GUIDANCE

Pricing Handbook

13. Cost Principles

Table of Contents

 

13.1 Introduction

13.2 Cost Principles Versus Cost Accounting Standards

13.3 Applicability to FAA Contracting

13.4 Elements of Allowability

13.5 Enforcement

13.6 Advance Agreements

13.7 Highlights of the Cost Principles

13.8 Summary

Appendix 13A: Cost Principles

 

13. COST PRINCIPLES

 

13.1 Introduction

The allowability of costs is a prominent subject in the formulation and administration of contracts. Analysts must be very knowledgeable of cost principles to accurately perform cost analyses and adequately support the contracting officer (CO) during contract administration. This chapter introduces cost principles, specifically the FAA Contract Cost Principles (FAA AMS Toolbox Guidance T3.3.2) and highlights key concepts. In addition, this chapter will discuss the following as they relate to commercial organizations:

  • Cost Principles versus Cost Accounting Standards (CAS)
  • Applicability
  • Elements of Allowability
  • Enforcement
  • Advance Agreements
  • Highlights of FAA Contract Cost Principles

 

13.2 Cost Principles Versus Cost Accounting Standards

CAS and cost principles are related, but the concepts are not interchangeable. CAS addressesimage accounting--the measurement, assignment, and allocation of costs to Government contracts. Cost principles address cost allowability. Cost allowability is a procurement matter and is a function of law, regulation, or contract clauses. Costs may be allocable but not allowable.

Some of the cost principles have directly incorporated certain standards. If costs related to cost principles are not accounted for in accordance with CAS, then the cost is unallowable. Table 13-1 provides examples of the link between certain cost principles and CAS.

 

Table 0-1. Cost Principles Versus CAS

Cost Principle

CAS
Consistency (general principle)

401      402
Accounting for unallowable costs (general principle)

405
Cost accounting period (general principle)

406
Compensation for personal services

412      413      415
Cost of money

414      417
Depreciation

409
Independent research & development and bid & proposal costs

420
Insurance & Indemnification

416

 

13.3 Applicability to FAA Contracting

The FAA’s AMS has established FAA Contract Cost Principles which are used for: 1.) the pricing of contracts, subcontracts, and modifications to contracts and subcontracts when cost analysis is performed, and 2.) the determination, negotiation, or allowance of costs when required by a contract clause (e.g., economic price adjustment or fixed-price incentive contracts). In accordance with FAA AMS, section 3.3.2, the CO will incorporate the cost principles and procedures in contracts with commercial organizations as the basis for the following:

  1. The determination of allowable costs under cost reimbursement contracts and cost reimbursement subcontracts and the cost reimbursement portion of time and materials contracts except when material is priced on a basis other than cost;
  2. The negotiation of indirect cost rates, when any of the following conditions exist:
    1. FAA has division or corporate contract administration responsibilities;
    2. Quick close-out procedures are used; or
    3. Indirect rate caps are negotiated in the contract;
  3. The determination or negotiation of costs under terminated contracts;
  4. Price revision of fixed-price incentive contracts;
  5. Price re-determination of price re-determination contracts; and
  6. Pricing changes and other contract modifications.

When division or corporate contract administration responsibilities rest with another Government agency (i.e. when the largest percentage of the company or segment’s business base is with another agency), the FAA will yield to the cost principles of the administering agency for the determination or negotiation of indirect rates not covered by 2(b) or 2(c) above.

WARNING:

Do not assume that the use of cost principles when analyzing and negotiating fixed-price contracts indicates that every element of cost has been agreed upon. How a Contractor calculates a bottom line price may be different from the way in which the Government does. The final negotiated price reflects only agreement on the total price.

 

13.4 Elements of Allowability

Cost principles contain explicit rules concerning whether certain costs are allowable and under what conditions they are considered reasonable and/or allowable. However, cost principles are only one of five factors which should be considered when determining allowability [FAA AMS Toolbox Guidance T3.3.2 (Contract Cost Principles), Section A-6]. Each of the five criteria is discussed below.

  1. Reasonableness. The nature and amount of the cost must not exceed that which would be incurred by a prudent person in a competitive business. The cost must be ordinary and necessary for running a business or performing a particular contract. The analyst must scrutinize costs particularly in situations where the cost is not significantly influenced by competitive market forces.
  2. Allocability. The cost must be assignable to the contract either directly or indirectly. A cost should be charged directly if it is specifically incurred for a particular contract. If the cost benefits the contract as well as other cost objectives or the cost is necessary for the overall operation of the business, the cost should be charged indirectly through overhead or G&A, respectively.
  3. CAS Standards. The contractor should follow CAS if applicable; otherwise, the contractor should follow generally accepted accounting practices and principles. As previously discussed in paragraph 13.2, certain cost principles incorporate portions of CAS.
  4. Terms of the contract. The contractor and the FAA CO can negotiate terms that would make certain costs unallowable. However, no term can make allowable a cost that is specifically unallowable per the cost principles.
  5. Cost principles. In conjunction with the aforementioned, the principles are used to determine allowability of costs.

 

13.5 Enforcement

A major responsibility in contract administration is the enforcement of the cost principles in contracts that are not fixed-price or fixed-price with Economic Price Adjustment (EPA) provisions. The administering CO can disallow costs that are unallowable and can assess a monetary penalty for unallowable costs which are included in indirect cost pools.

 

13.5.1 Disallowance of Cost during Contract Performance

The CO may disallow costs that are unallowable prior to or after incurrence of the subject costs. The CO may issue a "Notice of Intent to Disallow Costs" in accordance with the clause by the same name. The contractor has 60 days to respond and justify the allowability of such costs. Upon receipt of the response, the CO shall review the contractor’s justification and either withdraw the notice or issue a final decision. The final decision is subject to the FAA’s Dispute Resolution System.

The CO can still take exception to costs incurred without issuing a notice. The CO can disapprove and withhold vouchered costs considered unallowable. If the contractor disagrees, it can send a written request to the CO to reconsider the withholding and/or it can file a claim subject to the FAA’s Dispute Resolution System.

 

13.6 Advance Agreements

Disputes concerning cost principles can be avoided through the use of Advance Agreements. Advance Agreements record the common understanding of the contractor and the CO on the reasonableness, allocability, and allowability of various costs. Since there are many complex contracting situations and many accounting systems, Advance Agreements are encouraged. [reference FAA AMS Toolbox Guidance T3.3.2 (Contract Cost Principles), Section A-4] However, there is no requirement to negotiate Advance Agreements, and the lack of an advanced agreement will not affect the reasonableness, allocability, or allowability of costs.

Advance agreements canimage be negotiated before or during contract performance and can apply to a single contract, a group of contracts, all contracts of the agency, or all contracts of many agencies. Advanced agreements should be negotiated before the costs involved have been incurred. The agreement must be in writing, be signed by both parties, and be incorporated into current and future contracts, as applicable. The agreement should also adequately describe the situation, address the treatment of the costs, and contain a statement of applicability and duration.

The following are examples of costs that may be germane to Advance Agreements: [FAA AMS Toolbox Guidance T3.3.2 (Contract Cost Principles), Section A-4, par. h]

  • Compensation for personal services (including but not limited to: off-site pay, incentive pay, location allowances, hardship pay, cost of living differential, and termination of defined benefit pension plans);
  • Use charges for fully depreciated assets;
  • Deferred maintenance costs;
  • Independent research and development and bid & proposal costs;
  • Royalties and other costs for use of patents;
  • Selling and distribution costs;
  • Travel and relocation costs, as related to: 1.) special or mass personnel movements, 2.) travel via contractor-owned, leased, or chartered aircraft, or 3.) maximum per diem rates;
  • Costs of idle facilities and idle capacity;
  • Costs of automatic data processing equipment;
  • Severance pay to employees on support service contracts;
  • Plant reconversion;
  • Professional services (e.g., legal and engineering);
  • General and administrative costs (e.g., corporate, division, or branch allocations) attributable to the general management, supervision, and conduct of the contractor's business as a whole. These costs are particularly significant in construction, job-site, architect-engineer, facilities, and Government-owned contractor operated (GOCO) plant contracts;
  • Costs of construction plant and equipment;
  • Costs of public relations and advertising;
  • Training and education costs; and
  • Pre-contract costs (treatment of costs only; should not use to authorize costs).

 

13.7 Highlights of the Cost Principles

 

13.7.1 Reform Changes

The FAA reform effort resulted in the establishment of the FAA Contract Cost Principles (FAA AMS Toolbox Guidance T3.3.2 ). The FAA Contract Cost Principles have been developed based on the Federal Acquisition Regulation (FAR) but the FAA Contract Cost Principles contain the following significant changes:

  • General: Documentation has been streamlined. Principles that establish allowability of specific costs were kept as well as principles that defined reasonableness. The following principles were eliminated:
    • Civil Defense,
    • Labor Relations,
    • Manufacturing and Production Engineering,
    • Other Business Expenses, and
    • Plant Protection costs.
  • Costs of promoting products developed under FAA non-commercial contracts are now allowable. This may save the FAA money by lowering overall cost through higher production quantities and/or recoupment of development and other nonrecurring costs.
  • The treatment of compensation for family members, partners, sole proprietors, directors, officers, and majority owners is defined and clarified. This provides a better tool for judging the reasonableness of compensation in those special situations.
  • Compensation based on the change of price of corporate securities is no longer allowed. This type of compensation is influenced by not only performance but other factors such as the interest rate and public expectations and confidence. This type of compensation is akin to rewards associated with ownership as in distribution of profits. Since the distribution of profit is unallowable, this type of compensation should also be unallowable. (This does not affect Employee Stock Ownership Plans.)
  • Severance payments higher than normal severance that are conditioned upon some form of employee action, e.g., signing an agreement not to pursue legal action against company, are no longer allowed. This may save the FAA from unnecessary severance costs and facilitate expeditious resolution of severance situations.
  • Cost of money for facilities under construction is consistent with CAS 417. This allows a contractor to allocate its paid interest expense in accordance with established standards for financial accounting if the result is not materially different from what would be calculated in accordance with CAS 417.
  • The DoD specific language regarding ceilings on Bid & Proposal and Independent Research and Development has been removed and a reasonableness standard based on a set of general criteria has been instituted. The intent is to be less intrusive on business and minimize mandatory contract administration effort.
  • Additional criteria to the "precontract costs" cost principle have been added. The delivery schedule must now be nonnegotiable. This should help resolve the issue before it becomes a source of contention if the contractor is forced to seek an adjustment in delivery during negotiations, and prior to cost incurrence. If not awarded the contract, the costs are not allowable.
  • The principle regarding leasing of ADPE has been merged with the "rental" principle and unnecessary duplication has been eliminated. This gives the CO and ACO flexibility to require the contractor to provide a cost/benefit and market analyses to prove the cost effectiveness of a sale and leaseback arrangement.
  • DoD’s approach toward external restructuring has been adopted: if it would result in a net savings to the FAA, it is allowable. Reference is made to Defense Federal Acquisition Regulations (DFAR) for guidance to avoid unnecessary duplicity.
  • Termination settlement expenses have been clarified to exclude severance payments.
  • Limits for termination costs excluding settlement expenses are formally established. Termination costs cannot exceed the fixed (ceiling) price of a contract or the estimated cost or allocated funds of a cost reimbursement contract. The total costs can exceed those limits only in cases of authorized, unpriced work. This change and the clarification that severance payments are not part of termination settlement expenses should provide a better definition of the boundaries of total termination settlements, thereby facilitating the settlement process.

13.7.2 The FAA Contract Cost Principles

Appendix 13A of this chapter highlights the FAA Contract Cost Principles. The appendix is an aid only. The analyst should use it to become familiar with the principles and to quickly identify cost allowability issues. Any in-depth analysis and issue resolution require review of the actual principles.

The FAA Contract Cost Principles are not all-inclusive; the exclusion of an item of cost does not imply that it is either allowable or unallowable. When more than one principle applies to an element of cost, the determination of allowability will be based on the guidance contained in the principle that best captures the essential nature of the cost at issue.

13.7.3 Cost Principles for other Situations

There is special guidance in the principles regarding construction and architect-engineering and facilities contracts. Reference the FAA Contract Cost Principles (FAA AMS Toolbox Guidance T3.3.2, Section A-2) for further guidance.

Additionally, organizations other than commercial organizations have special principles that apply to them. They are referenced in OMB Circulars as follows:

  • Educational (OMB Circular No. A-21)
  • State, Local, and Federally Recognized Indian Tribal Governments (OMB Circular No. A-87)
  • Contracts With Nonprofit Organizations (OMB Circular No. A-122)

 

13.8 Summary

Federal Government contracts, including FAA contracts, generally require compliance with "Cost Principles and Procedures". In the absence of regulatory exemptions, compliance is required whenever cost analysis is performed. Contractors may debate the Government’s rationale for such policies, but the fact remains that the Government can, through the contract terms and conditions, determine the types and amount of costs that can be included in contract prices and reimbursements. Therefore, an understanding of the cost principles is vital for analysts, whether they negotiate, administer, terminate contracts, or prepare or evaluate proposals.

Appendix 13A

a. Advertising Costs

Comments
Allowable:
  • Required by or arising from requirements of the contract and that are for the following:
    • Recruiting personnel;
    • Acquiring scarce material or equipment; or
    • Disposing of scrap or surplus material.
  • Cost of activities to promote export sales of products normally sold to the U.S. Government. (Does not include entertainment.)
  • Costs of promoting products developed under FAA noncommercial contracts.
    •
 

 

 

 

Promoting products developed under FAA noncommercial contracts may result in lower overall production costs to the FAA due to higher production quantities and/or recoupment of nonrecurring costs.

 

b. Public Relations Costs

Comments
Allowable:
  • Required by contract;
  • Costs of the following:
    • Responding to inquiries on policies and activities;
    • Communicating with public, press, stockholders, creditors, and customers; and
    • Conducting general liaison with news media and Government public relations officers necessary to keep the public informed on matters of public concern.
  • Costs of participation in community service.
  • System commissioning and similar ceremonies to extent provided for by contract.
 Matters of public concern include contract awards, plant closings or openings, layoffs etc.

Community service includes activities such as blood drives, disaster assistance, charity drives, savings bond drives etc.

 

c. Bad Debts

Comments
Unallowable. Bad debts include uncollectible accounts receivable and other claims. Associated costs include collection and legal costs.

 

d. Compensation for Personal Services

Comments
Allowable:

  •
  • Generally, compensation is allowable in the following situations:
    • Must be for work performed by the employee in the current year and must not represent a retroactive adjustment of prior years’ salaries and wages.
    • Must be reasonable for work performed.
    • Each element of 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 an agreement to make the payment. Any departure from the plan or practice should be justified on merit and/or benefit to the company and/or Government.

     

  • Compensation for the following must be reasonable for the personal services rendered since such employees have influence over their own compensation and that of their family members:
    • Sole proprietors
    • Partners, or persons who are contractually entitled to acquire a partnership interest in a contractor enterprise
    • Persons who own 10 percent or more of an incorporated contractor’s stock, persons who are contractually entitled to acquire at least 10 percent of an incorporated contractor’s stock
    • Persons who are officers or directors of an incorporated contractor; or persons who otherwise have a substantial interest in the contractor’s enterprise.
  • Reasonable compensation established under "arm’s length" negotiated labor-management.

    •  

  • Foreign differential pay covering housing, cost of living, transportation, bonuses, additional Federal, State, local, or foreign income taxes resulting from foreign assignment, and other related expenses.
  • Incentive compensation for management, cash bonuses, suggestion awards, safety awards, and incentive compensation based on production, cost reduction, or efficient performance.
  • Backpay to employees for work for which they were underpaid.

    •  

  • Severance pay falls under one of two categories:
    • Normal
      • Actual payments are allocated to all work performed in contractor’s plant; or
      • Accruals based on historical severance payments and allocated to all work performed in contractor’s plant.
    • Abnormal or mass severance (considered on a case-by-case basis.)
  • Pension costs:
    • Accounted for in accordance with CAS 412 and 413;
      • Funded by the time set for filing of Federal Income tax return or any extension thereof.
      • Reasonable amount.
  • Reasonable fringe benefits such as vacation, sick leave, holidays, employee insurance etc.
  • Deferred compensation if reasonable and accounted for in accordance with CAS 415.

    •  

     


  •
  • Post-retirement benefits other than pensions (PRB) are allowable if they are:
    • Reasonable;
    • Funded prior to time set for filing Federal income taxes; and
    • Measured in accordance with cost principles.
  • Compensation derived from labor-management agreements that are:
    • Unwarranted because the nature of work covered is different than work performed for the Government; or
    • Discriminatory against the Government.
    • Domestic differential allowance based on additional Federal, State, or local income taxes.
  • Backpay which is not additional compensation for work performance.
  • Compensation based on changes in the prices of corporate securities or corporate security ownership.
  • Compensation represented by dividend payments or which is calculated based on dividend payments.
  • Payments in lieu of the employee receiving or exercising a right, option, or benefit of change in the price of a corporate security.
  • Compensation incidental to business acquisitions:
    • Golden parachutes: severance payment in excess of normal severance payment.
    • Golden handcuffs: payments to employees, contingent on remaining with contractor
  • Rebates and purchase discounts granted to employees on products or services produced by the contractor or affiliates.
 No presumption of allowability will exist where the contractor introduces major revisions to existing compensation plans or introduces new plans.

Costs that are unallowable under other cost principles are not allowable solely on the basis that they constitute personal service compensation.

 

Contractor has burden of showing reasonableness of compensation.

 

Cost principles provide guidelines for compensation to persons who have influence over their own compensation and that of their family members.

 

When compensation is paid in the form of stock of the contractor or an affiliate, the value of the stock is the fair market value on the first date the number of shares awarded is known, determined upon the most objective basis available.

 

  • Foreign differential cannot cover an employee’s specific increase in income taxes.

     

    Example of "underpaid" backpay is the difference in past and current wage rates for working without a contract or labor agreement.

     

     

     

    Specific rules for pensions and early retirement incentives are found in this principle.

     

    Deferred compensation is an award given by an employer to compensate an employee in a future cost accounting period(s) for services rendered in one or more cost accounting periods before the date of receipt of compensation by employee.

    PRB includes such benefits as post-retirement health care, tuition assistance, day care, legal services, housing subsidies etc.

 

e. Contingencies

Comments
Allowable:
  • Foreseeable within reasonable accuracy.

Unallowable:

  • Historical costing purposes.
  • Conditions which cannot be measured so precisely as to provide equitable results to the contractor and to the government.
  

 

May use contingencies to expedite settlement for minor unsettled matters.

May address unmeasurable contingencies through appropriated contract coverage such as reopener clauses.

 

f. Contributions or Donations

Comments
Unallowable regardless of method or recipient, except for community service activity costs.  

 

g. Cost of Money (FCCOM, FCCM or COM)

Comments
Allowable:
  • Facilities capital cost of money (FCCOM):
    • Accounted for in accordance with (IAW) CAS 414;
    • Adequate records of compliance with CAS 414; and
    • The FCCOM is specifically identified or proposed in proposals relating to the contract under which cost is to be claimed.
  • FCCOM for assets under construction:
    • Accounted for IAW CAS 417;
    • Adequate records of compliance with CAS 417; and
    • FCCOM is included in the capitalized cost of capital assets, which provide the bases of depreciation or amortization.
Cost of capital is measured without regard to whether the source is equity or debt.

Cost of money is not considered interest on borrowing.

 

h. Depreciation

Comments
Allowable:
  • Must adhere to CAS 409 if fully CAS-covered or if Contractor "elected to adopt" CAS 409 for all contracts.
  • If reasonable and allocable. It is reasonable if based on policies and procedures that are:
    • Consistent with those followed in nongovernment cost centers;
    • Reflected in account books and financial statements; and
    • Used and acceptable for Federal income tax purposes.

Unallowable:

  • Applied to Government Furnished Property; or
  • Applied to fully depreciated property.
 Depreciation based on useful life versus economic life.

Reasonable "use" charge may be applied to fully depreciated property.

 

i. Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits

Comments
Allowable:
  • Costs of activities (less generated income) designed to improve working conditions, employer-employee relations, employee morale, employee performance, employee fitness, team work, or company loyalty.
  • Losses on food and dormitory services operated on a break-even basis.
  • Contributions to employee organizations if equivalent amount would have been allowable if incurred by contractor.

Unallowable:

  • Gifts
  • Recreation, except costs of employees’ participation in sports teams or employee organizations designed to improve company loyalty, team work, or employee physical fitness.
 Examples of allowable activities:   internal publications, health clinics, fitness centers, counseling services.

Losses not allowed if prices are at rates that are not conducive to break-even operations.

 

Gifts do not include achievement awards.

 

j. Entertainment Costs

Comments
Unallowable. The following are examples of entertainment costs:
  • Amusement
  • Diversion
  • Social Activities
  • Membership in social, dining, country clubs, or similar organizations. Membership is unallowable even if reported as employee taxable income
  • Directly associated costs

 

k. Fines, Penalties, and Mischarging Costs

Comments
Allowable:
  • Fines and penalties incurred in as a result of compliance with contract or CO’s written instructions.

Unallowable:

  • Fines and penalties for violations or failure to follow Federal, state, local, or foreign laws and regulations.
  • Improper charging or recording of costs to include costs to measure and correct the mischarging.

 

 

 

 

Improper charging costs are those caused by or that result from alteration or destruction of records or other false charging practices.

 

l. Gains and Losses on Disposition of Depreciable Property or Other Capital Credits

Comments
Generally allowable:
  • Gains and losses not allowed on sale or exchange of capital assets other than depreciable property.
    •
  • The amount of gain is limited to the difference between the acquisition costs and the undepreciated balance.
  • Gains or losses are recognized as credits or charges to the same cost pool containing the applicable asset depreciation.
  • The gain or loss is recognized in the period asset disposition occurs.
 Gains or losses are the difference between the net amount realized (including insurance proceeds from involuntary conversions) and the undepreciated balance.

Special rules apply to involuntary conversions.

 

m. Idle Facilities and Idle Capacity Costs

Comments
Allowable:
  • Idle capacity

Unallowable

  • Idle Facilities unless:
    • Necessary to meet workload fluctuations; or
    • Were necessary when required but are now idle due to changes in requirements, production economies, termination, or other causes that could not be 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.
Widespread idle capacity among assets having common functions could signify idle facilities versus idle capacity.

Typical costs affected by this principle include maintenance, repair, housing, rent, property taxes, insurance, depreciation etc.

 

n. Independent Research and Development and Bid and Proposal Costs

Comments
Allowable:
  • Reasonable
  • Fully CAS-covered contracts must comply with CAS 420.
  • Modified or non-CAS-covered contracts must comply with most provisions of CAS 420.

Unallowable:

  • Deferred IR&D costs unless:
    • A contractor has developed a product at its own expense and:
    • The total amount of IR&D costs applicable to the product are identifiable;
    • Proration of such costs to sales of the product is reasonable;
    • Contractor either did not have Government business during time of incurred costs or did not allocate such cost to Government contracts; and
    • No costs of current IR&D programs are allocated to Government work except to prorate the costs of developing a specific product to the sales of that product.
 The following factors should be considered in an integrated assessment when determining reasonableness:
  1. IR&D and B&P spending profile of previous years: if spending is not significantly out of line from previous years, the costs are probably reasonable.
  2. IR&D and B&P spending of similar companies/segments: if companies in the same industry spend approximately the same, the costs are probably reasonable.
  3. Current business base versus capacity: if there is excess capacity greater than previous years, the company may spend more on IR&D and B&P.
  4. Business plans: if the company plans to expand its capacity or enter new areas, it may spend more. There should be evidence of such plans.

 

o. Insurance and Indemnification

Comments
Allowable:
  • Insurance required or approved pursuant to contract.
  • Insurance maintained in connection with the general conduct of business if reasonable.
  • Insurance for Government property if contractor is liable for such loss.
  • Self-insurance if approved and accounted for in accordance with CAS 416.

 

 

 

 

Unallowable:

  • Actual losses unless:
    • Expressly provided for in contract;
    • Nominal deductibles; and
    • As provided for in CAS 416 for self-insurance programs.
  • Premiums for retroactive or backdated insurance to cover incurred and known losses.
  • Self-insurance charges for risk of catastrophic losses.
  • late premium charges related to employee deferred compensation plans.
  

 

 

Insurance provided by insurers owned by or under the control of the contractor is considered self-insurance unless the insurer also sells insurance to the general public and the premium charged the contractor can be demonstrated to be in accordance with competitive, market forces.

Self-insurance charge should not exceed the costs of purchased insurance plus administration expenses if purchased insurance is available.

 

p. Interest Income and other financial costs

Comments
Unallowable  

 

q. Legislative Lobbying Costs

Comments
Allowable:
  • Providing technical and factual presentation on topic directly related to contract performance through hearing testimony, statements or letters to Congress or state legislature, or subdivision, or cognizant staff in response to a documented request.
  • Lobbying to influence state legislature to directly reduce costs or avoid material impairment of contract performance.
  • Activity statutorily authorized to use contract funds.

Unallowable:

  • Attempts to influence Federal, State, or local elections, referendums, or similar procedures.
  • Establishing, administering, contributing to or paying the expenses of a political party, political action committee or other organization aiming to influence the outcome of elections.
  • Attempts to influence the introduction or modification of Federal, State, or local legislation through:
    • Communication with any member or employee of Congress or Government official or employee and state and local equivalents; and
    • Publicity, propaganda, or otherwise urging members of the general public.
  • Legislative liaison activities carried on in support or preparation of the above unallowable activities.
 Contractors must maintain adequate records demonstrating compliance with this cost principle.

 

r. Losses on Other Contracts

Comments
Unallowable. Includes contractor’s share under cost-sharing contract. Also includes under-recovery on negotiated overhead rates when using "quick close-out" procedures.

 

s. Maintenance and Repair Costs

Comments
Allowable except for expenditures that should be capitalized and depreciated IAW contractor policy or CAS 404. Includes maintenance and repair of Government property unless otherwise provided.

 

t. Material Costs

Comments
Generally allowable. Interorganizational transfers should be at cost unless transfer of commercial items or when the transfer otherwise qualifies for an exemption from certification and the CO has not determined the price to be unreasonable.

 

u. Organization Costs

Comments
Allowable:
  • Planning or executing the organization or reorganization of the corporate structure including mergers and acquisitions.
  • Resisting or planning to resist the reorganization of the corporate structure or a change in the controlling interest in ownership.

Unallowable:

  • Raising capital.
 The FAA may allow restructuring costs if the restructuring would result in a net savings.

 

v. Patent Costs

Comments
  • Costs are allowable as long as they are incurred as requirements of the contract.
  • General counseling services relating to patents are allowable.
 Patent costs include:
  • Preparing applicable documentation;
  • Searching the art; and
  • Filing and prosecution of US patent application where title or royalty-free license is to be conveyed to Government.

 

w. Plant Reconversion Costs

Comments
Generally unallowable unless necessary due to the removal of Government property.  

 

x. Precontract Costs

Comments
Allowable:
  • Incurrence of precontract costs are necessary to comply with contract delivery schedule;
  • The delivery schedule is nonnegotiable;
  • The costs would otherwise be allowable if incurred after award; and
  • The contractor and CO enter into an Advance Agreement.
 Costs are not allowable if contractor is not awarded contract.

 

y. Professional and Consultant Service Costs

Comments
Generally allowable if reasonable.

 

 

Unallowable:

  • Contingent upon recovery of costs from the Government.
  • Services to improperly obtain, distribute, or use information or data protected by law or regulation.
  • Services to improperly influence the contents of solicitation, evaluation of proposals, or selection of sources.
  • Services obtained, performed, or otherwise resulting in violation of statue or regulation.
  • Services performed not consistent with the purpose and scope of the service contracted.
 Professional and consultant services are services rendered by members of a profession or who possess special skills and who are not officers or employees of the contractor, e.g., legal, economic, financial, and technical services.

 

z. Recruitment Costs

Comments
Allowable if consistent with workload:
  • Help-wanted advertising unless:
    • For personnel other than those required to perform obligations under a Government contract;
    • Does not describe specific positions or classes of positions;
    • Excessive compared to industry practice or to the number and importance of positions;
    • Includes material not relevant to recruitment;
    • Designed to pirate personnel from other contractors; and
    • Includes color.
  • Operating of employment office.
  • Operating an aptitude and educational testing program.
  • Travel costs incurred in recruiting.
  • Travel costs of applicants for interviews.
  • Employment agencies.
  

 

aa. Relocation Costs

Comments
Allowable:
  • Travel of employee and members of immediate family and transportation of household goods to new location.
  • Finding a new home:
    • Advance trips of employee and spouse; and
    • Temporary lodging facilities during transition period not to exceed 60 cumulative days for employee and 45 cumulative days for spouse.
  • Closing costs associated with disposing old home.
  • Continuing costs of ownership of old home.
  • Incidental expenses associated with relocation.
  • Expenses associated with acquiring home in new location not to exceed 5 percent of purchase price of new home.
  • Mortgage interest differential payments of difference between old and new mortgage rate times the old principal times 3 years.
  • Rental differential payments if employee maintains ownership of old home and rents at new location such as the following:
    • Rented quarters comparable to owned home; and
    • Does not exceed actual rental costs for new home less fair market rent for vacated home times 3 years.
  • Cancellation of unexpired leases.

Unallowable:

  • Loss on sale of house.
  • Certain incidental expenses associated with buying new home:
    • Real Estate broker fees & commissions;
    • Litigation;
    • Real & personal property insurance against damage or loss of property;
    • Mortgage life insurance;
    • Title policy insurance when not previously carried by employee; and
    • Property taxes and operating & maintenance costs.
  • Continuing principal payments on old home.
  • Payments for employee income or FICA taxes incident to reimbursed relocation costs.
  • Job counseling to nonemployee spouse and dependents.
  • Furnishing equity or nonequity loans or making arrangements for below-market mortgage.
 Employee must have been homeowner to receive costs related to acquiring new home and mortgage differential payments.

 

Combined closing costs and continuing costs of ownership of old home cannot exceed 14 percent of the sales price of the old home.

Further guidelines for cost allowability are:

  • Relocation must benefit employer;
  • Reimbursement must be in accordance with established policy or practice;
  • Cost not otherwise unallowable; and
  • Amounts reimbursed cannot exceed actual expenses except that a lump sum of $1,000 or less may be given for incidental expenses of relocation such as appliance disconnections, automobile registration etc.

Change of location must not be less than 12 months.

 

bb. Rental Costs

Comments
Allowable:
  • Rental costs under operating leases.
  • Rental costs under sale and leaseback arrangement as long as rent does not exceed the amount allowed if the contractor had retained title.
  • Rentals from organizations under common control if costs do not exceed normal costs of ownership or duplicate an other allowed cost.

Unallowable:

  • Rental costs for capital assets.

 

CO may require cost benefit and market analyses to prove cost effectiveness of sale and leaseback arrangement.

 

cc. Royalties and Other Costs for Use of Patents

Comments
Generally allowable:
  • Reasonable.
  • Necessary for contract performance.
  • Applicable to contract products or processes.

Unallowable:

  • Government has a license or the right to free use of patent.
  • Patent is invalid.
  • Patent is considered unenforceable.
  • Patent is expired.
  

 

dd. Selling Costs

Comments
Allowable:
  • Reasonable market planning.
  • Reasonable direct selling efforts.
  • Broadly targeted and direct selling efforts aimed at promoting export sales of goods normally sold to the Government.
 Direct selling includes such activities as negotiation, customer liaison, technical and consulting activities, individual demonstrations.

 

ee. Special Tooling and Special Test Equipment Costs

Comments
Allowable:
  • If allocated to specific contract(s) for which acquired.
  • Minor conversion to and from general purpose equipment.

Unallowable:

  • Items acquired before effective date of contract whether or not adapted for use on particular contract.
  • Items specifically excluded by contract schedule.
  

 

ff. Taxes

Comments
Allowable:
  • Federal, State, and local taxes.
  • Taxes upon which a claim of illegality or erroneous assessment exists as long as direction is sought and followed from the CO.
  • Costs of actions taken pursuant to CO direction to any resulting interest or penalty.
  • Superfund tax.

Unallowable:

  • Federal income and excess profit taxes.
  • Taxes associated with financing, refinancing, or reorganizations.
  • Taxes for which the contractor is eligible for exemptions.
  • Special assessments on land that represent capital improvements.
  • Real or personal property taxes on property used in work other than Government work.
  • Excise taxes in subtitle D, chapter. 43 of the Internal Revenue Code of 1986.
  • Income tax accruals designed to account for the tax effects of differences between taxable income and pre-tax income.
 Any refunded taxes, interest, or penalties that were allowed as contract costs shall be credited to the Government.

 

gg. Termination Costs

Comments
Allowable:
  • Common items in excess of quantities required in other work.
  • Effort that cannot be discontinued immediately.
  • Initial costs:
    • Nonrecurring labor, material, and applicable overhead not absorbed by previous delivery payments;
    • Contract preparation costs such as production planning or plant rearrangement.
  • Loss of useful life of special tooling and special equipment unless:
    • The special tooling and machinery is not reasonably capable of use on other work;
    • FAA’s interest is protected by transfer of title or other mitigating actions.
  • Rental under unexpired leases if:
    • Rental was reasonably necessary for performance of terminated contract;
    • Rent does not exceed the reasonable value of the property for the contract and any additional reasonable period; and
    • Contractor makes all reasonable efforts to terminate, assign, settle, or otherwise reduce the lease cost.
  • Alterations and restoration of leased property if alterations were necessary for contract.
  • Settlement expenses:
    • Reasonable costs necessary for preparation and presentation of settlement claims and termination and settlement of subcontractor claims;
    • Storage, transportation, protection, and disposition of property produced or acquired for the contract.
  • Subcontractor claims plus applicable indirect expenses.

    •  

     

     

     

     

  • Total termination costs, excluding settlement expenses, cannot exceed the contract (ceiling) price of fixed-price contracts and the estimated cost or allocated funds (whichever is less) of cost reimbursement contracts except in instances of authorized, unpriced work.
 The application of this and other principles should be tempered with what is fair and reasonable given the termination.

Examples of nonrecurring costs include:

  • Excessive spoilage due to inexperienced labor;
  • Idle time and subnormal production;
  • Training; and
  • Lack of familiarity or experience (learning curve).

 

 

 

 

Severance payments are not settlement expenses.

 

Normally, indirect functions may be charged direct as settlement expenses.

The indirect expense must exclude costs claimed directly or indirectly as settlement expenses.

Indirect costs related to salaries and wages included as settlement expenses should be limited to payroll taxes, fringe benefits, occupancy costs, and immediate supervision.

 

hh. Training and Education Costs

Comments
Allowable:
  • Vocational training:
    • Salaries or wages of trainees excluding overtime;
    • Salaries of internal training staff or tuition and fees if training provided by outside source; and
    • Training materials and textbooks.
  • Part-time undergraduate or post-graduate college-level education:
    • Fees and tuition;
    • Salaries of instructor staff if internal to company;
    • Training materials and textbooks; and
    • Straight-time compensation for employees attending classes not to exceed 156 hours per year.
  • Full-time post-graduate education:
    • Tuition and fees; and
    • Training materials and textbooks.
  • Specialized management programs of up to 16 weeks per employee:
    • Enrollment fees;
    • Employee salaries;
    • Training material and textbooks; and
    • Travel and subsistence.

Unallowable:

  • Grants, scholarships, and fellowships.
  • Training or education costs for other than bona-fide employees.
  • Employee dependent education plans.
  

 

 

Post-graduate education must be related to field in which the employee works or may be reasonably expected to work. Cannot exceed 2 years or length of degree program, whichever is less, unless an Advance Agreement is made.

 

Management programs must be designed to enhance the effectiveness of current management or prepare employees for management positions.

 

 

Exceptions apply to dependents in foreign country.

 

ii. Travel Costs

Comments
Travel costs are generally allowable. Costs include:
  • Transportation:
    • Reasonable mileage rates for privately owned vehicles.
    • Standard, coach airfare.
    • Reasonable miscellaneous expenses such as taxi to and form airport or airport parking.
  • Lodging, meals, and incidental expenses (per diem):
    • Comply with maximum per diem dictated by applicable travel regulations.
    • May use actual costs in excess of per diem under certain conditions.

Unallowable:

  • Airfare in excess of standard, coach unless such airfare would entail the following:
    • Require circuitous routing;
    • Require travel during unreasonable hours;
    • Prolong travel;
    • Result in increased costs that would offset transportation savings;
    • Would not meet physical or medical needs of traveler; or
    • Does not meet mission requirements.
  

 

 

Maximum per diem is not reasonable if:

  • No lodging costs are incurred; or
  • Travel days are partial.

 

jj. Costs related to Legal and Other Proceedings

Comments
Generally allowable if reasonable.

 

 

 

 

 

Unallowable:

  • Costs incurred in connection with any proceeding brought by a Federal, State, local or foreign Government for violation of, or a failure to comply with law or regulation are unallowable if the result is:
    • A conviction in a criminal proceeding;
    • Finding of contractor liability or imposition of monetary penalty in a civil or administrative proceeding;
    • Final decision by appropriate executive agency official to:
      • Debar or suspend;
      • Rescind or void contract; or
      • Terminate for Default for violation or failure to comply with a law or regulation.
    • Disposition of matter by consent or compromise except that cost may be allowable if agreement of consent or compromise between the contractor and the US Government specifically allows such costs.
  • Proceedings not described above where the underlying alleged misconduct could have led to such proceedings.
  • Costs incurred in connection with:
    • Defense against Federal claims or appeals or the prosecution of claims or appeals against the Government.
    • Prosecution of protests and appeals against the FAA.
    • Organization, reorganization or resisting mergers and acquisitions.
    • Defense of antitrust suits.
    • Defense of suits brought by employees or ex-employees under Section 2 of Major Fraud Act of 1988 where the contractor was found liable or settled.
    • Defense or prosecution of lawsuits or appeals between contractors arising from either an agreement or contract concerning a teaming arrangement, a joint venture, or similar arrangement or dual sourcing, co-production or similar programs.
    • Patent infringement litigation.
    • 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 hearing.
Costs under this principle include, but are not limited to, administrative and clerical expenses, legal services, accountants, consultants, salaries of employees, officers, and directors for effort related to proceeding.

Any allowable costs must be reasonable, not otherwise recovered from third party, and should not normally exceed 80 percent of the total costs.

Unallowable costs under this principle may be allowable for state, local, or foreign Government proceedings when incurred as direct result of specific contract terms and conditions of Federal contract or as a result of written direction from cognizant CO.

 

 

 

 

Proceeding includes an investigation.

 

kk. Deferred Research and Developments Costs

Comments
Allowable:
  • When they have been approved as a precontract cost.

Unallowable:

  • Research and development sponsored by or required in performance of a contract or grant that were incurred prior to award.
  • Costs incurred in excess of price or estimated cost of a contract for R&D effort cannot be allocated as a cost to any other Government contract.
Includes capitalized amounts.

 

ll. Goodwill

Comments
Unallowable. Goodwill occurs when the purchase price exceeds the sum of the identifiable individual assets acquired less liabilities assumed. Goodwill is the excess.

Only applicable purchase method of accounting which is a method that permits a company acquiring another by purchase of stock to value the acquired company’s assets as if it had purchased the assets directly.

 

mm. Executive Lobbying Costs

Comments
Unallowable. This principle covers costs incurred in attempting to improperly influence an employee or officer of the executive branch of the Federal Government.

Disclosure of executive lobbying activities is still required under SIRs.

 

nn. Costs of Alcoholic Beverages

Comments
Unallowable.  

 


oo. Asset Valuations resulting from Business Combinations

Comments
Amortization, cost of money, and depreciation are limited to the total of the amounts that would have been allowed had the combination not taken place. Only applicable to purchase method of accounting.