases, shall be considered as
adjustments of depreciation costs previously recognized. The gain
recognized for contract costing purposes shall be limited to the
difference between the acquisition cost of the asset and its
undepreciated balance (except see subdivision (c)(2)(i) or (ii) below).

\(c\) Special considerations apply to an involuntary conversion which
occurs when a contractor\'s property is destroyed by events over which
the owner has no control and an insurance award is recovered. The
following govern involuntary conversions:

\(1\) When there is a cash award and the converted asset is not
replaced, gain or loss shall be recognized in the period of disposition.
The gain recognized for contract costing purposes shall be limited to
the difference between the acquisition cost of the asset and its
undepreciated balance.

\(2\) When the converted asset is replaced, the contractor shall either
-

\(i\) Adjust the depreciable basis of the new asset by the amount of the
total realized gain or loss; or

\(ii\) Recognize the gain or loss in the period of disposition, in which
case the Government shall participate to the same extent as outlined in
subparagraph (c)(1) above.

\(d\) Gains and losses on the disposition of depreciable property shall
not be recognized as a separate charge or credit when -

\(1\) Gains and losses are processed through the depreciation reserve
account and reflected in the depreciation allowable under 8.11; or

\(2\) The property is exchanged as part of the purchase price of a
similar item, and the gain or loss is taken into consideration in the
depreciation cost basis of the new item.

\(e\) Gains and losses arising from mass or extraordinary sales,
retirements, or other disposition other than through business
combinations shall be considered on a case-by-case basis.

\(f\) Gains and losses of any nature arising from the sale or exchange
of capital assets other than depreciable property shall be excluded in
computing contract costs.

\(g\) With respect to long-lived tangible and identifiable intangible
assets held for use, no loss shall be allowed for a write-down from
carrying value to fair value as a result of impairments caused by events
or changes in circumstances (e.g., environmental damage, idle facilities
arising from a declining business base, etc.). If depreciable property
or other capital assets have been written down from carrying value to
fair value due to impairments, gains or losses upon disposition shall be
the amounts that would have been allowed had the assets not been written
down.

#### 8.17 Idle Facilities and Idle Capacity Costs.

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

\"Facilities\" means plant or any portion thereof (including 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.

\"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 in the calculation
instead of a one-shift basis if it can be shown that this amount of
usage could normally be expected for the type of facility involved.

\"Idle facilities\" means completely unused facilities that are excess
to the contractor\'s current needs.

\(b\) The costs of idle facilities are unallowable unless the facilities
-

\(1\) Are necessary to meet fluctuations in workload; or

\(2\) Were necessary when acquired and are now idle because of changes
in requirements, production economies, reorganization, termination, or
other causes which could not have been reasonably foreseen. (Costs of
idle facilities are allowable for a reasonable period, ordinarily not to
exceed 1 year, depending upon the initiative taken to use, lease, or
dispose of the idle facilities (but see 8.42)).

\(c\) Costs of idle capacity are 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 necessary
or was originally reasonable and is not subject to reduction or
elimination by subletting, renting, or sale. Widespread idle capacity
throughout an entire plant or among a group of assets having
substantially the same function may be idle facilities.

#### 8.18 Independent R and D Bid and Proposal Costs.

\(a\) Reserved

\(b\) Composition and allocation of costs.

\(1\) IR&D and B&P costs shall be allocated to final cost objectives on
the same basis of allocation used for the general and administrative
(G&A) expense grouping of the profit center in which the costs are
incurred. However, when IR&D or B&P costs clearly benefit other profit
centers or benefit the entire company, those costs shall be allocated
through the G&A of the other profit centers or through the corporate
G&A, as appropriate.

\(2\) If allocations of IR&D or B&P through the G&A base do not provide
equitable cost allocation, the CO may approve use of a different base.

\(c\) Allowability. Except as provided in paragraph (d) below, costs for
IR&D and B&P are allowable only in accordance with the following:

\(1\) Companies required to negotiate advance agreements.

\(i\) Any company that received payments for IR&D and B&P costs in a
fiscal year, either as a prime contractor or subcontractor, exceeding
\$7 million from Government agencies, is required to negotiate with the
Government an advance agreement which establishes a ceiling for
allowability of IR&D and B&P costs for the following fiscal year. This
agreement is binding on all Government agencies, unless prohibited by
statute. The requirements of Section 203 of Public Law 91-441
necessitate that DOD be the lead negotiating agency when the contractor
has received more than \$7 million in payments for IR&D and B&P from
DOD. Computation of IR&D and B&P costs to determine whether the
threshold criterion was reached shall include only recoverable IR&D and
B&P costs allocated during the company\'s previous fiscal year to prime
contracts and subcontracts for which the submission and certification of
cost or pricing data were required. The computation shall include full
burdening.

\(ii\) When a company meets the criterion in (i) above, required advance
agreements may be negotiated at the corporate level and/or with those
profit centers that contract directly with the Government and that in
the preceding year allocated recoverable IR&D and B&P costs exceeding
\$700,000, including burdening, to contracts and subcontracts for which
the submission and certification of cost or pricing data were required.
When ceilings are negotiated for separate profit centers of the company,
the allowability of IR&D and B&P costs for any center that in its
previous fiscal year did not reach the threshold cited above may be
determined in accordance with subparagraph (c)(2) below.

\(iii\) Ceilings are the maximum dollar amounts of total IR&D and B&P
costs that will be allowable for allocation over the appropriate base
for that part of the company\'s operation covered by an advance
agreement.

\(iv\) No IR&D and B&P cost shall be allowable if a company fails to
initiate negotiation of a required advance agreement prior to the end of
the fiscal year for which the agreement is required.

\(v\) When negotiations are held with a company meeting the \$7 million
criterion or with separate profit centers (when negotiations are held at
that level under (ii) above), and if no advance agreement is reached,
payment for IR&D and B&P costs shall be reduced below that which the
company or profit center would have otherwise received. The amount of
such reduced payment shall not exceed 75 percent of the amount which, in
the opinion of the CO, the company or profit center would be entitled to
receive under an advance agreement. Written notification of the CO\'s
determination of a reduced amount shall be provided the contractor. In
the event that an advance agreement is not reached before the end of the
contractor\'s fiscal year for which the agreement is to apply,
negotiations shall immediately be terminated, and the CO shall furnish a
determination of the reduced amount.

\(vi\) Contractors may appeal decisions of the CO to reduce payment. The
appeal shall be filed with the CO within 30 days of receipt of the CO\'s
determination.

\(2\) Companies not required to negotiate advance agreements. Costs for
IR&D and B&P are allowable as indirect expenses on contracts to the
extent that those costs are allocable and reasonable.

\(d\) Deferred IR&D and B&P costs. When appropriate, an agreement may be
negotiated between the contractor and the CO to establish the amounts of
IR&D and B&P costs incurred in previous accounting periods that will be
allowable.

#### 8.19 Insurance and Indemnification.

\(a\) Insurance by purchase or by self-insuring includes coverage the
contractor is required to carry, or to have approved, under the terms of
the contract and any other coverage the contractor maintains in
connection with the general conduct of its business. The amount of
insurance costs which may be allowed is subject to the cost limitations
and exclusions in the following subparagraphs.

\(1\) Costs of insurance required or approved, and maintained by the
contractor pursuant to the contract, are allowable.

\(2\) Costs of insurance maintained by the contractor in connection with
the general conduct of its business are allowable, subject to the
following limitations:

\(i\) Types and extent of coverage shall follow sound business practice,
and the rates and premiums must be reasonable.

\(ii\) Costs allowed for business interruption or other similar
insurance must be limited to exclude coverage of profit.

\(iii\) The cost of property insurance premiums for insurance coverage
in excess of the acquisition cost of the insured assets is allowable
only when the contractor has a formal written policy assuring that in
the event the insured property is involuntarily converted, the new asset
shall be valued at the book value of the replaced asset plus or minus
adjustments for differences between insurance proceeds and actual
replacement cost. If the contractor does not have such a formal written
policy, the cost of premiums for insurance coverage in excess of the
acquisition cost of the insured asset is unallowable.

\(iv\) Costs of insurance for the risk of loss of or damage to
Government property are allowable only to the extent that the contractor
is liable for such loss or damage and such insurance does not cover loss
or damage that results from willful misconduct or lack of good faith on
the part of any of the contractor\'s directors or officers or other
equivalent representatives.

\(v\) Contractors operating under a program of self-insurance must
obtain approval of the program when required by the CO.

\(vi\) Costs of insurance on the lives of officers, partners, or
proprietors are allowable only to the extent that the insurance
represents additional compensation (see 8.6).

\(3\) Actual losses are unallowable unless expressly provided for in the
contract, except \--

\(i\) Losses incurred under the nominal deductible provisions of
purchased insurance, in keeping with sound business practice, are
allowable for contracts not subject to 48 CFR 9904.416 and when the
contractor did not establish a self-insurance program. Such contracts
are not subject to the self-insurance requirements of 48 CFR 9904.416.
For contracts subject to 48 CFR 9904.416, and for those made subject to
the self insurance requirements of that Standard as a result of the
contractor\'s having established a self insurance program (see paragraph
a) above) actual losses may be used as a basis for charges under a
self-insurance program when the actual amount of losses will not differ
significantly from the projected average losses for the accounting
period (see 48 CFR 9904.416.50(a)(2)(ii)). In those instances where an
actual loss has occurred and the present value of the liability is
determined under the provisions of 48 CFR 9904.416-50(a)(3)(ii), the
allowable cost shall be limited to an amount computed using as a
discount rate the interest rate determined by the Secretary of the
Treasury pursuant to 50 USC App. 1215(b)(2) in effect at the time the
loss is recognized. However, the full amount of a lump sum settlement to
be paid within a year of the date of settlement is allowable.

\(ii\) Minor losses such as spoilage, breakage and disappearance of
small hand tools that occur in the ordinary course of doing business and
that are not covered by insurance are allowable.

\(4\) The cost of insurance to protect the contractor against the costs
of correcting its own defects in materials or workmanship is
unallowable. However, insurance costs to cover fortuitous or casualty
losses resulting from defects in materials or workmanship are allowable
as a normal business expense.

\(5\) Premiums for retroactive or backdated insurance written to cover
occurred and known losses are unallowable.

\(b\) If purchased insurance is available, the charge for any
self-insurance coverage plus insurance administration expenses shall not
exceed the cost of comparable purchased insurance plus associated
insurance administration expenses.

\(c\) Insurance provided by captive insurers (insurers owned by or under
the control of the contractor) is considered self-insurance, and charges
for it must comply with the self-insurance provisions. However, if the
captive insurer also sells insurance to the general public in
substantial quantities and it can be demonstrated that the charge to the
contractor is based on competitive market forces, the insurance will be
considered purchased insurance.

\(d\) The allowability of premiums for insurance purchased from fronting
insurance companies (insurance companies not related to the contractor
but who reinsure with a captive insurer of the contractor) shall not
exceed the amount (plus reasonable fronting company charges for services
rendered) which the contractor would have been allowed had it insured
directly with the captive insurer.

\(e\) Self-insurance charges for risks of catastrophic losses are not
allowable.

\(f\) The Government is obligated to indemnify the contractor only to
the extent authorized by law, as expressly provided for in the contract,
except as provided in paragraph (a)(3) above.

\(g\) Late premium payment charges related to employee deferred
compensation plan insurance incurred pursuant to Section 4007 (29 U.S.C.
1307) or Section 4023 (29 U.S.C. 1323) of the Employee Retirement Income
Security Act of 1974 are unallowable.

#### 8.20 Interest and Other Financial Costs.

Interest on borrowings (however represented), bond discounts, costs of
financing and refinancing capital (net worth plus long-term
liabilities), legal and professional fees paid in connection with the
preparation of prospectuses, costs of preparation and issuance of stock
rights, and directly associated costs are unallowable except for
interest assessed by State or local taxing authorities under the
conditions specified in 8.41 (but see 8.28).

#### 8.21 Labor Relations Costs.

Costs incurred in maintaining satisfactory relations between the
contractor and its employees, including costs of shop stewards, labor
management committees, employee publications, and other related
activities, are allowable.

#### 8.22 Lobbying and Political Activity Costs.

\(a\) Costs associated with the following activities are unallowable:

\(1\) Attempts to influence the outcomes of any Federal, State, or local
election, referendum, initiative, or similar procedure, through in-kind
or cash contributions, endorsements, publicity, or similar activities;

\(2\) Establishing, administering, contributing to, or paying the
expenses of a political party, campaign, political action committee or
other organization established for the purpose of influencing the
outcomes of elections;

\(3\) Any attempt to influence (i) the introduction of Federal, state,
or local legislation, or (ii) the enactment or modification of any
pending Federal, state, or local legislation through communication with
any member or employee of the Congress or state legislature (including
efforts to influence state or local officials to engage in similar
lobbying activity), or with any government official or employee in
connection with a decision to sign or veto enrolled legislation;

\(4\) Any attempt to influence (i) the introduction of Federal, state,
or local legislation, or (ii) the enactment or modification of any
pending Federal, state, or local legislation by preparing, distributing
or using publicity or propaganda, or by urging members of the general
public or any segment thereof to contribute to or participate in any
mass demonstration, march, rally, fund raising drive, lobbying campaign
or letter writing or telephone campaign;

\(5\) Legislative liaison activities, including attendance at
legislative sessions or committee hearings, gathering information
regarding legislation, and analyzing the effect of legislation, when
such activities are carried on in support of or in knowing preparation
for an effort to engage in unallowable activities; or

\(6\) Costs incurred in attempting to improperly influence (see Part
3.5), either directly or indirectly, an employee or officer of the
Executive branch of the Federal Government to give consideration to or
act regarding a regulatory or contract matter.

\(b\) The following activities are excepted from the coverage of (a)
above:

\(1\) Providing a technical and factual presentation of information on a
topic directly related to the performance of a contract through hearing
testimony, statements or letters to the Congress or a state legislature,
or subdivision, member, or cognizant staff member thereof, in response
to a documented request (including a Congressional Record notice
requesting testimony or statements for the record at a regularly
scheduled hearing) made by the recipient member, legislative body or
subdivision, or a cognizant staff member thereof; provided such
information is readily obtainable and can be readily put in deliverable
form; and further provided that costs under this section for
transportation, lodging or meals are unallowable unless incurred for the
purpose of offering testimony at a regularly scheduled Congressional
hearing pursuant to a written request for such presentation made by the
Chairman or Ranking Minority Member of the Committee or Subcommittee
conducting such hearing.

\(2\) Any lobbing made unallowable by (a)(3) above to influence state or
local legislation in order to directly reduce contract cost, or to avoid
material impairment of the contractor\'s authority to perform the
contract.

\(3\) Any activity specifically authorized by statute to be undertaken
with funds from the contract.

\(c\) When a contractor seeks reimbursement for indirect costs, total
lobbying costs shall be separately identified in the indirect cost rate
proposal, and thereafter treated as other unallowable activity costs.

\(d\) Contractors shall maintain adequate records to demonstrate that
the certification of costs as being allowable or unallowable (see 14.17)
pursuant to this subsection complies with the requirements of this
subsection.

\(e\) Existing procedures should be utilized to resolve in advance any
significant questions or disagreements concerning the interpretation or
application of the subsection.

#### 8.23 Losses on Other Contracts.

An excess of costs over income under any other contract (including the
contractor\'s contributed portion under cost-sharing contracts) is
unallowable.

#### 8.24 Maintenance and Repair Costs.

\(a\) Costs necessary for the upkeep of property (including Government
property, unless otherwise provided for) that neither add to the
permanent value of the property nor appreciably prolong its intended
life, but keep it in an efficient operating condition, are to be treated
as follows (but see 8.11):

\(1\) Normal maintenance and repair costs are allowable.

\(2\) Extraordinary maintenance and repair costs are allowable, provided
those costs are allocated to the applicable periods for purposes of
determining contract costs.

\(b\) Expenditures for plant and equipment, including rehabilitation
which should be capitalized and subjected to depreciation, are allowable
only on a depreciation basis.

#### 8.25 Manufacturing and Production Engineering Costs.

Costs of manufacturing and production engineering, including engineering
activities in connection with the following, are allowable:

\(a\) Current manufacturing processes \-- Methods analysis, job
analysis, motion and time study, and tool design and improvement.

\(b\) Current production problems \-- Materials analysis for production
suitability and component design for simplifying production.

#### 8.26 Material Costs.

\(a\) Material costs include the costs of such items as raw materials,
parts, sub-assemblies, components, and manufacturing supplies, whether
purchased or manufactured, and may include such collateral items as
inbound transportation and in-transit insurance. In computing material
costs, consideration shall be given to reasonable overruns, spoilage, or
defective work (unless otherwise provided in any contract provision
relating to inspection and correction of defective work). These costs
are allowable, subject to the provisions of (b) through (e) below.

\(b\) Costs of material shall be adjusted for income and other credits,
including trade discounts, refunds, rebates, allowances, cash discounts,
and credits for scrap, salvage, and material returned to vendors. Such
income and other credits shall either be credited directly to the cost
of the material or be allocated as a credit to indirect costs. When the
contractor can demonstrate that failure to take cash discounts was
reasonable, lost discounts need not be credited.

\(c\) Reasonable adjustments arising from differences between periodic
physical inventories and book inventories may be included in arriving at
costs; provided, such adjustments relate to the period of contract
performance.

\(d\) When materials are purchased specifically for and are identifiable
solely with performance under a contract, the actual purchase cost
should be charged to the contract. If material is issued from stores,
any generally recognized method of pricing is acceptable if that method
is consistently applied and the results are equitable. When estimates of
future materials costs are required, current market price or anticipated
acquisition cost may be used, but the basis of pricing must be
disclosed.

\(e\) Allowance for all materials, supplies, and services sold or
transferred between any divisions, subsidiaries, or affiliates of the
contractor under a common control shall be on the basis of cost incurred
in accordance with this subpart. However, allowance may be at a price
when it is the established practice of the transferring organization to
price interorganizational transfers at other than cost for commercial
work of the contractor or any division, subsidiary, or affiliate of the
contractor under a common control, and when the price \--

\(1\) Is, or is based on, an \"established catalog or market price of
commercial items sold in substantial quantities to the general public\",
or

\(2\) Is the result of \"adequate price competition\" and is the price
at which an award was made to the affiliated organization after
obtaining quotations on an equal basis from such organization and one or
more outside sources which produce the item or its equivalent in
significant quantity.

\(3\) Provided that either subparagraphs (1) or (2) above apply only
when \--

\(i\) The price is not in excess of the transferor\'s current sales
price to the most favored customer (including any division, subsidiary
or affiliate of the contractor under a common control) for a like
quantity under comparable conditions; and

\(ii\) The CO has not determined the price to be unreasonable.

\(f\) The price determined in accordance with paragraph (e)(1) above and
Part 12.5.4 should be adjusted to reflect the quantities being acquired
and may be adjusted to reflect actual cost of any modifications
necessary because of contract requirements.

#### 8.27 Organization Costs.

\(a\) Except as provided in paragraph (b) of this subsection,
expenditures in connection with (1) planning or executing the
organization or reorganization of the corporate structure of a business,
including mergers and acquisitions, (2) resisting or planning to resist
the reorganization of the corporate structure of a business or a change
in the controlling interest in the ownership of a business, and (3)
raising capital (net worth plus long-term liabilities), are unallowable.
Such expenditures include but are not limited to incorporation fees and
costs of attorneys, accountants, brokers, promoters and organizers,
management consultants and investment counselors, whether or not
employees of the contractor. Unallowable \"reorganization\" costs
include the cost of any change in the contractor\'s financial structure,
excluding administrative costs of short-term borrowings for working
capital, resulting in alterations in the rights and interests of
security holders, whether or not additional capital is raised.

\(b\) The cost of activities primarily intended to provide compensation
will not be considered organizational costs subject to this subjection,
but will be governed by 8.6. These activities include acquiring stock
for (1) executive bonuses, (2) employee savings plans, and (3) employee
stock ownership plans.

#### 8.28 Other Business Expenses.

The following types of costs are allowable when allocated on an
equitable basis:

\(a\) Registry and transfer charges resulting from changes in ownership
of securities issued by the contractor.

\(b\) Cost of shareholders\' meetings.

\(c\) Normal proxy solicitations.

\(d\) Preparing and publishing reports to shareholders.

\(e\) Preparing and submitting required reports and forms to taxing and
other regulatory bodies.

\(f\) Incidental costs of directors\' and committee meetings.

\(g\) Other similar costs.

#### 8.29 Plant Protection Costs.

Costs of items such as (a) wages, uniforms, and equipment of personnel
engaged in plant protection, (b) depreciation on plant protection
capital assets, and (c) necessary expenses to comply with military
requirements, are allowable.

#### 8.30 Patent Costs.

\(a\) The following patent costs are allowable to the extent that they
are incurred as requirements of a Government contract:

\(1\) Costs of preparing invention disclosures, reports, and other
documents.

\(2\) Costs for searching the art to the extent necessary to make the
invention disclosures.

\(3\) Other costs in connection with the filing and prosecution of a
United States patent application where title or royalty-free license is
to be conveyed to the Government.

\(b\) General counseling services relating to patent matters are
allowable.

\(c\) Other than those for general counseling services, patent costs not
required by the contract are unallowable.

#### 8.31 Reserved.

#### 8.32 Precontract Costs.

Precontract costs are those incurred prior to the effective date of the
contract directly pursuant to the negotiation and in anticipation of the
contract award when 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.

#### 8.33 Professional and Consultant Service Costs.

\(a\) Definition. \"Professional and consultant services\" are those
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. Examples include those services acquired by contractors or
subcontractors in order to enhance their legal, economic, financial, or
technical positions. Professional and consultant services are generally
acquired to obtain information, advice, opinions, alternatives,
conclusions, recommendations, training, or direct assistance, such as
studies, analyses, evaluations, liaison with Government officials, or
other forms of representation.

\(b\) Costs of professional and consultant services are allowable
subject to this paragraph and paragraphs \[c\] through \[f\] of this
subsection when reasonable in relation to the services rendered and when
not contingent upon recovery of the costs from the Government \[but see
8.30\].

\(c\) Costs of professional and consultant services performed under any
of the following circumstances are unallowable:

\(1\) Services to improperly obtain, distribute, or use information or
data protected by law or regulation.

\(2\) Services that are intended to improperly influence the contents of
solicitations, the evaluation of proposals or quotations, or the
selection of sources for contract award, whether award is by the
Government, or by a prime contractor or subcontractor.

\(3\) Any other services obtained, performed, or otherwise resulting in
violation of any statute or regulation prohibiting improper business
practices or conflicts of interest.

\(4\) Services performed which are not consistent with the purpose and
scope of the services contracted for or otherwise agreed to.

\(d\) In determining the allowability of costs \[including retainer
fees\] in a particular case, no single factor or any special combination
of factors is necessarily determinative. However, the CO shall consider
the following factors, among others:

\(1\) The nature and scope of the service rendered in relation to the
service required,

\(2\) The necessity of contracting for the service, considering the
contractor\'s capability in the particular area,

\(3\) The past pattern of acquiring such services and their costs,
particularly in the years prior to the award of Government contracts.

\(4\) The impact of Government contracts on the contractor\'s business.

\(5\) 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 when the services rendered are not of a
continuing nature and have little relationship to work under Government
contracts.

\(6\) Whether the service can be performed more economically by
employment rather than by contracting.

\(7\) The qualifications of the individual or concern rendering the
service and the customary fee charged, especially on nongovernment
contracts.

\(8\) Adequacy of the contractual agreement for the service \[e.g.,
description of the service, estimate of time required, rate of
compensation, termination provisions\].

\(e\) Retainer fees, to be allowable, must be supported by evidence
that\--

\(1\) The services covered by the retainer agreement are necessary and
customary;

\(2\) The level of past services justifies the amount of the retainer
fees \[if no services were rendered, fees are not automatically
unallowable\];

\(3\) The retainer fee is reasonable in comparison with maintaining an
in-house capability to perform the covered services, when factors such
as cost and level of expertise are considered; and

\(4\) The actual services performed are documented in accordance with
paragraph \[f\] of this subsection.

\(f\) Fees for services rendered shall be allowable only when supported
by evidence of the nature and scope of the service furnished. \[See also
8.38(g).\] However, retainer agreements generally are not based on
specific statements of work. Evidence necessary to determine that work
performed is proper and does not violate law or regulation shall
include:

\(1\) Details of all agreements \[e.g., work requirements, rate of
compensation, and nature and amount of other expenses, if any\] with the
individuals or organizations providing the services and details of
actual services performed;

\(2\) Invoices or billings submitted by consultants, including
sufficient detail as to the time expended and nature of the actual
services provided; and

\(3\) Consultants\' work products and related documents, such as trip
reports indicating persons visited and subjects discussed, minutes of
meetings, and collateral memoranda and reports.

#### 8.34 Recruitment Costs.

\(a\) Subject to paragraphs (b) and (c) below, and provided that the
size of the staff recruited and maintained is in keeping with workload
requirements, the following costs are allowable:

\(1\) Costs of help-wanted advertising.

\(2\) Costs of operating an employment office needed to secure and
maintain an adequate labor force.

\(3\) Costs of operating an aptitude and educational testing program.

\(4\) Travel costs of employees engaged in recruiting personnel.

\(5\) Travel costs of applicants for interviews.

\(6\) Costs for employment agencies, not in excess of standard
commercial rates.

\(b\) Help-wanted advertising costs are unallowable if the advertising
\--

\(1\) Is for personnel other than those required to perform obligations
under a Government contract;

\(2\) Does not describe specific positions or classes of positions;

\(3\) Is excessive relative to the number and importance of the
positions or to the industry practices;

\(4\) Includes material that is not relevant for recruitment purposes;

\(5\) Is designed to \"pirate\" personnel from another Government
contractor; or

\(6\) Includes color (in publications).

\(c\) Excessive compensation costs offered to prospective employees to
\"pirate\" them from another Government contractor are unallowable. Such
excessive costs may include salaries, fringe benefits, or special
emoluments which are in excess of standard industry practices or the
contractor\'s customary compensation practices.

#### 8.35 Relocation Costs.

\(a\) Relocation costs are costs incident to the permanent change of
duty assignment (for an indefinite period or for a stated period, but in
either event for not less than 12 months) of an existing employee or
upon recruitment of a new employee. The following types of relocation
costs are allowable as noted, subject to paragraphs (b) and (f) below:

\(1\) Cost of travel of the employee and members of the immediate family
(see 8.46) and transportation of the household and personal effects to
the new location.

\(2\) Cost of finding a new home, such as advance trips by employees and
spouses to locate living quarters, and temporary lodging during
transition periods not exceeding separate cumulative totals of 60 days
for employees and 45 days for spouses and dependents, including advance
trip time.

\(3\) Closing costs (i.e., brokerage fees, legal fees, appraisal fees,
points, finance charges, etc.) incident to the disposition of actual
residence owned by the employee when notified of transfer, except that
these costs when added to the costs described in subparagraph (a)(4)
below shall not exceed 14 percent of the sales price of the property
sold.

\(4\) Continuing costs of ownership of the vacant former actual
residence being sold, such as maintenance of building and grounds
(exclusive of fixing-up expenses), utilities, taxes, property insurance,
mortgage interest, after settlement date or lease date of new permanent
residence, except that these costs when added to the costs described in
subparagraph (a)(3) above, shall not exceed 14 percent of the sales
price of the property sold.

\(5\) Other necessary and reasonable expenses normally incident to
relocation, such as disconnecting and connecting household appliances;
automobile registration; driver\'s license and use taxes; cutting and
fitting rugs, draperies, and curtains; forfeited utility fees and
deposits; and purchase of insurance against damage to or loss of
personal property while in transit.

\(6\) Costs incident to acquiring a home in a new location, except that
(i) these costs will not be allowable for existing employees or newly
recruited employees who, before the relocation, were not homeowners and
(ii) the total costs shall not exceed 5 percent of the purchase price of
the new home.

\(7\) Mortgage interest differential payments, except that these costs
are not allowable for existing or newly recruited employees who, before
the relocation, were not homeowners and the total payments are limited
to an amount determined as follows:

\(i\) The difference between the mortgage interest rates of the old and
new residences times the current balance of the old mortgage times 3
years.

\(ii\) When mortgage differential payments are made on a lump sum basis
and the employee leaves or is transferred again in less than 3 years,
the amount initially recognized shall be proportionately adjusted to
reflect payments only for the actual time of the relocation.

\(8\) Rental differential payments covering situations where relocated
employees retain ownership of a vacated home in the old location and
rent at the new location. The rented quarters at the new location must
be comparable to those vacated, and the allowable differential payments
may not exceed the actual rental costs for the new home, less the fair
market rent for the vacated home times 3 years.

\(9\) Cost of canceling an unexpired lease.

\(b\) The costs described in paragraph (a) above must also meet the
following criteria to be considered allowable:

\(1\) The move must be for the benefit of the employer.

\(2\) Reimbursement must be in accordance with an established policy or
practice that is consistently followed by the employer and is designed
to motivate employees to relocate promptly and economically.

\(3\) The costs must not otherwise be unallowable under this Appendix.

\(4\) Amounts to be reimbursed shall not exceed the employee\'s actual
expenses, except that for miscellaneous costs of the type discussed in
subparagraph (a)(5) above, a flat amount, not to exceed \$ 1,000, may be
allowed in lieu of actual costs.

\(c\) The following types of costs are not allowable:

\(1\) Loss on sale of a home.

\(2\) Costs incident to acquiring a home in a new location as follows:

\(i\) Real estate brokers fees and commissions.

\(ii\) Cost of litigation.

\(iii\) Real and personal property insurance against damage or loss of
property.

\(iv\) Mortgage life insurance.

\(v\) Owner\'s title policy insurance when such insurance was not
previously carried by the employee on the old residence (however, cost
of a mortgage title policy is allowable).

\(vi\) Property taxes and operating or maintenance costs.

\(3\) Continuing mortgage principal payments on residence being sold.

\(4\) Payments for employee income or FICA (social security) taxes
incident to reimbursed relocation costs.

\(5\) Payments for job counseling and placement assistance to employee
spouses and dependents who were not employees of the contractor at the
old location.

\(6\) Costs incident to furnishing equity or nonequity loans to
employees or making arrangements with lenders for employees to obtain
lower-than-market rate mortgage loans.

\(d\) If relocation costs for an employee have been allowed either as an
allocable indirect or direct cost, and the employee resigns within 12
months for reasons within the employee\'s control, the contractor shall
refund or credit the relocation costs to the Government.

\(e\) Subject to the requirements of paragraphs (a) through (d) above,
the costs of family movements and of personnel movements of a special or
mass nature are allowable. The cost, however, should be assigned on the
basis of work (contracts) or time period benefited.

\(f\) Relocation costs (both outgoing and return) of employees who are
hired for performance on specific contracts or long-term field projects
are allowable if \--

\(1\) The term of employment is not less that 12 months;

\(2\) The employment agreement specifically limits the duration of
employment to the time spent on the contract or field project for which
the employee is hired;

\(3\) The employment agreement provides for return relocation to the
employee\'s permanent and principal home immediately prior or the
outgoing relocation, or other location of equal or lesser cost; and

\(4\) The relocation costs are determined under the rules of paragraphs
(a) through (d) above. However, the costs to return employees, who are
released from employment upon completion of field assignments pursuant
to their employment agreements, are not subject to the refund or credit
requirement of paragraph (d).

#### 8.36 Rental Costs.

\(a\) This subsection is applicable to the cost of renting or leasing
real or personal property, except ADPE, acquired under \"operating
leases\" as defined in Statement of Financial Accounting Standards No.
13 (FAS-13), Accounting for Leases. Compliance with 8.11(m) requires
assets acquired by means of capital leases, as defined in FAS-13 shall
be treated as purchased assets.

\(b\) The following costs are allowable:

\(1\) Rental costs under operating leases, to the extent that the rates
are reasonable at the time of the lease decision, after consideration
of:

\(i\) rental costs of comparable property, if any;

\(ii\) market conditions in the area;

\(iii\) the type, life expectancy, condition, and value of the property
leased;

\(iv\) alternatives available; and

\(v\) other provisions of the agreement.

\(2\) Rental costs under a sale and leaseback arrangement only up to the
amount the contractor would be allowed if the contractor retained title.

\(3\) Charges in the nature of rent for property between any divisions,
subsidiaries, or organization under common control, to the extent that
they do not exceed the normal costs of ownership nor duplicate any other
allowed cost. Rental cost of personal property leased from any division,
subsidiary, or affiliate of the contractor under common control, that
has an established practice of leasing the same or similar property to
unaffiliated lessees shall be allowed in accordance with subparagraph
(b)(1) above.

\(4\) Reserved.

\(c\) The allowability of rental costs under unexpired leases in
connection with terminations is treated in 8.42(e).

#### 8.37 Royalties and Other Costs for Use of Patents.

\(a\) Royalties on a patent or amortization of the cost of purchasing a
patent or patent rights necessary to satisfy contract obligations are
allowable unless\--

\(1\) The Government has a license or the right to a free use of the
patent;

\(2\) The patent is invalid due to adjudication or administrative
determination;

\(3\) The patent is considered to be unenforceable; or

\(4\) The patent is expired.

\(b\) Care should be exercised in determining reasonableness when the
royalties may have been arrived at as a result of
less-than-arm\'s-length bargaining; e.g., royalties \--

\(1\) Paid to persons, including corporations, affiliated with the
contractor;

\(2\) Paid to unaffiliated parties, including corporations, under an
agreement entered into in contemplation that a Government contract would
be awarded; or

\(3\) Paid under an agreement entered into after the award of the
contract.

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

#### 8.38 Selling Costs.

\(a\) \"Selling\" is a generic term encompassing all efforts to market
the contractor\'s products or services, some of which are covered
specifically in other subsections of Section 8. Selling activity
includes the following broad categories:

\(1\) Advertising.

\(2\) Corporate image enhancement, including broadly-targeted sales
efforts, other than advertising.

\(3\) Bid and proposal costs.

\(4\) Market planning.

\(5\) Direct selling.

\(b\) Advertising costs are defined at 8.1(b) and are subject to the
allowability provisions of 8.1(d) and (f). Corporate image enhancement
activities are included within the definitions of public relations at
8.1(a) and entertainment at 8.14, and are subject to the allowability
provisions at 8.1(e) and (f) and 8.14, respectively. Bid and proposal
costs are defined at 8.18 and have their allowability controlled by that
subsection. Market planning involves market research and analysis and
generalized management planning concerned with development of the
contractor\'s business. The allowability of long-range market planning
costs is controlled by the provisions of 8.12. Other market planning
costs are allowable to the extent that they are reasonable. Costs of
activities which are correctly classified and disallowed under cost
principles referenced in this paragraph (b) are not to be reconsidered
for reimbursement under any other provision of this subsection.

(c)(1) Direct selling efforts are those acts or actions to induce
particular customers to purchase particular products or services of the
contractor. Direct selling is characterized by person-to-person contact
and includes such activities as familiarizing a potential customer with
the contractor\'s products or services, conditions of sale, service
capabilities, etc. It also includes negotiation, liaison between
customer and contractor personnel, technical and consulting activities,
individual demonstrations, and any other activities having as their
purpose the application or adaptation of the contractor\'s products or
services for a particular customer\'s use. The cost of direct selling
efforts is allowable if reasonable in amount.

\(2\) Reserved.

\(d\) The costs of any selling efforts other than those addressed in
paragraphs (b) or (c) of this subsection are unallowable.

\(e\) Costs of the type identified in paragraphs (b), (c), and (d) of
this subsection are often commingled on the contractor\'s books in the
selling expense account because these activities are performed by the
sales departments. However, identification and segregation of
unallowable costs is required under the provisions of 8.6 and 48 CFR
9904.405, and such costs are not allowable merely because they are
incurred in connection with allowable selling activities.

\(f\) Notwithstanding any other provision of this subsection, sellers\'
or agents\' compensation, fees, commissions, percentages, and retainer
or brokerage fees, whether or not contingent upon the award of
contracts, are allowable only when paid to bona fide employees or
established commercial or selling agencies maintained by the contractor
for the purpose of securing business.

#### 8.39 Service and Warranty Costs.

Service and warranty costs incurred in fulfilling any contractual
obligation are allowable when not inconsistent with the terms of the
contract. However, care should be taken to avoid duplication of the
allowance as an element of both risk and estimated product cost.

#### 8.40 Special Tooling and Special Test Equipment Costs.

\(a\) The cost of special tooling and special test equipment is
allowable and shall be allocated to the Government contracts for which
acquired, except that the cost of items acquired by the contractor prior
to the effective date of the contract (or replacement of such items),
whether or not altered or adapted for the contract, and items which the
contract schedule specifically excludes shall be allowable only as
depreciation or amortization.

\(b\) When items are disqualified as special tooling or special test
equipment because with minor expense they can be made suitable for
general purpose use and have a value as such commensurate with their
value as special tooling or test equipment, the cost of adapting the
items for use under the contract and the cost of returning them to their
prior configuration are allowable.

#### 8.41 Taxes.

\(a\) The following types of costs are allowable:

\(1\) Federal, State and local taxes, except as otherwise provided in
paragraph (b) below that are required to be and are paid or accrued in
accordance with generally accepted accounting principles. Fines and
penalties are not considered taxes.

\(2\) Taxes otherwise allowable under subparagraph (a)(1) above, but
upon which a claim of illegality or erroneous assessment exists;
provided the contractor, before paying such taxes \--

\(i\) Promptly requests instructions from the CO concerning such taxes;
and

\(ii\) Takes all action directed by the CO arising out of subparagraph
(2)(i) above or an independent decision of the Government as to the
existence of a claim of illegality or erroneous assessment, to (A)
determine the legality of the assessment or (B) secure a refund of such
taxes.

\(3\) The reasonable cost of any action taken by the contractor at the
direction or with the concurrence of the CO. Interest or penalties
incurred by the contractor for non-payment of any tax at the direction
of the CO or by reason of the failure of the CO to insure timely
direction after a prompt request.

\(b\) The following types of costs are not allowable:

\(1\) Federal income and excess profits taxes.

\(2\) Taxes in connection with financing, refinancing, refunding
operations, or reorganizations.

\(3\) Taxes from which exemptions are available to the contractor
directly or based on an exemption afforded the Government, except when
the CO determines that the administrative burden incident to obtaining
the exemption outweighs the corresponding benefits accruing to the
Government. When partial exemption from a tax is attributable to
Government contract activity, taxes charged to such work in excess of
that amount resulting from application of the preferential treatment are
unallowable. These provisions assure that any tax preference
attributable to Government contract activity be realized by the
Government. The term \"exemption\" means freedom from taxation in whole
or in part and includes a tax abatement or reduction resulting from mode
of assessment, method of calculation, or otherwise.

\(4\) Special assessments on land that represent capital improvements.

\(5\) Taxes (including excises) on real or personal property, or on the
value, use, possession or sale thereof, which is used solely in
connection with work other than on Government contracts (see paragraph
(c) below).

\(6\) Any excise tax in subtitle D, chapter 43 of the Internal Revenue
Code of 1986, as amended. That chapter includes excise taxes imposed in
connection with qualified pension plans, welfare plans, deferred
compensation plans, or other similar types of plans.

\(7\) Income tax accruals designed to account for the tax effects of
differences between taxable income and pretax income as reflected by the
books of account and financial statements.

\(c\) Taxes on property used solely in connection with either
non-Government or Government work should be considered directly
applicable to the respective category of work unless the amounts
involved are insignificant, or comparable results would otherwise be
obtained; e.g., taxes on contractor-owned work-in-process which is used
solely in connection with non-Government work should be allocated to
such work; taxes on contractor-owned work-in-process inventory (and
Government-owned work-in-process inventory when taxed) used solely in
connection with Government work should be charged to such work. The cost
of taxes incurred on property used in both Government and non-Government
work shall be apportioned to all such work based upon the use of such
property.

\(d\) Any taxes, interest, or penalties that were allowed as contract
costs and are refunded to the contractor shall be credited or paid to
the Government in the manner it directs.

#### 8.42 Termination Costs.

Contract terminations generally give rise to the incurrence of costs or
the need for special treatment of costs that would not have arisen had
the contract not been terminated. The following cost principles are to
be used in conjunction with the others in this Appendix:

\(a\) Common items. The cost of items reasonably usable on the
contractor\'s other work shall not be allowable unless the contractor
submits evidence that the items could not be retained at cost without
sustaining a loss. The CO should consider the contractor\'s plans and
orders for current and planned production when determining if items can
reasonably be used on other work of the contractor.

\(b\) Costs continuing after termination. Costs which cannot be
discontinued immediately after the effective date of termination are
generally allowable. However, any costs continuing after the effective
date of the termination due to the negligence or willful failure of the
contractor to discontinue the costs shall be unallowable.

\(c\) Initial costs. Initial costs including starting load and
preparatory costs, are allowable as follows:

\(1\) Starting load costs are nonrecurring labor, material, and related
overhead costs that are incurred in the early part of production and
result from factors such as \--

\(i\) Excessive spoilage due to inexperienced labor;

\(ii\) Idle time and lower-than-expected production due to testing and
changing production methods;

\(iii\) Training; and

\(iv\) Lack of familiarity or experience with the product, materials, or
processes.

\(2\) Preparatory costs include such costs as those incurred for initial
plant rearrangement and alterations, management and personnel
organization, and production planning. They do not include special
machinery and equipment and starting load costs.

\(3\) When initial costs are included in the settlement proposal as a
direct charge, such costs shall not also be included in overhead.
Initial costs attributable to only one contract shall not be allocated
to other contracts.

\(4\) If initial costs are claimed and have not been segregated on the
contractor\'s books, they shall be segregated for settlement purposes
from cost reports and schedules reflecting the high unit cost incurred
during the early stages of the contract.

\(5\) If the settlement proposal is on the inventory basis, initial
costs should normally be allocated on the basis of total end items
called for by the contract immediately prior to termination; however, if
the contract includes end items of a diverse nature, some other
equitable basis may be used, such as machine or labor hours.

\(d\) Loss of useful value. Loss of useful value of special tooling, and
special machinery and equipment is generally allowable, provided \--

\(1\) The special tooling, or special machinery and equipment is not
reasonably capable of use in the other work of the contractor;

\(2\) The Government\'s interest is protected by transfer of title or by
other means deemed appropriate by the CO; and

\(3\) The loss of useful value for any one terminated contract is
limited to that portion of the acquisition cost which bears the same
ratio to the total acquisition cost as the terminated portion of the
contract bears to the entire terminated contract and other Government
contracts for the which the special tooling, or special machinery and
equipment was acquired.

\(e\) Rental under unexpired leases. Rental costs under unexpired
leases, less the residual value of such leases, are generally allowable
when shown to have been reasonably necessary for the performance of the
terminated contract, if \--

\(1\) The amount of rental claimed does not exceed the reasonable use
value of the property leased for the period of the contract and such
further period as may be reasonable; and

\(2\) The contractor makes all reasonable efforts to terminate, assign,
settle, or otherwise reduce the cost of such lease.

\(f\) Alterations of leased property. The cost of alterations and
reasonable restorations required by the lease may be allowed when the
alterations were necessary for the performance of the contract.

\(g\) Settlement expenses.

\(1\) Settlement expenses, including the following, are generally
allowable:

\(i\) Accounting, legal, clerical, and similar costs reasonably
necessary for \--

\(A\) The preparation and presentation, including supporting data, of
settlement claims to the CO; and

\(B\) The termination and settlement of subcontracts.

\(ii\) Reasonable costs for the storage, transportation, protection, and
disposition of property acquired or produced for the contract.

\(iii\) Indirect costs related to salary and wages incurred as
settlement expenses in (i) and (ii); normally, such as indirect costs
shall be limited to payroll taxes, fringe benefits, occupancy costs, and
immediate supervision costs.

\(2\) If settlement expenses are significant, a cost account or work
order shall be established to separately identify and accumulate them.

\(h\) Subcontractor claims. Subcontractor claims, including the
allocable portion of claims common to the contract and to other work of
the contractor, are generally allowable. An appropriate share of the
contractor\'s indirect expense may be allocated to the amount of
settlements with subcontractors; provided that the amount allocated is
reasonably proportionate to the relative benefits received. The indirect
expense so allocated shall exclude costs claimed directly or indirectly
as settlement expenses.

#### 8.43 Trade, Business, Technical, and Professional Activity Costs.

The following types of costs are allowable:

\(a\) Memberships in trade, business, technical, and professional
organizations.

\(b\) Subscriptions to trade, business, professional, or other technical
periodicals.

\(c\) When the principal purpose of a meeting, convention, conference,
symposium, or seminar is the dissemination of trade, business, technical
or professional information or the stimulation of production or improved
productivity:

\(l\) Costs of organizing, setting up, and sponsoring the meetings,
conventions, symposia, etc., including rental of meeting facilities,
transportation, subsistence, and incidental costs;

\(2\) Costs of attendance by contractor employees, including travel
costs (see 8.46); and

\(3\) Costs of attendance by individuals who are not employees of the
contractor, provided (i) such costs are not also reimbursed to the
individual by the employing company or organization, and (ii) the
individuals attendance is essential to achieve the purpose of the
conference, meeting, convention, symposium, etc.

#### 8.44 Training and Education Costs.

\(a\) Allowable costs. Training and education costs are allowable to the
extent indicated below.

\(b\) Vocational training. Costs of preparing and maintaining a
non-college level program of instruction, but not limited to on-the-job,
classroom, and apprenticeship training, designed to increase the
vocational effectiveness of employees are allowable. These costs
include:

\(1\) salaries or wages of trainees (excluding overtime compensation),

\(2\) salaries of the director of training and staff when the training
program is conducted by the contractor,

\(3\) tuition and fees when the training is in an institution not
operated by the contractor, and/or

\(4\) training materials and textbooks.

\(c\) Part-time college-level education. Allowable costs of part-time
college education at an undergraduate or postgraduate level, including
that provided at the contractor\'s own facilities, are limited to \--

\(1\) Fees and tuition charged by the educational institution, or,
instead of tuition, instructor\'s salaries and the related share of
indirect cost of the educational institution, to the extent that the sum
thereof is not in excess of the tuition that would have been paid to the
participating educational institution;

\(2\) Salaries and related costs of instructors who are employees of the
contractor;

\(3\) Training materials and textbooks; and

\(4\) Straight-time compensation of each employee for time spent
attending classes during working hours not in excess of 156 hours per
year where circumstances do not permit the operation of classes or
attendance at classes after regular working hours.

\(d\) Full-time education. Costs of tuition, fees, training materials
and textbooks (but not subsistence, salary, or any other emoluments) in
connection with full-time education, including that provided at the
contractor\'s own facilities, at a postgraduate but not undergraduate
college level, are allowable only when the course or degree pursued is
related to the field in which the employee is working or may reasonably
be expected to work and are limited to a total period not to exceed two
school years or the length of the degree program, whichever is less, for
each employee so trained.

\(e\) Specialized programs. Costs of attendance of up to 16 weeks per
employee per year at specialized programs specifically designed to
enhance the effectiveness of managers or to prepare employees for such
positions are allowable. Such costs include enrollment fees and related
charges and employees\' salaries, subsistence, training materials,
textbooks, and travel. Costs allowable under this paragraph do not
include costs for courses that are part of a degree-oriented curriculum,
which are only allowable pursuant to paragraphs (c) and (d) of this
subsection.

\(f\) Other expenses. Maintenance expense and normal depreciation or
fair rental on facilities owned or leased by the contractor for training
purposes are allowable in accordance with 8.11, 8.17, 8.24, and 8.36.

\(g\) Grants. Grants to educational or training institutions, including
the donation of facilities or other properties, scholarships, and
fellowships are considered contributions and are unallowable.

\(h\) Advance agreements. (1) Training and education costs in excess of
those otherwise allowable under (c) and (d) of this subsection,
including subsistence, salaries, or any other emoluments, may be allowed
to the extent set forth in an advance agreement negotiated under
Section 1. To be considered for an advance agreement, the contractor
must demonstrate that the costs are consistently incurred under an
established managerial, engineering, or scientific training and
education program and that the course or degree pursued is related to
the field in which the employees are now working or may reasonably be
expected to work. Before entering into the advance agreement, the CO
shall give consideration to such factors as \--

\(i\) The length of employees\' service with the contractor;

\(ii\) Employees\' past performance and potential;

\(iii\) Whether employees are in formal development programs; and

\(iv\) The total number of participating employees.

\(2\) Any advance agreement must include a provision requiring the
contractor to refund to the Government training and education costs for
employees who resign within 12 months of completion of such training or
education for reasons within an employee\'s control.

\(i\) Training or education costs for other than bona fide employees.
Costs of tuition, fees, textbooks, and similar or related benefits
provided for other than bona fide employees are unallowable, except that
the costs incurred for educating employee dependents (primary and
secondary level studies) when the employee is working in a foreign
country where public education is not available and where suitable
private education is inordinately expensive may be included in overseas
differential.

\(j\) Employee dependent education plans. Costs of college plans for
employee dependents are unallowable.

#### 8.45 Transportation Costs.

Allowable transportation costs include freight, express, cartage, and
postage charges relating to goods purchased, in process, or delivered.
When these costs can be identified with the items involved, they may be
directly costed as transportation costs or added to the cost of such
items. When identification with the materials received cannot be made,
inbound transportation costs may be charged to the appropriate indirect
cost accounts if the contractor follows a consistent and equitable
procedure. Outbound freight, if reimbursable under the terms of the
contract, shall be treated as a direct cost.

#### 8.46 Travel Costs.

(a)(1) Costs for transportation, lodging, meals, and incidental expenses
incurred by contractor personnel on official company business are
allowable subject to the limitation contained in this subsection. Costs
for transportation may be based on mileage rates, actual costs incurred,
or on a combination thereof, provided the method used results in a
reasonable charge. Costs for lodging, meals, and incidental expenses may
be based on per diem, actual expenses, or a combination thereof,
provided the method used results in a reasonable charge.

\(2\) Except as provided in subparagraph (a)(3) of this subsection,
costs incurred for lodging, meals, and incidental expenses (as defined
in the regulations cited in (a)(2)(i) through (iii) of this
subparagraph) shall be considered to be reasonable and allowable only to
the extent that they do not exceed on a daily basis the maximum per diem
rates in effect at the time of travel as set forth in the \--

\(i\) Federal Travel Regulations, prescribed by the General Services
Administration, for travel in the conterminous 48 United States,
available on a subscription basis from the Superintendent of Documents,
U.S. Government Printing Office, Washington, DC 20402, Stock No.
022-001-81003-7;

\(ii\) Joint Travel Regulations, Volume 2, DOD Civilian Personnel,
Appendix A, prescribed by the Department of Defense, for travel in
Alaska, Hawaii, the Commonwealth of Puerto Rico, and territories and
possessions of the United States, available on a subscription basis from
the Superintendent of Documents, U. S. Government Printing Office,
Washington, DC 20402, Stock No. 908-010-00000-1; or

\(iii\) Standardized Regulations (Government Civilians, Foreign Areas),
section 925, \"Maximum Travel Per Diem Allowances of Foreign Areas,\"
prescribed by the Department of State, for travel in areas not covered
in (a)(2)(i) and(ii) of this paragraph, available on a subscription
basis from the Superintendent of Documents, U.S. Government Printing
Office, Washington, DC 20402, Stock No. 744-088-00000-0.

\(3\) In special or unusual situations, actual costs in excess of the
above-referenced maximum per diem rates are allowable provided that such
amounts do not exceed the higher amounts authorized for Federal civilian
employees as permitted in the regulations referenced in (a) (2) (i),
(ii),or (iii) of this subsection. For such higher amounts to be
allowable, all of the following conditions must be met:

\(i\) One of the conditions warranting approval of the actual expense
method, as set forth in the regulations referenced in (a)(2)(i), (ii),
or (iii) of this subsection, must exist.

\(ii\) A written justification for use of the higher amounts must be
approved by an officer of the contractor\'s organization or designee to
ensure that the authority is properly administered and controlled to
prevent abuse.

\(iii\) If it becomes necessary to exercise the authority to use the
higher actual expense method repetitively or on a continuing basis in a
particular area, the contractor must obtain advance approval from the
CO.

\(iv\) Documentation to support actual costs incurred shall be in
accordance with the contractor\'s established practices provided that a
receipt is required for each expenditure of \$75.00 or more. The
approved justification required by (a)(3)(ii) and, if applicable,
(a)(3)(iii) of this subsection must be retained.

\(4\) Subparagraphs (a)(2) and (a)(3) of this subsection do not
incorporate the regulations cited in (a)(2)(i), (ii), and (iii) in their
entirety. Only the maximum per diem rates, the definitions of lodging,
meals and incidental expenses, and the regulatory coverage dealing with
specific or unusual situations are incorporated herein.

\(5\) An advance agreement (see Section 1) with respect to compliance
with subparagraphs (a)(2) and (a)(3) of this subsection may be useful
and desirable.

\(6\) The maximum per diem rates referenced in subparagraph (a)(2) of
this subsection generally would not constitute a reasonable daily charge
-

\(i\) When no lodging costs are incurred; and/or

\(ii\) On partial travel days (e.g., day of departure and return).

Appropriate downward adjustments from the maximum per diem rates would
normally be required under these circumstances. While these adjustments
need not be calculated in accordance with the Federal Travel Regulation
or Joint Travel Regulations, they must result in a reasonable charge.

\(7\) Costs shall be allowable only if the following information is
documented\--

\(i\) Date and place (city, town, or other similar designation) of the
expenses;

\(ii\) Purpose of the trip; and

\(iii\) Name of person on trip and that person\'s title or relationship
to the contractor.

\(b\) Travel costs incurred in the normal course of overall
administration of the business are allowable and shall be treated as
indirect costs.

\(c\) Travel costs directly attributable to specific contract
performance are allowable and may be charged to the contract.

\(d\) Airfare costs in excess of the lowest customary standard, coach,
or equivalent airfare offered during normal business hours are
unallowable, except when such accommodations require circuitous routing,
require travel during unreasonable hours, excessively prolong travel,
result in increased cost that would offset transportation savings, are
not reasonably adequate for the physical or medical needs of the
traveler, or are not reasonably available to meet mission requirements.
However, in order for airfare costs in excess of the above standard
airfare to be allowable, the applicable condition(s) set forth in this
paragraph must be documented and justified.

(e)(1) \"Cost of travel by contractor-owned, -leased, or -chartered
aircraft\" includes the cost of lease, charter, operation (including
personnel), maintenance, depreciation, insurance, and other related
costs.

\(2\) The costs of travel by contractor-owned, -leased, or -chartered
aircraft are limited to the standard airfare described in paragraph (d)
of this subsection for the flight destination unless travel by such
aircraft is specifically required by contract specification, term, or
condition, or a higher amount is approved by the CO. A higher amount may
be agreed to when one or more of the circumstances for justifying higher
than standard airfare listed in paragraph (d) of this subsection are
applicable, or when an advance agreement under subparagraph (e)(3) of
this subsection has been executed. In all cases, travel by
contractor-owned, -leased, or -chartered aircraft must be fully
documented and justified. For each contractor-owned, -leased, or
-chartered aircraft used for any business purpose which is charged or
allocated, directly or indirectly, to a Government contract, the
contractor must maintain and make available manifest/logs for all
flights on such company aircraft. As a minimum, the manifest/log shall
indicate\--

\(i\) Date, time, and point of departure;

\(ii\) Destination, date, and time of arrival;

\(iii\) Name of each passenger and relationship to the contractor;

\(iv\) Authorization for trip; and

\(v\) Purpose of trip.

\(3\) Where an advance agreement is proposed (see Section 1),
consideration may be given to the following:

\(i\) Whether scheduled commercial airlines or other suitable, less
costly, travel facilities are available at reasonable times, with
reasonable frequency, and serve the required destinations conveniently.

\(ii\) Whether increased flexibility in scheduling results in time
savings and more effective use of personnel that would outweigh
additional travel costs.

\(f\) Costs of contractor-owned or -leased automobiles, as used in this
paragraph, include the costs of lease, operation (including personnel),
maintenance, depreciation, insurance, etc. These costs are allowable, if
reasonable, to the extent that the automobiles are used for company
business. That portion of the cost of company-furnished automobiles that
relates to personal use by employees (including transportation to and
from work) is compensation for personal services and is unallowable as
stated in 8.6(m)(2).

#### 8.47 Defense of Fraud Proceedings.

\(a\) Definitions.

\"Costs\" include, but are not limited to, administrative and clerical
expenses; the cost of legal services, whether performed by in-house or
private counsel; the costs of the services of accountants, consultants,
or others retained by the contractor to assist it; costs of employees,
officers, and directors; and any similar costs incurred before, during
and after commencement of a judicial or administrative proceeding which
bear a direct relationship to the proceedings.

\"Fraud\" means (1) acts of fraud or corruption or attempts to defraud
the Government or to corrupt its agents, (2) acts which constitute a
cause for debarment or suspension, and (3) acts which violate the False
Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-Kickback Act, 41
U.S.C., sections 51 and 54.

\"Penalty\" does not include restitution, reimbursement, or compensatory
damages.

\"Proceeding\" includes an investigation.

\(b\) Costs incurred in connection with any proceeding brought by
Federal, state, local or foreign Government for violation of, or a
failure to comply with, law or regulation by the contractor (including
its agents or employers) are unallowable if a result is -

\(1\) In a criminal proceeding, a conviction;

\(2\) In a civil or administrative proceeding, either a finding of
contractor liability or imposition of a monetary penalty;

\(3\) A final decision by an appropriate official of an executive agency
to:

\(i\) Debar or suspend the contractor,

\(ii\) Rescind or void a contract; or

\(iii\) Terminate a contract for default by reason of a violation or
failure to comply with a law or regulation.

\(4\) Disposition of the matter by consent or compromise if the
proceeding could have led to any of the outcomes listed in subparagraphs
(b)(1) through (3) of this subsection (but see paragraphs (c) and (d) of
this subsection); or

\(5\) Not covered by subparagraphs (b)(1) through (4) of the subsection,
but where the underlying alleged contractor misconduct was the same as
that which led to a different proceeding whose costs are unallowable by
reason of subparagraphs (b)(1) through (4) of this subsection.

\(c\) To the extent they are not otherwise unallowable, costs incurred
in connection with any proceeding under paragraph (b) of this subsection
commenced by the United States that is resolved by consent or compromise
pursuant to an agreement entered into between the contractor and the
United states, and which are unallowable solely because of paragraph (b)
of this subsection, may be allowed to the extent specifically provided
in such agreement.

\(d\) To the extent that they are not otherwise unallowable, costs
incurred in connection with any proceeding under paragraph (b) of this
subsection commenced by a State, local or foreign government may be
allowable when the CO determines that the costs were incurred either:

\(1\) As a direct result of a specific term or condition of a Federal
contract; or

\(2\) As a result of compliance with specific written direction of the
cognizant CO.

\(e\) Costs incurred in connection with proceedings described in
paragraph (b) of this subsection, but which are not made unallowable by
that paragraph, may be allowable to the extent that:

\(1\) The costs are reasonable in relation to the activities required to
deal with the proceeding and the underlying cause of action;

\(2\) The costs are not otherwise recovered from the Federal Government
or a third party, either directly as a result of the proceeding or
otherwise; and

\(3\) The percentage of costs allowed does not exceed the percentage
determined to be appropriate considering the complexity of the
procurement litigation, generally-accepted principles governing the
award of legal fees in civil actions involving the United States as a
party, and such other factors as may be appropriate. Such percentage
shall not exceed 80%. However, if an agreement reached under paragraph
(c) of this subsection has explicitly considered this 80% rule, then the
full amount of costs resulting from that agreement shall be allowable.

\(f\) Costs not covered elsewhere in this subsection are unallowable if
incurred in connection with -

\(1\) Defense against Government claims or appeals or the prosecution of
claims or appeals against the Government.

\(2\) Organization, reorganization, (including mergers and acquisitions)
or resisting mergers and acquisitions.

\(3\) Defense of antitrust suits.

\(4\) Defense of suits brought by employees or ex-employees of the
contractor under section 2 of the Major Fraud Act of 1988 where the
contractor was found liable or settled.

\(5\) Costs of legal, accounting and consultant services and directly
associated costs incurred in connection with the defense or prosecution
of lawsuits or appeals between contractors arising from either (1) an
agreement or contract concerning a teaming arrangement, a joint venture,
or similar arrangement of shared interest, or (2) dual sourcing,
co-production, or similar programs, are unallowable, except when (i)
incurred as a result of compliance with specific terms and conditions of
the contract or written instructions from the CO, or (ii) when agreed to
in writing by the CO.

\(6\) Patent infringement litigation, unless otherwise provided for in
the contact.

\(7\) Representation of, or assistance to, individuals, groups, or legal
entities which the contractor is not legally bound to provide, arising
from an action where the participant was convicted of violation of a law
or regulation or was found liable in a civil or administrative
proceeding.

\(8\) Protests of solicitations or contract awards, or the defense
against protests of such solicitations or contract awards, unless the
costs of defending against a protest are incurred pursuant to a written
request from the CO.

\(g\) Costs which may be unallowable under 8.47, including directly
associated costs, shall be segregated and accounted for by the
contractor separately. During the pendency of any proceeding covered by
paragraph (b) and subparagraphs (f)(4) and (f)(7) of this subsection,
the CO shall generally withhold payment of such costs. However, if in
the best interests of the Government, the CO may provide for conditional
payment upon provision of adequate security, or other adequate
assurance, and agreement by the contractor to repay all unallowable
costs, plus interest, if the costs are subsequently determined to be
unallowable.

#### 8.48 Deferred Research and Development Costs.

\"Research and development\" means the type of technical effort which is
described in 8.18 but which is sponsored by, or required in performance
of, a contract or grant. Research and development costs (including
amounts capitalized that were incurred before the award of a particular
contract) are unallowable except when allowable as precontract costs. In
addition, when costs are incurred in excess of either the price of a
contract or amount of a grant for research and development effort, such
excess may not be allocated as a cost to any other Government contract.

#### 8.49 Goodwill.

Goodwill, an unidentifiable intangible asset, originates under the
purchase method of accounting for a business combination when the price
paid by the acquiring company exceeds the sum of the identifiable
individual assets acquired less liabilities assumed, based upon their
fair values. The excess is commonly referred to as goodwill. Goodwill
may arise from the acquisition of a company as a whole or a portion
thereof. Any costs for amortization, expensing, write-off, or write-down
of goodwill (however represented) are unallowable.

#### 8.50 Reserved.

#### 8.51 Costs of Alcoholic Beverages.

Costs of alcoholic beverages are unallowable.