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APPENDIX 1

FEDERAL ACQUISITION REGULATION (48 CFR CHAPTER 1)

SUBPART 31.2 - CONTRACTS WITH COMMERCIAL ORGANIZATIONS

The following is a direct reprint of FAR Subpart 31.2:

31.201 General.

31.201-1 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 pursuant to

31.205-10. In ascertaining what constitutes a cost, any generally
accepted

method of determining or estimating costs that is equitable and is

consistently applied may be used, including standard costs properly

adjusted for applicable variances.

31.201-2 Determining allowability.

\(a\) The factors to be considered in determining whether a cost is

allowable include the following:

\(1\) Reasonableness.

\(2\) Allocability.

\(3\) Standards promulgated by the CAS Board, if applicable;

otherwise, generally accepted accounting principles and

practices appropriate to the particular circumstances.

\(4\) Terms of the contract.

\(5\) Any limitations set forth in this subpart.

\(b\) Certain cost principles in this subpart incorporate the
measurement,

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assignment, and allocability rules of selected CAS and limit the

allowability of costs to the amounts determined using the criteria in

those selected standards. Only those CAS or portions of standards

specifically made applicable by the cost principles in this subpart

are mandatory unless the contract is CAS-covered (see Part 30).

Business units that are not otherwise subject to these standards

under a CAS clause are subject to the selected standards only for the

purpose of determining allowability of costs on Government contracts.

Including the selected standards in the cost principles does not

subject the business unit to any other CAS rules and regulations.

The applicability of the CAS rules and regulations is determined by

the CAS clause, if any, in the contract and the requirements of the

standards themselves.

\(c\) When contractor accounting practices are inconsistent with this

Subpart 31.2, costs resulting from such inconsistent practices shall

not be allowed in excess of the amount that would have resulted from

using practices consistent with this subpart.

31.201-3 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 contracting

officer or the contracting officer\'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

the contract performance;

\(2\) Generally accepted sound business practices, arms length

bargaining and Federal and State laws and regulations;

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\(3\) The contractor\'s responsibilities to the Government, other

customers, the owners of the business, employees, and the

public at large; and

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

practices.

31.201-4 Determining 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 a

Government 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.

31.201-5 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 the Government either as a cost
reduction

or by cash refund. See 31.205-6(j)(4) for rules related to refund or

credit to the Government upon termination of an overfunded defined
benefit

pension plan.

31.201-6 Accounting for unallowable costs.

\(a\) Costs that are expressly unallowable or mutually agreed to be

unallowable, including mutually agreed to be unallowable directly

associated costs, shall be identified and excluded from any billing,

claim, or proposal applicable to a Government contract. A directly

associated cost is any cost which is generated solely as a result of

incurring another cost, and which would not have been incurred had

the other cost not been

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incurred. When an unallowable cost is incurred, its directly

associated costs are also unallowable.

\(b\) Costs which specifically become designated as unallowable or as

unallowable directly associated costs of unallowable costs as a

result of a written decision furnished by a contracting officer shall

be identified if included in or used in computing any billing, claim,

or proposal applicable to a Government contract. This identification

requirement applies also to any costs incurred for the same purpose

under like circumstances as the costs specifically identified as

unallowable under either this paragraph or paragraph (a) above.

\(c\) The detail and depth of records required as backup support for

proposals, billings, or claims shall be that which is adequate to

establish and maintain visibility of identified unallowable costs,

including directly associated costs. Unallowable costs involved in

determining rates used for standard costs, or for indirect cost

proposals or billing, need be identified only at the time rates are

proposed, established, revised, or adjusted. These requirements may

be satisfied by any form of cost identification which is adequate for

purposes of contract cost determination and verification.

\(d\) If a directly associated cost is included in a cost pool which is

allocated over a base that includes the unallowable cost with which

it is associated, the directly associated cost shall remain in the

cost pool. Since the unallowable costs will attract their allocable

share of costs from the cost pool, no further action is required to

assure disallowance of the directly associated costs. In all other

cases, the directly associated costs, if material in amount, must be

purged from the cost pool as unallowable costs.

\(e\) (1) In determining the materiality of a directly associated cost,

consideration should be given to the significance of (i) the

actual dollar amount, (ii) the cumulative effect of all

directly associated costs in a cost pool, or (iii) the ultimate

effect on the cost of Government contracts.

\(2\) Salary expenses of employees who participate in activities that

generate unallowable costs shall be treated as directly

associated costs to the extent of the time spent on the

proscribed activity, provided the costs are material in

accordance with subparagraph

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(e)(1) above (except when such salary expenses are, themselves,

unallowable). The time spent in proscribed activities should

be compared to total time spent on company activities to

determine if the costs are material. Time spent by employees

outside the normal working hours should not be considered

except when it is evident that an employee engages so

frequently in company activities during periods outside normal

working hours as to indicate that such activities are a part of

the employee\'s regular duties.

\(3\) When a selected item of cost under 31.205 provides that

directly associated costs be unallowable, it is intended that

such directly associated costs be unallowable only if

determined to be material in amount in accordance with the

criteria provided in paragraphs (e)(1) and (e)(2) above, except

in those situations where allowance of any of the directly

associated costs involved would be considered to be contrary to

public policy.

31.201-7 Construction and architect-engineer contracts.

Specific principles and procedures for evaluating and determining costs
in

connection with contracts and subcontracts for construction, and

architect-engineer contracts related to construction projects, were

discussed previosuly. The applicability of these principles and
procedures

is also discussed.

31.202 Direct costs.

\(a\) A direct cost is any cost that can be identified specifically with
a

particular final cost objective. No final cost objective shall have

allocated to it as a direct cost any cost, if other costs incurred

for the same purpose in like circumstances have been included in any

indirect cost pool to be allocated to that or any other final cost

objective. Costs identified specifically with the contract are

direct costs of the contract and are to be charged directly to the

contract. All costs specifically identified with other final cost

objectives of the contractor are direct costs of those cost

objectives and are not to be charged to the contract directly or

indirectly.

\(b\) For reasons of practicality, any direct cost of minor dollar
amount

may

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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.

31.203 Indirect costs.

\(a\) An indirect cost is any cost not directly identified with a
single,

final cost objective, but 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. Commonly, manufacturing overhead, selling expenses, and

general and administrative (G&A) expenses are separately grouped.

Similarly, the particular case may require subdivision of these

groupings, e.g., building occupancy costs might be separable from

those of personnel administration within the manufacturing overhead

group. This necessitates selecting a distribution base common to all

cost objectives to which the grouping is to be allocated. The base

should be selected so as to permit allocation of the grouping on the

basis of the benefits accruing to the several cost objectives. 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 distributing indirect costs has been

accepted, it shall not be fragmented by removing 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

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Government contract costs. For example, when a cost input base is

used for the distribution of 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 standards promulgated by the CAS Board, if applicable

to the contract; otherwise, the method 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 products, or other relevant

circumstances; or

\(3\) Indirect cost groupings developed for a contractor\'s primary

location are applied to offsite locations. Separate cost

groupings for costs allocable to offsite locations may be

necessary to permit equitable distribution of costs on the

basis of the benefits accruing to the several cost objectives.

\(e\) A base period for allocating indirect costs is the cost accounting

period during which such costs are incurred and accumulated for

distribution to work performed in that period. The criteria and

guidance in 30.406 for selecting the cost accounting periods to be

used in allocating indirect costs are incorporated herein for

application to contracts subject to full CAS coverage. For contracts

subject to modified CAS coverage and for non-CAS-covered contracts,

the base period for allocating indirect costs will normally be the

contractor\'s fiscal year. But a shorter period may be appropriate

\(1\) for contracts in which performance involves only a minor portion

of the fiscal year or (2) when it is general practice in the industry

to use a shorter period. When a contract is performed over an

extended period, as many base periods shall be used as are required

to represent the period of contract performance.

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

paragraphs

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(b), (c), and (d) above when Government-owned contractor-operated

(GOCO) plants are involved. The distribution of corporate, division,

or branch office G&A expenses to such plants operating with little or

no dependence on corporate administrative activities may require more

precise cost groupings, detailed accounts screening, and carefully

developed distribution bases.

31.204 Application of principles and procedures.

\(a\) Costs shall be allowed to the extent they are reasonable,
allocable,

and determined to be allowable under 31.201, 31.202, 31.203, and

31.205. 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, fixed-price incentive, or price redeterminable

type subcontract of any tier above the first firm-fixed-price

subcontract or fixed-price subcontract with economic price adjustment

provisions are allowable to the extent that allowance is consistent

with the appropriate subpart of this Part 31 applicable to the

subcontract involved. 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 under 15.805-3, shall be allowable only

to the extent that the price was negotiated in accordance with

31.102.

\(c\) Section 31.205 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 subpart and the treatment of

similar or related selected items. When more than one subsection in

31.205 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 31.205 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.

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31.205 Selected costs.

31.205-1 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, 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 Government

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 31.205-34);

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

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

performance.

Costs of this nature, if incurred for more than one Government

contract or both Government work and other work of the contractor,

are allowable to the extent that the principles in 31.201-3,

31.201-4, and 31.203 are observed.

\(e\) 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).

\(5\) Costs of keel laying, ship launching, commissioning, and

roll-out ceremonies, to the extent specifically provided for by

contract.

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

following:

\(1\) All advertising costs other than those specified in

paragraph (d)

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of this subsection.

\(2\) Costs of air shows and other special events, such as

conventions and trade shows, including :

\(i\) Costs of displays, demonstrations, and exhibits;

\(ii\) Costs of meeting rooms, hospitality suites, and other

special facilities used in conjunction with shows and

other special events; and

\(iii\) Salaries and wages of employees engaged in setting up and

displaying exhibits, making demonstrations, and providing

briefings.

\(3\) 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 (but see 31.205-13(a), Employee morale, health,

welfare, food service, and dormitory costs and credits;

31.205-21, Labor relations costs; 31.205-43(c), Trade,

business, technical, and professional activity costs; and

31.205-44, Training and educational costs).

\(6\) 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.

\(8\) All public relations costs, other than those specified in

paragraph (e) of this subsection, whose primary purpose is to

promote the sale of products or services by stimulating

interest in a product or product line (except for those costs

made allowable under

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31.205-38(c)), or by disseminating messages calling favorable

attention to the contractor for purposes of enhancing the

company image to sell the company\'s products or services.

Nothing in this paragraph (f)(8) modifies the express

unallowability of costs listed in paragraph (f)(2) through

(f)(7). The purpose of this paragraph is to provide criteria

for determining whether costs not specifically identified

should be unallowable.

\(g\) Notwithstanding the provisions of paragraph (d) and subparagraph

(f)(2) of this subsection, reasonable costs incurred to promote

American aerospace exports at domestic and international exhibits,

such as air shows, trade shows, and conventions, are allowable. Such

reasonable costs include transportation of the aircraft, aerospace

parts and equipment, and other associated support cost. However,

such allowable costs shall not include the cost of entertainment,

hospitality suites or chalets, advertising media other than exhibits,

and other costs not necessary to establish, operate or maintain an

exhibit, display, or demonstration so long as Section 8062 of Pub. L.

100-202, or a similar provision in a subsequent act, is in effect.

31.205-2 Automatic data processing equipment leasing costs.

\(a\) This subsection applies to all contractor-leased automatic data

processing equipment (ADPE), as defined in 31.001 (except as

components of an end item to be delivered to the Government),

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

31.205-11(m) requires that ADPE acquired by means of capital leases,

as defined in FAS-13, shall 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. Allowability of costs

related to contractor-owned ADPE is governed by other requirements of

this subpart.

\(b\) (1) If the contractor leases ADPE but cannot demonstrate, on the

basis of facts existent 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 the

Government

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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 only 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 terms of the rental agreement.

\(ii\) The costs do not give rise to a material equity in the

facilities (such as an option to renew or purchase at a

bargain rental or price other than that normally given to

industry at large) but represent charges only for the

current use of the equipment, including incidental

service costs such as maintenance, insurance, and

applicable taxes.

\(iii\) The contracting officer\'s approval was obtained for the

leasing arrangement (see paragraph (d)(3) below) when the

total cost of leasing :

\(A\) The ADPE is to be allocated to one or more

Government contracts which require negotiating or

determining costs, or

\(B\) ADPE 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

negotiating or determining 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.

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\(4\) 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 Subpart 31.2 and including the cost of

money (see 31.205-10)). When there is an established practice

of leasing the same or similar equipment to unaffiliated

lessees, rental costs shall be allowed in accordance with

paragraphs (b)(1) and (2) above, except that the purchase price

and costs of ownership shall be determined under 31.205-26(e).

\(c\) (1) An estimate of the anticipated useful life of the ADPE may

represent 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)

depending upon the facts and circumstances and the particular

facilities involved. 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.

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\(3\) In estimating the least cost to the Government 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. For the purpose of this comparison,

the costs of ADPE exclude interest or other unallowable costs

pursuant to this Subpart 31.2; they include but are not limited

to the costs of operation, maintenance, insurance,

depreciation, facilities capital cost of money, rental, and the

cost of machine services, as applicable.

\(d\) (1) Except as provided in paragraph (3) below, the contractor\'s

justification, under paragraph (b) above, of the leasing

decisions shall consist of the following supporting data,

prepared before acquisition:

\(i\) 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 selecting the equipment chosen and for the

decision to lease.

\(2\) Except as provided in paragraph (3) below, the contractor\'s

annual justification, under paragraph (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 subdivisions (d)(1)(i) through (iii) above.

\(3\) If the contractor\'s prospective ADPE lease cost meets the

threshold in 31.205-2(b)(2)(iii) above, the contractor shall

furnish data supporting the initial decision to lease (see

paragraph (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

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2210.19

Appendix 1

percent or more of the total leasing cost is allocated to

Government contracts which require 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 paragraph (b)(2) above).

31.205-3 Bad debts.

Bad debts, including actual or estimated losses arising from
uncollectible

accounts receivable due from customers and other claims, and any
directly

associated costs such as collection costs, and legal costs are
unallowable.

31.205-4 Bonding costs.

\(a\) Bonding costs arise when the Government requires assurance against

financial loss to itself or others by reason of the act or default of

the contractor. They arise also in instances where the contractor

requires similar assurance. Included are such bonds as bid,

performance, payment, advance payment, infringement, and fidelity

bonds.

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

allowable.

\(c\) Costs of bonding required by the contractor in the general conduct
of

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.

31.205-5 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

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2210.18

Appendix 1

when allocated to all work of the contractor.

\(b\) Costs of capital assets acquired for civil defense purposes are

allowable through depreciation (see 31.205-11).

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

unallowable.

31.205-6 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, 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, and stock

ownership plans; employee insurance; fringe benefits; contributions

to pension, annuity, and management 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 parts 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 31.205-6(g), (h), (j), (k), and (m) 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.

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2210.19

Appendix 1

\(4\) 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 cognizant ACO of the changes either

before their implementation or within a reasonable period

after their implementation, and

\(ii\) Has not provided the Government, 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

Subpart 31.2 shall not be allowable under this subsection

31.205-6 solely on the basis that they constitute compensation

for personal services. (See 31.205-34(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. In

administering this principle, it is recognized that not every

compensation case need

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2210.18

Appendix 1

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, contracting officers

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

contracting officer 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

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2210.19

Appendix 1

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.

Contracting officers or their representatives should

normally challenge increased

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2210.18

Appendix 1

costs where major revisions of existing compensation

plans or new plans are introduced by the contractor, and

the contractor :

\(A\) Has not notified the cognizant ACO of the changes

either before their implementation or within a

reasonable period after their implementation; and

\(B\) Has not provided the Government, 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. Nothwithstanding any other
requirements

of this subsection 31.205-6, costs of compensation are not allowable

to the extent that they result from provisions of labor-management

agreements that, as applied to work in performing Government

contracts, are determined to be unreasonable because they are either

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 :

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2210.19

Appendix 1

\(1\) 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.

\(d\) Salaries and wages. Salaries and wages for current services
include

gross compensation paid to employees in the form of cash, stock (see

paragraph (f)(2) below regarding valuation), products, or services,

and are allowable.

\(e\) 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.

\(2\) Although the additional taxes in paragraph (1) above may be

considered in establishing foreign overseas differential, any

increased compensation calculated directly on the basis of an

employee\'s specific increase in income taxes is unallowable.

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

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2210.18

Appendix 1

agreement to make such payment and the basis for the award is

supported.

\(2\) When the costs of bonuses and incentive compensation are paid

in the stock of the contractor or of an affiliate, the

following additional restrictions apply:

\(i\) Valuation placed on the stock 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; and

\(ii\) Accruals for the cost of stock before issuing the stock

to the employees shall be subject to adjustment according

to the possibilities that the employees will not receive

the stock and that their interest in the accruals will be

forfeited.

\(3\) When the bonus and incentive compensation payments are

deferred, the costs are subject to the requirements of

paragraph (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 paragraph (j)(6) 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 (but see 37.110(f) regarding services

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2210.19

Appendix 1

performed outside the United States). 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 be considered on a case-by-case

basis.

\(h\) Backpay.

\(1\) Backpay resulting from violations of Federal labor laws or the

Civil Rights Act of 1964. Backpay 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

backpay falls into two categories: one requiring the

contractor to pay employees additional compensation for work

performed for which they were underpaid, and the other

resulting from other violations, such as when the employee was

improperly discharged, discriminated against, or other

circumstances for which the backpay was not additional

compensation for work performed. Backpay resulting from

underpaid work is

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2210.18

Appendix 1

compensation for the work performed and is allowable. All

other backpay resulting from violation of Federal labor laws or

the Civil Rights Act of 1964 is unallowable.

\(2\) Other backpay. Backpay may also result from payments to union

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

backpay is allowable. Backpay 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.

\(i\) Stock options, stock appreciation rights, and phantom stock plans,

and junior stock conversions.

\(1\) The cost of stock options awarded to employees to purchase

stock of the contractor or of an affiliate will be treated as

deferred compensation and must comply with the requirements of

paragraph (k) of this subsection. The allowable cost of stock

options is limited to the difference between the option price

and the market price on the first date on which the option

price and the number of shares are known. Accordingly, when

the stock option price is equal to or greater than the market

price on that date, then no costs are allowable for contract

costing purposes.

\(2\) Stock appreciation rights are rights granted to employees by

contractors to receive the increase in value, or appreciation,

of company stock even though the employee neither purchases the

stock nor receives title to it. Stock appreciation rights will

be treated as deferred compensation and must comply with the

requirements of paragraph (k) of this subsection. The

allowable cost of stock appreciation rights is limited to the

difference between the stock-appreciation-right base price from

which appreciation will be measured and the market price on the

first date on which both the number of shares and the

stock-appreciation-right base price are known. Accordingly,

when the stock-appreciation-right base price is equal to or

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2210.19

Appendix 1

greater than the market price on that date, then no costs are

allowable for contract costing purposes.

\(3\) In phantom-stock-type plans, contractors assign or attribute

contingent shares of stock to employees as if the employees own

the stock, even though the employees neither purchase the stock

nor receive title to it. Under these plans, an employee\'s

account may be increased by the equivalent of dividends paid

and any appreciation in the market price of the stock on the

first date on which the number of shares awarded is known.

Such increases in employee accounts for dividend equivalents

and market price appreciation are unallowable.

\(4\) Junior stock is a class of equity stock that (i) is sold to

employees at a price below that of the contractor\'s common

stock, (ii) carries reduced dividend and voting rights, and

\(iii\) is convertible to common stock upon the attainment of

specified corporate goals. Costs associated with the

conversion of junior stock into common stock are not allowable,

whether or not they are accounted for as compensation costs.

\(j\) 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 30.412, Composition and Measurement of Pension Costs, and

CAS 413, Adjustment and Allocation of Pension Cost. The costs

of all defined contribution pension plans shall be measured,

allocated,

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2210.18

Appendix 1

and accounted for in accordance with the provisions of 30.412.

Pension costs are allowable subject to the referenced standards

and the cost limitations and exclusions set forth in

subdivision (j)(2)(i) and in subparagraphs (j)(3) through (8)

of this subsection.

\(i\) Except for unfunded pension plans as defined in 31.001,

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) of this subsection, 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 paragraph 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

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2210.19

Appendix 1

cost limitations and exclusions pertaining to defined benefit

plans are as follows:

\(i\) Normal costs of pension plans not funded in the year

incurred, and all other components of pension costs (see

30.412.40(a)(1)) assignable to the current accounting

period but not funded during it, shall not be allowable

in subsequent years (except that a payment made to a 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) (see 30.412.50(c)(3)), 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.

\(A\) Except for unfunded pension plans as defined in

31.001, normal costs of pension plans not funded in

the year incurred, and all other components of

pension costs (see 30.412-40(a)(1)) assignable to

the current accounting period but not funded

during it, shall not be allowable in subsequent

years (except that a payment made to a 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

Employees\' Retirement Income Security Act of 1974

(ERISA) (see 30.412-50(c)(3)), will be allowable in

those future accounting periods in which the

funding does occur. The allowability of these

deferred contributions will be limited to

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2210.18

Appendix 1

the amounts that would have been allowed had the

funding occurred in the year the costs would have

been assigned except for the waiver.

\(B\) Allowable costs for unfunded pension plans, as

defined in 31.001, are limited to the amount

computed in accordance with 30.412 and 30.413.

\(ii\) 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 in accordance with 30.412.50(a)(7).

\(iii\) 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

as provided for in 30.413.50(c)(5). 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

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2210.19

Appendix 1

work. If a beneficial or other equitable relationship

exists, the Government will participate, despite the

requirements of 31.205-19(a)(3) and (b), in the

indemnification payment to the extent of its fair share.

\(4\) Termination of defined benefit pension plans. When excess or

surplus assets revert to the contractor as a result of

termination of a defined benefit 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. The Government\'s equitable

share shall reflect the Government\'s participation in pension

costs through those contracts for which certified (see 15.804)

cost or pricing data were submitted or which are subject to

subpart 31.2.

\(5\) Defined contribution pension plans. This paragraph 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 paragraph (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 (see 30.412.50(c)(3)) 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.

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Appendix 1

\(iii\) 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 ESOP\'s are

allowable subject to the following conditions:

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Appendix 1

\(A\) 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 contracting officer

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

contracting officer\'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

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2210.18

Appendix 1

satisfactory to the contracting officer

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

contracting officer 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

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Appendix 1

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 31.205-6(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 30.415,

Accounting for the Cost of Deferred Compensation.

\(3\) Deferred compensation payments to employees under awards made

before the effective date of 30.415 are allowable to the extent

they would have been allowable under prior acquisition

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

Subpart 31.2, the costs of fringe benefit are allowable to the

extent that they are

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2210.18

Appendix 1

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

31.205-46(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.

31.205-7 Contingencies.

\(a\) \"Contingency,\" as used in this subpart, 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. However, in some cases, as for

example, terminations, a contingency factor may be recognized when it

is applicable to a past period 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; e.g., anticipated costs of

rejects and defective work. Contingencies of this category are

to be included in the estimates of future costs so as to

provide the best estimate of performance cost.

\(2\) Those that may arise from presently known or unknown

conditions, the effect of which cannot be measured so precisely

as to provide equitable results to the contractor and to the

Government; e.g., results of pending litigation. Contingencies

of this category are to be excluded from cost estimates under

the

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2210.19

Appendix 1

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.

(See, for example, 31.205-6(g), 31.205-19, and 31.205-24.)

31.205-8 Contributions or donations.

Contributions or donations, including cash, property and services,

regardless of recipient, are unallowable, except as provided in

31.205-1(e)(3).

31.205-9 Reserved.

31.205-10 Cost of money.

\(a\) Facilities capital cost of money.

\(1\) General.

\(i\) Facilities capital cost of money (cost of capital

committed to facilities) is an imputed cost determined by

applying a cost-of-money rate to facilities capital

employed in contract performance. A cost-of-money rate

is uniformly imputed to all contractors (see subdivision

\(ii\) below). Capital employed is determined without

regard to whether its source is equity or borrowed

capital. The resulting cost of money is not a form of

interest on borrowings (see 31.205-20).

\(ii\) 30.414, Cost of Money as an Element of the Cost of

Facilities Capital, establishes criteria for measuring

and allocating, as an element of contract cost, the cost

of capital committed to facilities. Cost-of-money

factors are developed on Form CASB-CMF, broken down by

overhead pool at the business unit, using (A)

business-unit facilities capital data, (B) overhead

allocation base data, and (C) the cost-of-money rate,

which is based on interest rates specified by the

Secretary of the Treasury under 50 U.S.C. App.

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Appendix 1

1215(b)(2).

\(2\) Allowability. Whether or not the contract is otherwise subject

to CAS, facilities capital cost of money is allowable if :

\(i\) The contractor\'s capital investment is measured,

allocated to contracts, and costed in accordance with

30.414;

\(ii\) The contractor maintains adequate records to demonstrate

compliance with this standard;

\(iii\) The estimated facilities capital cost of money is

specifically identified or proposed in cost proposals

relating to the contract under which this cost is to be

claimed; and

\(iv\) The requirements of 31.205-52, which limit the

allowability of facilities capital cost of money, are

observed.

\(3\) Accounting. The facilities capital cost of money need not be

entered on the contractor\'s books of account. However, the

contractor shall (i) make a memorandum entry of the cost and

\(ii\) maintain, in a manner that permits audit and verification,

all relevant schedules, cost data, and other data necessary to

support the entry fully.

\(4\) Payment. Facilities capital cost of money that is (i)

allowable under paragraph (2) above and (ii) calculated,

allocated, and documented in accordance with this cost

principle shall be an \"incurred cost\" for reimbursement

purposes under applicable cost-reimbursement contracts and for

progress payment purposes under fixed-price contracts.

\(5\) The cost of money resulting from including asset valuations

resulting from business combinations in the facilities capital

employed base is unallowable (see 31.205-52).

\(b\) Cost of money as an element of the cost of capital assets under

construction

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\(1\) General.

\(i\) Cost of money as an element of the cost of capital assets

under construction is an imputed cost determined by

applying a cost-of-money rate to the investment in

tangible and intangible capital assets while they are

being constructed, fabricated, or developed for a

contractor\'s own use. Capital employed is determined

without regard to whether its source is equity or

borrowed capital. The resulting cost of money is not a

form of interest on borrowing (see 31.205-20).

\(ii\) 30.417, Cost of Money as an Element of the Cost of

Capital Assets Under Construction, establishes criteria

for measuring and allocating, as an element of contract

cost, the cost of capital committed to capital assets

under construction, fabrication, or development.

\(2\) Allowability.

\(i\) Whether or not the contract is otherwise subject to CAS,

and except as specified in subdivision (ii) below, the

cost of money for capital assets under construction,

fabrication, or development is allowable if :

\(A\) The cost of money is calculated, allocated to

contracts, and costed in accordance with 30.417;

\(B\) The contractor maintains adequate records to

demonstrate compliance with this standard;

\(C\) The cost of money for tangible capital assets is

included in the capitalized cost that provides the

basis for allowable depreciation costs, or, in the

case of intangible capital assets, the cost of

money is included in the cost of those assets for

which amortization costs are allowable; and

\(D\) The requirements of 31.205-52, which limit the

allowability of cost of money for capital assets

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2210.18

Appendix 1

under construction, fabrication, or development,

are observed.

\(ii\) Actual interest cost in lieu of the calculated imputed

cost of money for capital assets under construction,

fabrication, or development is unallowable.

\(3\) Accounting. The cost of money for capital assets under

construction need not be entered on the contractor\'s books of

account. However, the contractor shall (i) make a memorandum

entry of the cost and (ii) maintain, in a manner that permits

audit and verification, all relevant schedules, cost data, and

other data necessary to support the entry fully.

\(4\) Payment. The cost of money for capital assets under

construction that is allowable under paragraph (2) above of

this cost principle shall be an \"incurred cost\" for

reimbursement purposes under applicable cost-reimbursement

contracts and for progress payment purposes under fixed-price

contracts.

31.205-11 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.

\(b\) Contractors having contracts subject to 30.409, Depreciation of

Tangible Capital Assets, must adhere to the requirement of that

standard for all fully CAS-covered contracts and may elect to adopt

the standard for all other contracts. All requirements of 30.409 are

applicable if the election is made, and its requirements supersede

any conflicting requirements of this cost principle. Once electing

to adopt CAS 409 for all contracts, contractors must continue to

follow it until notification of final acceptance of all deliverable

items on all open negotiated Government contracts. Paragraphs (c)

through (e) below apply to contracts to which

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Appendix 1

30.409 is not applied.

\(c\) 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 (i) below).

\(d\) 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.

\(e\) 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 (straight line, sum of the years\' digits,

etc.) acceptable for income tax purposes. Allowable depreciation

shall not exceed the amounts used for book and statement purposes and

shall be determined in a manner consistent with the depreciation

policies and procedures followed in the same cost center on

non-Government business.

\(f\) Depreciation for reimbursement purposes in the case of tax-exempt

organizations shall be determined on the basis described in paragraph

\(e\) immediately above.

\(g\) 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

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2210.18

Appendix 1

allowable after the effective date of this 31.205-11 shall not exceed

the cost basis of the asset less any depreciation allowed or

allowable under prior acquisition regulations.

\(h\) 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

multishift operations.

\(i\) In the case of emergency facilities covered by certificates of

necessity, a contractor may elect to use normal depreciation without

requesting a determination of \"true depreciation,\" or may elect to

use either normal or \"true depreciation\" after a determination of

\"true depreciation\" has been made by an Emergency Facilities

Depreciation Board (EFDB). The method elected must be followed

consistently throughout the life of the emergency facility. When an

election is made to use normal depreciation, the criteria in

paragraphs (c), (d), (e), and (f) above shall apply for both the

emergency period and the post-emergency period. When an election is

made to use \"true depreciation\", the amount allowable as

depreciation :

\(1\) With respect to the emergency period (five years), shall be

computed in accordance with the determination of the EFDB and

allocated rateably over the full five year emergency period;

provided no other allowance is made which would duplicate the

factors, such as extraordinary obsolescence, covered by the

Board\'s determination; and

\(2\) After the end of the emergency period, shall be computed by

distributing the remaining undepreciated portion of the cost of

the emergency facility over the balance of its useful life

provided the remaining undepreciated portion of such cost shall

not include any amount of unrecovered \"true depreciation.\"

\(j\) 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.

\(k\) The depreciation on any item which meets the criteria for
allowance

at a \"price\" under 31.205-26(e) may be based on that price, provided

the

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Appendix 1

same policies and procedures are used for costing all business of the

using division, subsidiary, or organization under common control.

\(l\) 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 (but see 31.109(h)(2)). 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.

\(m\) 30.404, 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 30.404

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 31.205-11 while

assets acquired under leases classified as operating leases are

subject to the requirements on rental costs in 31.205-36. 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, as defined in FAS-13, for all real and personal

property, between any related parties are subject to the

requirements of this subparagraph 31.205-11(m). 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.

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Appendix 1

\(3\) 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

31.205-36(b)(4).

\(n\) Whether or not the contract is otherwise subject to CAS, the

requirements of 31.205-52, which limit the allowability of

depreciation, shall be observed.

31.205-12 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 31.205-27.

\(b\) 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 principle.

31.205-13 Employee morale, health, welfare, food service, and dormitory

costs and credits.

\(a\) Aggregate costs incurred on 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) immediately below, and

to the extent that the net amount is reasonable. Some examples are

house publications, health clinics, recreation, 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

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2210.19

Appendix 1

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

\(b\) 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.

\(c\) 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 (d) immediately below).

\(d\) 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.

31.205-14 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
31.205-1

and 31.205-13). Costs of membership in social, dining, or country clubs
or

other organizations having the

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Appendix 1

same purposes are also unallowable, regardless of whether the

cost is reported as taxable income to the employees.

31.205-15 Fines and penalties.

\(a\) 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 contracting officer.

\(b\) Costs incurred in connection with, or related to, the mischarging
of

costs on Government contracts are unallowable. Such costs include

those incurred to identify, 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.

31.205-16 Gains and losses on disposition of depreciable property or
other

capital assets.

\(a\) Gains and losses from the sale, retirement, or other disposition
(but

see 31.205-19) 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) of this subsection). However, no

gain or loss shall be recognized as a result of the transfer of

assets in a business combination (see 31.205-52).

\(b\) Gains and losses on disposition of tangible capital assets,
including

those acquired under capital leases (see 31.205-11(m), shall be

considered as adjustments of depreciation costs previously

recognized. The gain or loss for each asset disposed of is the

difference between the net amount realized, including insurance

proceeds from involuntary conversions, and its undepreciated balance.

The gain recognized for contract costing purposes shall be limited to

the difference between the acquisition cost (or for assets acquired

under a capital lease, the value at which the leased asset is

capitalized) of the asset and its undepreciated balance (except see

subdivisions (c)(2)(i) or (ii) below).

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2210.19

Appendix 1

\(c\) 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, such as fire, windstorm, flood, accident,

theft, etc., 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

31.205-11; 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 buisness

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.

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2210.18

Appendix 1

31.205-17 Idle facilities and idle capacity costs.

\(a\) \"Costs of idle facilities or idle capacity,\" as used in this

subsection, means costs such as maintenance, repair, housing, rent,

and other related costs; e.g., property taxes, insurance, and

depreciation.

\"Facilities,\" as used in this subsection, 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,\" as used in this subsection, 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,\" as used in this subsection, 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 31.205-42)).

\(c\) 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

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2210.19

Appendix 1

subletting, renting, or sale, in accordance with sound business,

economics, or security practices. Widespread idle capacity

throughout an entire plant or among a group of assets having

substantially the same function may be idle facilities.

\(d\) Any costs to be paid directly by the Government for idle
facilities

or idle capacity reserved for defense mobilization production shall

be the subject of a separate agreement.

31.205-19 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. Any contractor

desiring to establish a program of self-insurance applicable to

contracts that are not subject to 30.416, Accounting for Insurance

Costs, shall comply with the self-insurance requirements of that

standard as well as with Part 28 of this Regulation. However,

approval of a contractor\'s insurance program in accordance with Part

28 does not constitute a determination as to the allowability of the

program\'s cost. 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

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2210.18

Appendix 1

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

28.308(a).

\(vi\) Costs of insurance on the lives of officers, partners, or

proprietors are allowable only to the extent that the

insurance represents additional compensation (see

31.205-6).

\(3\) 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

30.416 and when the contractor did not establish a

self-insurance program. Such contracts are not subject

to the self-insurance requirements of 30.416. For

contracts subject to 30.416, 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

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2210.19

Appendix 1

self-insurance program when the actual amount of losses

will not differ significantly from the projected average

losses for the accounting period (see 4 CFR

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

30.416.50(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 U.S.C. 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 of

30.416. 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.

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2210.18

Appendix 1

\(d\) 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 (see 28.308(e)).

\(f\) 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.

31.205-20 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 preparing
prospectuses,

costs of preparing and issuing stock rights, and directly associated
costs

are unallowable except for interest assessed by State or local taxing

authorities under the conditions specified in 31.205-41 (but see

31.205-28).

31.205-21 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.

31.205-22 Legislative lobbying costs.

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

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2210.19

Appendix 1

\(1\) 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 or

state legislation, or (ii) the enactment or modification of any

pending Federal or state 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 or

state legislation, or (ii) the enactment or modification of any

pending Federal or state 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; or

\(5\) 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.

\(b\) 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

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2210.18

Appendix 1

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 lobbying made unallowable by (a)(3) above to influence

state 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 submit as part of their annual indirect cost
rate

proposals a certification that the requirements and standards of this

subsection have been complied with.

\(e\) Contractors shall maintain adequate records to demonstrate that
the

certification of costs as being allowable or unallowable pursuant to

this subsection complies with the requirements of this subsection.

\(f\) Time logs, calendars, or similar records shall not be required to
be

created for purposes of complying with this subsection, during any

particular calendar month when -:

\(1\) The employee engages in lobbying, (as defined in paragraphs (a)

and (b) of this subsection), 25 percent or less of the

employee\'s compensated hours of employment during that calendar

month; and

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2210.19

Appendix 1

\(2\) Within the preceding 5-year period, the organization has not

materially misstated allowable or unallowable costs of any

nature, including legislative lobbying costs.

When the conditions of subparagraphs (f)(1) and (2) of this

subsection are met, contractors are not required to establish records

to support the allowability of claimed costs in addition to records

already required or maintained. Also, when the conditions of

subparagraphs (f)(1) or (2) of this subsection are met, the absence

of time logs, calendars, or similar records will not serve as a basis

for disallowing costs by contesting estimates of lobbying time spent

by employees during a calendar month.

\(g\) Existing procedures should be utilized to resolve in advance any

significant questions or disagreements concerning the interpretation

or application of this subsection.

31.205-23 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.

31.205-24 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 31.205-11):

\(1\) 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 (but see 31.109).

\(b\) Expenditures for plant and equipment, including rehabilitation
which

should be capitalized and subject to depreciation, according to

generally accepted accounting principles as applied under the

contractor\'s established policy or, when applicable, according to

30.404, Capitalization

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2210.18

Appendix 1

of Tangible Assets, are allowable only on a depreciation basis.

31.205-25 Manufacturing and production engineering costs.

\(a\) The costs of manufacturing and production engineering effort as

described in (1) through (4) below are all allowable:

\(1\) Developing and deploying new or improved materials, systems,

processes, methods, equipment, tools and techniques that are or

are expected to be used in producing products or services;

\(2\) Developing and deploying pilot production lines;

\(3\) Improving current production functions, such as plant layout,

production scheduling and control, methods and job analysis,

equipment capabilities and capacities, inspection techniques,

and tooling analysis (including tooling design and application

improvements); and

\(4\) Material and manufacturing producibility analysis for

production suitability and to optimize manufacturing processes,

methods, and techniques.

\(b\) This cost principle does not cover:

\(1\) Basic and applied research effort (as defined in 31.205-18(a))

related to new technology, materials, systems, processes,

methods, equipment, tools and techniques. Such technical

effort is governed by 31.205-18, Independent research and

development costs; and

\(2\) Development effort for manufacturing or production materials,

systems, processes, methods, equipment, tools and techniques

that are intended for sale is also governed by 31.205-18.

\(c\) Where manufacturing or production development costs are
capitalized

or required to be capitalized under the contractor\'s capitalization

policies, allowable cost will be determined in accordance with the

requirements of 31.205-11, Depreciation.

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2210.19

Appendix 1

31.205-26 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 by the contractor, and may include

such collateral items as inbound transportation and intransit

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 inspecting and

correcting defective work). These costs are allowable, subject to

the requirements of paragraphs (b) through (e) below.

\(b\) Costs of material shall be adjusted for income and other credits,

including available trade discounts, refunds, rebates, allowances,

and 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 of

those materials should be charged to the contract. If material is

issued from stores, any generally recognized method of pricing such

material is acceptable if that method is consistently applied and the

results are equitable. When estimates of future material 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 that are 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

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2210.18

Appendix 1

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\" in accordance with 15.804; or

\(2\) Is the result of \"adequate price competition\" in accordance

with 15.804 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

that produce the item or its equivalent in significant

quantity.

\(3\) Provided, that in either subparagraph (1) or (2) above :

\(i\) The price is not in excess of the transferor\'s current

sales price to its 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 contracting officer has not determined the price to

be unreasonable.

\(f\) The price determined in accordance with subparagraph (e)(1) above

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.

31.205-27 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

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2210.19

Appendix 1

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

subsection, but will be governed by 31.205-6. These activities

include acquiring stock for (1) executive bonuses, (2) employee

savings plans, and (3) employee stock ownership plans.

31.205-28 Other business expenses.

The following types of recurring 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.

31.205-29 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.

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2210.18

Appendix 1

31.205-30 Patent costs.

\(a\) The following patent costs are allowable to the extent that they
are

incurred as requirements of a Government contract (but see

31.205-33):

\(1\) 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, such as

advice on patent laws, regulations, clauses, and employee agreements,

are allowable (but see 31.205-33).

\(c\) Other than those for general counseling services, patent costs not

required by the contract are unallowable. (See also 31.205-37.)

31.205-31 Plant reconversion costs.

Plant reconversion costs are those incurred in restoring or
rehabilitating

the contractor\'s facilities to approximately the same condition
existing

immediately before the start of the Government contract, fair wear and
tear

excepted. Reconversion costs are unallowable except for the cost of

removing Government property and the restoration or rehabilitation costs

caused by such removal. However, in special circumstances where equity
so

dictates, additional costs may be allowed to the extent agreed upon
before

costs are incurred. Care should be exercised to avoid duplication
through

allowance as contingencies, additional profit or fee, or in other

contracts.

31.205-32 Precontract costs.

Precontract costs are those incurred before the effective date of the

contract

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2210.19

Appendix 1

directly pursuant to the negotiation and in anticipation of the contract

award when such incurrence is necessary to comply with the proposed

contract delivery schedule. Such costs are allowable to the extent that

they would have been allowable if incurred after the date of the
contract

(see 31.109.)

31.205-33 Professional and consultant service costs.

\(a\) Definition. Professional and consultant services, as used in this

subpart, 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 (h) 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

31.205-30).

\(c\) 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 (e.g. FAR 52.215-12,

Restriction on Disclosure and Use of Data);

\(2\) 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;

or

\(3\) 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

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Appendix 1

and scope of the services contracted for or otherwise agreed

to.

\(d\) Costs of legal, accounting, and consultant services and directly

associated costs incurred in connection with organization and

reorganization (see also 31.205-27), defense of antitrust suits,

defense against Government claims or appeals, or the prosecution of

claims or appeals against the Government (see 33.201) are unallowable

(but see 31.205-47). Such costs incurred in connection with patent

infringement litigation are unallowable unless otherwise provided for

in the contract.

\(e\) 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 contracting officer, or

\(ii\) When agreed to in writing by the contracting officer.

\(f\) In determining the allowability of costs (including retainer fess)
in

a particular case, no single factor or any special combination of

factors is necessarily determinative. However, the contracting

officer 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.

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Appendix 1

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

business.

\(5\) Whether the proportion 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).

\(g\) 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 (h) of this subsection.

\(h\) Fees for services rendered shall be allowable only when supported
by

evidence of the nature and scope of the service furnished. (See also

31.205-38(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:

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\(1\) 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.

31.205-34 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;

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Appendix 1

\(2\) 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, such as extensive illustrations or descriptions of

the company\'s products or capabilities;

\(5\) 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.

31.205-35 Relocation costs.

\(a\) Relocation costs are costs incident to the permanent change of
duty

of 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)

through (f) below:

\(1\) Cost of travel of the employee and members of the immediate

family (see 31.205-46) 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 the 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

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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.

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\(8\) 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 Subpart 31.2.

\(4\) 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.

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\(iv\) 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 than 12 months;

\(2\) The employment agreement specifically limits the duration of

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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 to

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).

31.205-36 Rental costs.

\(a\) This subsection is applicable to the cost of renting or leasing
real

or personal property, except ADPE (see 31.205-2), acquired under

\"operating leases\" as defined in Statement of Financial Accounting

Standards No. 13 (FAS-13), Accounting for Leases. Compliance with

31.205-11(m) requires that assets acquired by means of capital

leases, as defined in FAS-13, shall 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 lease term as amortization charges, as appropriate (but see

subparagraph (b)(4) below).

\(b\) 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.

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\(3\) 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, such as depreciation, taxes, insurance, facilities

capital cost of money, and maintenance (excluding interest or

other unallowable costs pursuant to Part 31), provided that no

part of such costs shall 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.

\(4\) Rental costs under leases entered into before March 1, 1970 for

the remaining term of the lease (excluding options not

exercised before March 1, 1970) to the extent they would have

been allowable under Defense Acquisition Regulation (Formerly

ASPR) 15-205.34 or Federal Procurement Regulations section

1-15.205-34 in effect 1 January 1969.

\(c\) The allowability of rental costs under unexpired leases in
connection

with terminations is treated in 31.205-42(e).

31.205-37 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 for the proper performance of the

contract and applicable to contract products or processes are

allowable unless :

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

patent;

\(2\) The patent has been adjudicated to be invalid, or has been

administratively determined to be invalid;

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

\(4\) The patent is expired.

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\(b\) 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 contract award.

\(c\) 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.

\(d\) See 31.109 regarding advance agreements.

31.205-38 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 31.205. 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 31.205-1(b) and are subject to
the

allowability provisions of 31.205-1 (d) and (f). Corporate image

enhancement activities are included within the definitions of public

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relations at 31.205-1(a) and entertainment at 31.205-14 and are

subject to the allowability provisions at 31.205-1 (e) and (f) and

31.205-14, respectively. Bid and proposal costs are defined at

31.205-18 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 31.205-12. 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.

\(c\) 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.

\(d\) 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 31.201-6 and

30.405, 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, costs
direct

selling efforts, as defined in paragraph (c) of this subsection,

incurred in connection with potential and actual Foreign Military

Sales, as defined by the Arms Export Contract Act, or foreign sales

of military products or services are unallowable on U.S. Government

requirements.

\(g\) Notwithstanding any other provision of this subsection, sellers\'
or

agents\'

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compensation, fees, commissions, percentages, 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 (see 3.408-2).

31.205-39 Service and warranty costs.

Service and warranty costs include those arising from fulfillment of any

contractual obligation of a contractor to provide services such as

installation, training, correcting defects in the products, replacing

defective parts, and making refunds in the case of inadequate
performance.

When not inconsistent with the terms of the contract, such service and

warranty costs are allowable. However, care should be exercised to avoid

duplication of the allowance as an element of both estimated product
cost

and risk.

31.205-40 Special tooling and special test equipment costs.

\(a\) The terms \"special tooling\" and \"special test equipment\" are
defined

in 45.101.

\(b\) The cost of special tooling and special test equipment used in

performing one or more Government contracts is allowable and shall be

allocated to the specific Government contract or contracts for which

acquired, except that the cost of (1) items acquired by the

contractor before the effective date of the contract (or replacement

of such items), whether or not altered or adapted for use in

performing the contract, and (2) items which the contract schedule

specifically excludes, shall be allowable only as depreciation or

amortization.

\(c\) When items are disqualified as special tooling or special test

equipment because with relatively 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 special 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.

31.205-41 Taxes.

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

\(1\) Federal, State, and local taxes (see Part 29), 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 contracting

officer concerning such taxes; and

\(ii\) Takes all action directed by the contracting officer

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.

\(3\) Pursuant to subparagraph (a) (2) above, the reasonable costs of

any action taken by the contractor at the direction or with the

concurrence of the contracting officer. Interest or penalties

incurred by the contractor for non-payment of any tax at the

direction of the contracting officer or by reason of the

failure of the contracting officer to ensure 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 (see 31.205-20 and 31.205-27).

\(3\) Taxes from which exemptions are available to the contractor

directly, or available to the contractor based on an exemption

afforded the Government, except when the contracting officer

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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 intend that 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).

\(6\) Taxes on accumulated funding deficiencies of, or prohibited

transactions involving, employee deferred compensation plans

pursuant to Section 4971 or Section 4975 of the Internal

Revenue Code of 1954, as amended.

\(7\) 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 (see subparagraph (b)(5) above) 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 on the respective final

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cost objectives.

\(d\) 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. If a contractor or

subcontractor obtains a foreign tax credit that reduces its U.S.

Federal income tax return because of the payment of any tax or duty

allowed as contract costs, and if those costs were reimbursed by a

foreign government, the amount of the reduction shall be paid to the

Treasurer of the United States at the time the Federal income tax

return is filed. However, any interest actually paid or credited to

a contractor incident to a refund of tax, interest, or penalty shall

be paid or credited to the Government only to the extent that such

interest accrued over the period during which the contractor had been

reimbursed by the Government for the taxes, interest, or penalties.

31.205-42 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 peculiar to

termination situations are to be used in conjunction with the other cost

principles in Subpart 31.2:

\(a\) Common items. The costs 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 contracting officer 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. Contemporaneous purchases of common items by the

contractor shall be regarded as evidence that such items are

reasonably usable on the contractor\'s other work. Any acceptance of

common items as allocable to the terminated portion of the contract

should be limited to the extent that the quantities of such items on

hand, in transit, and on order are in excess of the reasonable

quantitative requirements of other work.

\(b\) Costs continuing after termination. Despite all reasonable efforts

by the contractor, costs which cannot be discontinued immediately

after the effective date of termination are generally allowable.

However, any costs

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continuing after the effective date of the termination due to the

negligent or willful failure of the contractor to discontinue the

costs shall be unallowable.

\(c\) Initial costs. Initial costs (see 15.804-6(f)), including starting

load and preparatory costs, are allowable as follows:

\(1\) Starting load costs not fully absorbed because of termination

are nonrecurring labor, material, and related overhead costs

incurred in the early part of production and result from

factors such as :

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

\(ii\) Idle time and subnormal production due to testing and

changing production methods;

\(iii\) Training; and

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

materials, or manufacturing processes.

\(2\) Preparatory costs incurred in preparing to perform the

terminated contract 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 that 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 before

termination;

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2210.18

Appendix 1

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 contracting officer;

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 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 performing the contract.

\(g\) Settlement expenses.

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

allowable:

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2210.19

Appendix 1

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

necessary for :

\(A\) The preparation and presentation, including

supporting data, of settlement claims to the

contracting officer; 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

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 the 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 and is

otherwise consistent with 31.201-4 and 31.203(c). The indirect

expense so allocated shall exclude the same and similar costs claimed

directly or indirectly as settlement expenses.

31.205-43 Trade, business, technical and professional activity costs.

The following types of costs are allowable:

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

organizations.

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2210.18

Appendix 1

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

periodicals.

\(c\) When the principal purpose of a meeting, conference, symposium, or

seminar is the dissemination of trade, business, technical or

professional information or the stimulation of production or improved

productivity:

\(1\) Costs of organizing, setting up, and sponsoring the meetings,

symposia, etc., including rental of meeting facilities,

transportation, subsistence, and incidental costs;

\(2\) Costs of attendance by contractor employees, including travel

costs (see 31.205-46); 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 individual\'s attendance is essential to achieve the

purpose of the conference, meeting, symposium, etc.

31.205-44 Training and education costs.

\(a\) Allowable costs. Training and education cost are allowable to the

extent indicated below.

\(b\) Vocational training. Costs of preparing and maintaining a

non-college level program of instruction, including 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,

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2210.19

Appendix 1

instead of tuition, instructors\' 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. In unusual cases, the period may be extended (see

paragraph (h) below).

\(d\) 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 2 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

subparagraph 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 31.205-17, 31.205-24, and

31.205-36.

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Appendix 1

\(g\) 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 extend set forth in an advance agreement negotiated

under 31.109. 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 employees

are now working or may reasonably be expected to work. Before

entering into the advance agreement, the contracting officer

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

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2210.19

Appendix 1

inordinately expensive may be included in overseas differential.

\(j\) Employee dependent education plans. Costs of college plans for

employee dependents are unallowable.

31.205-45 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.

31.205-46 Travel costs.

\(a\) (1) Costs for transportation, lodging, meals, and incidental

expenses incurred by contractor personnel on official company

business are allowable subject to paragraphs (b) through (f) of

this section. 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 paragraph (a)(3) of this section, costs

incurred for lodging, meals, and incidental expenses (as

defined in the regulations cited in (a)(2) (i) through (iii) of

this paragraph) 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

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2210.18

Appendix 1

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. 906-010-00000-1;

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) or this section. 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 referred

in (a)(2) (i), (ii), or (iii) of this section, 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

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2210.19

Appendix 1

continuing basis in a particular area, the contractor

must obtain advance approval from the contracting

officer.

\(iv\) 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

in excess of \$25.00. The approved justification required

by (a)(3)(ii) and, if applicable, (a)(3)(iii) of this

paragraph must be retained.

\(4\) Paragraphs (a)(2) and (a)(3) of this section do not incorporate

the regulations cited in (a)(2) (i), (ii), and (iii) in their

entirety. Only the coverage in the referenced regulations

dealing with special or unusual situations, the maximum per

diem rates, and definitions of lodging, meals and incidental

expenses are incorporated herein.

\(5\) An advance agreement (see 31.109) with respect to compliance

with paragraphs (a)(2) and (a)(3) of this section may be useful

and desirable.

\(b\) 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 under 31.202.

\(d\) 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,\" as used in this subparagraph, includes the cost of

lease, charter, operation (including personnel), maintenance,

depreciation, insurance, and other related costs.

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Appendix 1

\(2\) 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 contracting officer. 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 points 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 31.109),

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.

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Appendix 1

\(f\) 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 31.205-6(m)(2).

31.205-47 Costs related to legal and other proceedings.

\(a\) Definitions.

\"Conviction,\" as used in this subsection, is defined in 9.403.

\"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; all

elements of compensation, related costs and expenses of employees,

officers, and directors; and any similar costs incurred before,

during, and after commencement of a judicial or administrative

proceeding which bears a direct relationship to the proceedings.

\"Fraud,\" as used in this subsection, 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

under 9.406-2(a) and 9.407-2(a) 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 any proceeding brought by Federal,

State, local or foreign Government for violation of, or failure to

comply with, law or regulation by the contractor (including its

agents or employers) are unallowable if a result is:

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Appendix 1

\(1\) 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 this

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 contracting officer (or other official specified

in agency procedures) determines, that the costs were incurred

either:

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Appendix 1

\(1\) 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 contracting officer.

\(e\) 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

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 percent.

However, if an agreement reached under paragraph (c) of this

subsection has explicitly considered this 80 percent 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 (see 33.201).

\(2\) Organization, reorganization, (including mergers and

acquisitions) or resisting mergers and acquisitions (see also

31.205-27).

\(3\) Defense of antitrust suits.

\(4\) Defense of suits brought by employees or ex-employees of the

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2210.18

Appendix 1

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,

coproduction, 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

contracting officer, or (ii) when agreed to in writing by the

contracting officer.

\(6\) Patent infringement litigation, unless otherwise provided for

in the contract.

\(7\) 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.

\(g\) Costs which may be unallowable under 31.205-47, 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 contracting officer shall generally withhold payment

of such costs. However, in the best interests of the Government, the

contracting officer 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.

31.205-48 Deferred research and development costs.

\"Research and development,\" as used in this subsection, means the type
of

technical effort which is described in 31.205-18 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

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Appendix 1

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.

31.205-49 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.

31.205-50 Executive lobbying costs.

Costs incurred in attempting to improperly influence (see FAR 3.401),

either directly or indirectly, an employee or officer of the executive

branch of the Federal Government to give consideration or to act
regarding

a regulatory or contract matter are unallowable.

31.205-51 Costs of alcoholic beverages.

Costs of alcoholic beverages are unallowable.

31.205-52 Asset valuations resulting from business combinations.

When the purchase method of accounting for a business combination is
used,

allowable amortization, cost of money, and depreciation shall be limited
to

the total of the amounts that would have been allowed had the
combination

not taken place.

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