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Chapter 10 - Cost and Profit

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10.1 General Information

(2010-01-11)

When a contract must be awarded on a non-competitive basis, or when, following a competitive process, price negotiations with the successful bidder are required, contracting officers must determine the contract price based on the procedures outlined in this Chapter.
The calculation of prices and costs depends on the circumstances of each contract. Before referring to the general sections the establishing of costs (see 10.5) and profit (see 10.65), contracting officer must determine that the following special circumstances do not apply:
1. Travel and Living Expenses (see 10.10);
2. Prices for Out of Plant Services of Individuals (see 10.15);
3. Surplus Materials in Cost-Reimbursable Contracts (see 10.20);
4. Costing of Lease Transactions (see 10.25);
5. Service Contracts (see 10.30);
6. Joint Ventures (see 10.35);
7. Research and Development Contracts with Universities and Colleges (see 10.40);
8. Non-competitive Contracts with Non-profit Organizations, excluding Universities and Colleges (see 10.45);
9. Non-competitive Acquisitions of Manufactured Products and Repair and Overhaul Services from Agency and Resale Outlets (see 10.50);
10. Transfer Pricing (see 10.55);
11. Special Production Tooling and Special Test Equipment (see 10.60).
Contracting officers should also refer to the requirements for audit. (See 4.70.35)

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10.5 Establishing Costs

(2010-01-11)

Whenever a contract price is negotiated based on costs, the costs must be determined using Contract Cost Principles 1031-2 of the Standard Acquisition Clauses and Conditions (SACC) Manual.
In particular, for non-competitive contracts valued at $50,000 and over, with a firm price or fixed time rate basis of payment, except in cases for the acquisition of commercial goods and services, the price or rate will be negotiated based on the estimated costs computed in accordance with the Contract Cost Principles 1031-2.

For non-competitive contracts valued at $50,000 or over, with a cost reimbursable basis of payment, except in cases for the acquisition of commercial goods and services, the price will be determined based on actual costs incurred computed in accordance with the Contract Cost Principles.

In both of the above cases, the Contract Cost Principles will be included as a condition of the contract. Annex 10.4 explains why certain costs are considered non-applicable when utilizing Contract Cost Principles 1031-2.

For determining costs in accordance with the Contract Cost Principles, the Cost Interpretations Bulletins issued by Policy, Risk, Integrity and Strategic Management Sector should be taken into consideration at the time of negotiations. There are currently Cost Interpretation Bulletins on:
1. Excess Facilities - Annex 10.5.1
2. Depreciation - Annex 10.5.2
3. Lease Costs - Annex 10.5.3
4. Travel Costs - Annex 10.5.4
5. Head Office Expenses - Annex 10.5.5
6. Pension Costs - Annex 10.5.6
7. Research and Development Expenses - Annex 10.5.7
8. Bid and Proposal Expenses - Annex 10.5.8
9. Selling and Marketing Expenses - Annex 10.5.9
10. Severance Payments - Annex 10.5.10
11. Pension Plan Refunds - Annex 10.5.11
12. Company Funded Costs - Annex 10.5.12
13. Executive Compensation - Annex 10.5.13
14. Mobile Repair Party Requirements - Annex 10.5.14
15. Environmental Costs - Annex 10.5.15
16. Take Out Rates - Annex 10.5.16
17. Government Supplied Materials - Annex 10.5.17
18. Incentive Remuneration Profit Sharing Plans - Annex 10.5.18
19. Purchased Labour B Personnel Procured from Outside Sources - Annex 10.5.19.
The Contract Cost Principles 1031-2 are not required for commercial goods and services, since these are used regularly for other than government purposes, and are sold by the supplier in the course of carrying out its normal business operations; and there is a sufficient number of buyers, other than the government, to establish a going price for the good or service.

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10.10 Travel and Living Expenses

(2010-01-11)

Normally, travelling and living expenses incurred by a contractor in the ordinary course of business must be treated as indirect costs chargeable to overhead. Contracts bear their proportionate share of such overhead, and this overhead is profit bearing. Therefore, no special provision with respect to these incidental travel and living expenses is required for such contracts.
However, some contractors consistently charge travel and living expenses directly to contracts. Where a price is negotiated with suppliers, these charges will be acceptable as direct charges against the contract if:
1. the expenses are directly attributable to the performance of the work under the contract, and these expenses are deducted from indirect costs; and
2. the practice of direct charging is consistently followed by the contractor in the costing of both government and commercial work; and
3. the expenses referred to in (i) above are eliminated from indirect costs allocated to contracts.
When travel and living expenses must be directly charged to the contract, these expenses will attract administrative overhead either at full rates, where adequate support for the claimed general and administrative rate can be demonstrated, or at a lower negotiated rate where such substantiation cannot be provided. Alternatively, where industry practices so dictates, a contract may provide for travel and living expenses to be charged at cost with no allowance for overhead or profit.
When travel and living expenses, plus profit and/or overhead, as applicable, will be directly charged to a contract on a cost reimbursable basis, contracting officers must use Standard Acquisition Clauses and Conditions (SACC) Manual clause C4000C; when there is no allowance for profit and/or overhead, clause C4001C must be used.

The Treasury Board (TB) Travel Directive applies to travel expenses incurred on contracts with persons outside the Public Service, when these expenses are a specific element of the contract. For more details, consult the TB Travel Directive www and Special Travel Authorities www.

The contracting officer may accept the contractor's travel and living rates, if they are lower than the TB rates.

For additional information, contracting officers should consult Annex 10.5.4.
Department of National Defence (DND) service establishments may be able to provide transportation, mess and lodging facilities to the contractor's employees performing work at or near these establishments under mobile repair party and maintenance-type contracts. The commanding officer of the establishment must, upon request, advise the contractor as to the availability of these facilities, which must reduce direct contract expenses.
Any costs incurred by the contractor for the use of these facilities, plus any incidental expenses incurred, must be reimbursed under the contract, together with allowances for profit and/or administrative overhead. In order for the contractor to be reimbursed, contracting officers must use C4004C in the contract.

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10.15 Prices for Out of Plant Services of Individuals

(2010-01-11)

The following methods are applicable to all negotiated charge-out rates, irrespective of whether any subsequent contract is fixed price, fixed unit price, cost reimbursable, etc. and covers out-of-plant services of individuals or groups of individuals, with or without equipment.
Services include field service representatives, out-of-plant technical services and mobile repair parties away from the contractor's plant.
When rates have not been established commercially or when they are considered excessive, the Contract Cost Principles 1031-2 must be used as a basis for negotiating out-of-plant charge-out rates (including applicable overhead). Profit must be negotiated in accordance with 10.65. Travel and living expenses must be determined in accordance with 10.10.
Contracting officers are responsible for negotiating fair and reasonable charge-out rates which would normally be on a fixed time rate, i.e. hourly, per diem, monthly, etc. Charge-out rates will be shown as a separate line item in the basis of payment.
In determining charge-out rates, some items to be considered are:
1. normal industrial practice/commercial rates;
2. whether the company usually provides the service;
3. availability of the service from other sources;
4. wages of the individuals;
5. whether the plant overhead should apply or whether a separate overhead should be negotiated;
6. equipment utilized;
7. use of the facilities of Canada.
Before contract award, contracting officers are advised to seek guidance and cost interpretations from the sector/region cost analyst with respect to negotiated charge-out rates.
Full plant overhead should not be applied to out-of-plant charge-out rates, unless the out of plant technical services are a relatively minor part (less than 10 percent) of the contractor's total business (volume/direct labour) in any one year.
Dislocation/displacement pay allowances may be allowed provided that the amount of the displacement pay is reasonable; the displacement pay is for justifiable purposes; and/or displacement pay is in accordance with the contractor's established practice.
For removal, living, car allowances and outside Canada expenses, contracting officers must consider the following:
1. Only one removal from and back to the original residence will be paid for any one representative. Where removal expenses to the site of the work have been paid by the Canada on a previous contract and the services are being extended for a further period, such contract amendment or subsequent contract should provide for reimbursement only for expenses incurred for moving the representative back to the original residence.
2. Removal expenses should not be paid on assignments of less than six months, and any removal by a married employee for assignments exceeding six months must be carried out during the first 90 days, and by a single employee during the first 60 days.
3. Reimbursement for living expenses for a married employee on an assignment exceeding six months should cease when the family is moved (whether or not removal expenses have been paid) to permanent quarters at the location of the work.
4. Reimbursement for living expenses for a single employee on an assignment exceeding six months should cease when the employee's effects have been moved (whether or not removal expenses have been paid) to the location of the work or in any event after the first 60 days of such assignment.
5. Reasonable car allowances in accordance with the contractor's practice may be paid for the use of personally owned motorcars by the contractor's personnel for essential on-base travelling where local Canada transportation is not available.
6. Cases where the representative is required to go abroad must be dealt with individually and considered on their merits.
For additional information, contracting officers should consult Annex 10.5.14.

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10.20 Surplus Materials in Cost Reimbursable Contracts

(2010-01-11)

Surplus materials resulting from the performance of a contract may be disposed of in several ways:
1. declared surplus at a Crown Assets Distribution Centre (CADC);
2. transferred to the client, or to another contract with the same contractor, or to another contractor; or
3. returned to the original supplier.
Each of these has implications on the terms of the contract relating to costs and profits.
Costs of surplus materials are allowable costs in a production contract if the surplus is due to:
1. normal accumulation of stores, during or on completion of a contract, and which are declared surplus to CADC, or transferred to the client or to another contract with the same or a different contractor;
2. major design changes or other major adjustments of a substantial nature not including termination;
3. minor design changes or other minor adjustments in the scope of the work provided the contract does not specifically exclude such items.
When the surplus is due to excess purchasing by a contractor, the costs are not allowable in a contract.
Handling costs associated with the surplus materials are allowable costs in a contract whenever the costs of surplus materials are allowable.
General and administrative overhead costs associated with surplus materials are allowable costs in a contract only when the surplus materials consist of work-in-process and finished goods resulting from design changes and minor cutbacks.
Profit will be allowed on the following categories (10.20(b), 10.20(d), 10.20(e)) of allowable costs, except that:
1. in the case of surplus materials arising from the normal accumulation of stores, during or on completion of a contract, profit will be allowed only if the inventories acquired for a contract were financed by the contractor;
2. in the case of surplus materials arising from major design changes, or other major changes of a substantial nature, profit will be allowed only if the inventories were either purchased by the contractor or, if not purchased by the contractor, were manufactured by the contractor and rendered surplus as the result of the changes.
For cost reimbursable with fixed fee or cost reimbursable with incentive fee contracts, and contracts containing a ceiling price, allowable costs of surplus materials will be treated as an extra direct cost to the contract, outside the area of fixed fee, incentive fee or ceiling price considerations. It may be necessary to renegotiate the principal terms of the contract.
Where incentive fee contracts require negotiation of targets, the costs of surplus materials should be included in the revision of a target only where other reasons make it essential to re-open the calculation for the protection of either the contractor or Canada. Alternatively, when a contract so provides, these costs may be paid for as an extra to the target or other arrangements, e.g. at cost plus a fixed fee at whatever rate of profit is appropriate.

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10.25 Costing of Lease Transactions

(2010-01-11)

When a contractor proposes to include, in the cost of a contract, costs relating to the leasing by the contractor of an asset, the amount of allowable charge depends on the type of lease.
The necessary information for contracting officers is in Annex 10.5.3.

10.30 Service Contracts

(2010-01-11)

Fees for all services not established by price competition, except repair and overhaul, are negotiated on the basis of the prevailing rates for the type of work required and recognizing the circumstances of each contract. Considerations are:
1. requirements of the task: an assessment of skill level, expertise necessary, or complexity of the task requirements;
2. bidder qualifications: fees will vary in terms of factors like the calibre of proposed personnel, knowledge or expertise, previous experience, personnel utilization rate, use of facilities, or the area of specialization;
3. market conditions: a determination as to whether there is a commercial or going rate for a particular expertise or service capability in private industry should be made. If these rates cannot be determined, the fee scales recommended by provincial professional associations may be used as a reference point from which the reasonableness of a negotiated rate can be compared;
4. costing/fee practices: the costing structures of individuals, bidders and universities are different and will vary significantly. Some costs that would otherwise be charged separately are sometimes charged to overhead, thus increasing the total rate.
Fees should include only those elements of cost properly associated with the actual time expended on the work. These are the direct labour costs and their fair share of overheads, general and administrative expenses and profit. Other direct costs such as charges for publication of reports, special computer or test services, travel and living, should normally be shown separately. Each case must be taken on its own merits to arrive at an assessment of which amounts are reasonable charges, either as a fee element, or as a separately charged item.
In all contracts for services with a cost reimbursable or fixed time rate basis of payment, the time rates of payment must be specified for the entire period required for performance of the contract, including all phases and specified option periods. When this is not possible, payments for each year or phase must be based on a pre-agreed rate or formula that is to be specified in the contract.

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10.35 Joint Ventures

(2010-01-11)

For non-competitive contracts intended to be awarded to a joint venture, special costs that may be attributed to the joint venture arrangement alone, such as legal, accounting and consulting fees in connection with the setting up of the joint venture, are not acceptable charges.
Ongoing operational costs related to the joint venture arrangement are acceptable to the extent that they are considered reasonable and can be allocated to the contract using the Contract Cost Principles 1031-2.
When materials, supplies or services must be transferred to the joint venture under subcontracts issued to a representative of the joint venture, the contracting officer should negotiate acceptable subcontract costs with the representative in accordance with the establishment of costs policy stated in 10.50 to 10.50.5(b).
The joint venture cannot submit a price bid based on average rates. Each joint venture member's workload must be priced separately using appropriate costing procedures. The total of all the joint venture member prices must be the total proposed contract price.

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10.40 Research and Development Contracts with Universities and Colleges

(2010-01-11)

Research and development work carried out by universities or colleges is priced at direct costs plus a contribution to overhead. This contribution is a maximum take-out rate of 65 percent of direct payroll costs for on-campus work, and 30 percent of direct payroll costs for off-campus work. In addition, a contribution equivalent to 2 percent of applicable and acceptable travel and living expenses must be made.
Contract Cost Principles 1031-2 must not be called up in the contract, and post-contract audits of overhead charges must not be carried out. Direct costs must be subject to cost verification or audit.
Allowable direct costs are:
1. Direct Payroll Costs
  1. professional salaries
  2. clerical salaries
  3. technicians' wages
  4. fellowships - daily rate of personnel working directly on a contract
  5. fringe benefits including:
    - I. unemployment Insurance
    - II. workers' compensation
    - III. Canada or Quebec Pension Plan
  6. university pension plan (current service only)
  7. university portion of medical plans
  8. sick leave
  Annual salaries must be prorated over annual working days, taking into account statutory holidays and annual vacation.
2. Materials and Supplies
  1. stationery
  2. postage
  3. materials issued from stores
  4. materials, parts and components purchased specially for the contract at "laid-down cost"
  5. long distance telephone charges
  6. telegrams and cables
  7. freight and express
  8. publication charges as agreed in contract
3. Direct expenses - those costs which can be specifically identified and measured as having been used or to be used in the performance of the contract, and which are so identified and measured by the institution's cost accounting system. These expenses may include such items as:
  1. travel expenses
  2. consultant services
  3. apparatus and equipment acquisition. (This must remain Canada's property and be subject to Crown Assets Distribution Centre procedures.)
  4. other costs as agreed and negotiated, including charges for computer time.
Consultants are to be considered in three separate categories:
1. in-house standard rate of pay: the 65 percent overhead is applicable;
2. external type consultant, which is in-house personnel working additional hours at increased rates, but using university equipment: direct charge without overhead;
3. outside consultant: direct charge without overhead.
Manufactured equipment is to be considered as a "make" or "buy" decision for the contracting officer. If it is a "buy", it must be a direct charge, and be Canada's property: a decision regarding disposal must be made later. If it is a "make", the university would be allowed the cost of parts and labour as laid out in the bid, including the 65 percent overhead, with ownership and disposal the same as for a buy. This should be a separate item under the contract.
Allowable overhead costs are:
1. maximum of 65 percent applicable to Direct Payroll Costs for on-campus work;
2. maximum of 30 percent applied to Direct Payroll Costs for off-campus work;
3. an administration charge of 2 percent on travel and living expenses incurred directly against the contract is allowed.
Costs incurred by the university or college that have no direct bearing on the research activity are not acceptable as direct charges against Canada research contracts. These include:
1. university annual reports
2. contingency reserves
3. convention expenses - unless applicable to specific contract
4. post service lump-sum payments
5. termination allowances not earned during the course of the contract
6. admissions department
7. grants - unless for services rendered for a specific contract
8. finance charges (bank, debenture, bond interest, etc.)
Additional special facility charges must not be included in the price, since these are accounted for in the contribution to overhead.
Charges for use of a computer centre must be directed to a contract at a predetermined rate per hour, including general overhead, and computed at a break-even level for the centre. These charges must be in line with normal policies of the university for internal use.
Departments and agencies of the United States (U.S.) Government negotiate directly with Canadian universities and colleges towards research and development contracts. Public Works and Government Services Canada may be asked for assistance in developing an appropriate overhead rate. These requests will be handled by the Services and Technology Acquisition Management Sector, which must develop the overhead rates from the latest certified financial statements of the university or college, with indirect costs prorated over the direct cost base in conformity with the costing principles set out in the applicable U.S. Government directive on the subject.

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10.45 Non-competitive Contracts with Non-profit Organizations, excluding Universities and Colleges

(2010-01-11)

Non-profit organizations incur financing charges for working capital, over and above normal operating costs as determined in accordance with the Contract Cost Principles 1031-2. They are also subject to business and contractual risk, though less than profit-oriented organizations.
The price is based on costs incurred, computed using the Contract Cost Principles 1031-2 plus an allowance in lieu of profit.
For financing charges on working capital employed, the allowance depends on the basis of payment:
1. if there is a provision for progress payments or milestone payments: 1.5 percent of costs incurred;
2. if there is no provision for progress payments or milestone payments: 3 percent of costs incurred.
For general business risk, the allowance is based on contract costs:
1. direct materials, subcontracts and direct charges: up to 1 percent of such costs;
2. direct labour and overhead: up to 2 percent of such costs.
The allowance that may be included in recognition of contractual risk depends upon the basis of payment selected for the contract or part thereof:
1. firm price: up to 4 percent of costs incurred;
2. fixed time rate with ceiling price: up to 3 percent of costs incurred;
3. cost reimbursable with ceiling price: up to 3 percent of costs incurred;
4. fixed time rate with no ceiling price: up to 2 percent of costs incurred;
5. cost reimbursable with no ceiling price: 0 percent.

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10.50 Non-competitive Acquisitions of Manufactured Products and Repair and Overhaul Services, from Agency and Resale Outlets

(2010-01-11)

The procedures detailed in 10.50.1 to 10.50.15 provide for the establishment of fair and reasonable prices, when the competitive process cannot be used for:
1. acquisitions from Canadian agency and resale outlets, and
2. acquisitions of manufactured products and repair and overhaul services, from Canadian suppliers, except Canadian agency and resale outlets.
There are key differences between these two types of acquisitions in the determination of what costs are allowed, and how profits are determined. The procedures also differ depending on whether the good or service is commercial or non-commercial.

10.50.1 Non-competitive Requirements of Commercial Goods and/or Services

(2010-01-11)

The contracting officer must negotiate a fair price on the basis of at least one of the following criteria:
1. recent prices paid;
2. latest published price lists or catalogues;
3. prices paid by others, such as other governments, Crown corporations, hospitals, universities and large private sector corporations or companies.
For requirements valued at $50,000 or less, the contracting officer may, at its discretion, request additional price justification by way of a price certification signed by the bidder; but for requirements valued at $50,000 or more, price certifications must be obtained in all cases.
Contracting officers must include the following applicable price certification Standard Acquisition Clauses and Conditions (SACC) Manual clause in non-competitive bid solicitations:
1. C0002T: for commercial goods and/or services, other than petroleum products with Canadian suppliers, other than agency and resale outlets;
2. C0004T: for commercial goods and/or services with Canadian agency and resale outlets, including subsidiaries of foreign manufacturers;
3. C0006T: for petroleum products;
4. C0600T: for commercial services (Canadian bidders).
Contracting officers must include the discretionary audit clause C0100C in contracts.

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10.50.5 Non-competitive Requirements of Non-commercial Goods and/or Services

(2010-01-11)

For non-competitive requirements of non-commercial goods and/or services valued at $50,000 or less, a fair price may be negotiated in accordance with the guidelines for commercial goods and/or services given above, provided the data required to follow this guideline is available.
For acquisitions from agency and resale outlets only, if the data is not available, then the guideline presented in 10.50.10 should be followed.
The contracting officer must request the bidder to submit an itemized breakdown of the price quoted. In the case of agency and resale outlets, the contracting officer will analyze the price breakdown in accordance with 10.50.15. The depth of the analysis required will depend on the value of the requirement and the quality and completeness of the support data provided by the bidder. The cost of performing the analysis versus the potential benefit in the form of cost savings on the requirement should be taken into account.
For more details on the bases of payment, see 4.70.20. A firm price basis of payment is generally used for contracts with agency and resale outlets.

Contracting officers must include the price certification SACC Manual clause C0003T in non-competitive bid solicitations, for non-commercial goods and/or services with Canadian suppliers; include the discretionary audit clause C0101C in contracts, and rate certification clause C0601T in non-competitive bid solicitations for fixed time rate contracts, for non-commercial services valued at $50,000 or more, submitted by a Canadian bidder.

10.50.10 Agency and Resale Outlets - Additional Requirements

(2010-01-11)

The two chief types of agency and resale outlets encountered when purchasing for Canada are:

those engaged in manufacturing, which also act as agency or resale outlets representing other manufacturers (type 1); and
those not engaged in any form of manufacturing, which act solely as agents, distributors, wholesalers, jobbers or retailers. They may conduct the functions of purchasing, receiving, storing, shipping and accounting (type 2).

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10.50.15 Price Analysis

(2010-01-11)

The following should be considered when analyzing the price breakdown:
1. Laid-down costs
  Ensure that the necessary support for the price of the good/service quoted by the principal is provided by the bidder and that all trade discounts have been deducted. The applicability and amount of any added costs for transportation, foreign exchange, customs duty and brokerage should be verified. Transfer prices representing fair market value, constitute laid-down cost for the purposes of price analysis and profit calculations.
2. Cost of necessary services and overhead
  Establishment of the cost of necessary services rendered by the bidder is dependent upon requirements, the type of organization the bidder operates, and the degree of sophistication in the bidder's cost accounting system.
  
  Types of services that may be considered for costing purposes:
  1. purchasing;
  2. internal handling including unpacking, incoming inspection, inhibiting, warehousing, and re-packing for delivery to one or more destinations, but excluding costs related to the bidder's own manufacturing or other related costs;
  3. general and administrative expenses applicable to the activity required.
  After-sales activity, such as on-site installation and test should be taken into account in establishing the overall price structure.
  
  An examination of the overhead costs allocated to the particular buy should be made to ensure that the allocation represents a reasonable and justifiable distribution of overhead costs in accordance with the Contract Cost Principles 1031-2.
  
  If Canada's requirements can be met by direct shipment from the principal, the bidder's charges are normally confined to the costs of purchasing and invoicing, and in such cases, a special direct shipment rate of overhead should be developed.
  
  The negotiated rates established in accordance with the foregoing are generally applied as a percentage additive to the laid-down costs.
3. Profit
  Agency and Resale Outlet (type 1)
  
  A reasonable rate of profit is allowed on the total of laid-down costs and the cost of services required by Canada. The rate must be commensurate with the risk, the volume of resale business to Canada and other circumstances. For example, if the services required include the maintenance of an inventory, a higher rate of profit is permitted.
  
  Agency and Resale Outlet (type 2)
  
  The profit amounts should be calculated by application of the following:
  1. Profit on laid-down costs:
    Recognizing the cost of financing and risks associated with the maintenance of stocks, the maximum rates of profit applied to laid-down costs vary in accordance with the method of supply as follows:
    1. supplied from stocks maintained and financed by the bidder: up to 4 percent.
    2. supplied from stocks held by the bidder on consignment from the principal: up to 3 percent.
    3. supplied by the principal through the bidder, only when ordered by Canada: up to 3 percent.
    4. supplied by the principal in direct shipment to Canada: up to 2 percent.
  2. Profit on cost of necessary services and overhead:
    Recognizing the associated general business risk, the rates of profit applied to the cost of necessary services and overhead may vary in accordance with the services provided and are:
    1. where the services include those of purchasing and invoicing only: up to 7.5 percent.
    2. where the services include other than purchasing and invoicing: up to 10 percent.
4. Price certification and discretionary audit:
  Subsequent to the price negotiation, the bidder should resubmit its price proposal based on the agreement reached and include a price certification. In addition, all contracts for non-competitive acquisitions from agency and resale outlets valued at $50,000 and over must contain a discretionary audit clause. (See 10.50.1(b) and 10.50.5(b).)

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10.55 Transfer Pricing

(2010-01-11)

When materials, supplies or services are transferred to a supplier to Canada from divisions, subsidiaries or affiliates under common control, the transfer price must be established in conformity with standard criteria, to avoid the payment of a rate of profit exceeding departmental norms.
Considerations of materiality and practicality must govern in the application of these criteria. Consistency is also an objective - consistency between government and commercial work, consistency among the various kinds of firm price and cost reimbursable contracts, and consistency from one year to the next. In order to ensure consistency, personnel from all sectors/regions should consult early, in the negotiation process, a repository of applicable data maintained by the Policy, Risk, Integrity and Strategic Management Sector.
The following criteria apply to the establishment of acceptable inter-company and intra-company transfer prices on non-competitive contracts for which a price is negotiated with the bidder through a process involving analysis of costs and determination of profit.
These criteria do not apply if the transfer price can be verified to be reasonable by reference to comparable third party prices involving transactions between the Canadian subsidiary (agency or resale outlet) or its parent and a third party, or between unrelated parties.
Intra-company transfer prices (that is, for transfers between divisions of the same legal or corporate entity) must be charged under the contract at cost according to the Contract Cost Principles 1031-2 without allowances for profit or an allocation of corporate general and administrative expenses. These allowances must apply on the cost of the finished product sold to Canada.
Inter-company transfer prices (that is, for transfers between a company and its subsidiary or affiliate enjoying separate legal status but otherwise under common ownership control) charged under the contract must not be, whenever possible, greater than those which approximate fair market value. In those situations where approximate fair market value cannot be determined, inter-company transfer prices must be those that can be considered as reasonable under the circumstances if the parties to the transaction had been dealing at arm's length.
Fair Market Value means the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm's length who are fully informed and not under any compulsion to transact.

If the good or service has a going price at which significant quantities are known to sell in the market in arm's length transactions, such a price will represent fair market value. Examples: regulated prices, posted prices, catalogue prices and other prices actually available and given in past transactions to arm's-length parties for the size, quality, timing and location of the transaction, after all discounts have been considered. An inter-company transfer price representing fair market value will be used as "laid-down cost" for that item for the purposes of computing mark-up, profit and contract price.

In any case where the circumstances described in the last paragraph do not apply, it must be deemed that the transfer prices of the company are established at cost calculated in accordance with Contract Cost Principles 1031-2 without allowance for profit and without an allocation of corporate general and administrative expenses.

In interpreting the term "reasonable under the circumstances," the following considerations apply:
1. If the supplier to Canada can prove that the transfer price is at cost, then a normal profit at rates as set out in 10.65 must apply to the final product cost.
2. If the supplier to Canada can provide satisfactory price support for a transfer price in excess of cost, the profit element in such transfer price must be limited to a return (at a rate not exceeding the corporate bond rate periodically published by the Policy, Risk, Integrity and Strategic Management Sector), on the fixed and working capital used in the production of the goods and services. The formula for computing profit is as follows:
  (R/12) x M(a x (b/c)) = P
  
  R = corporate bond rate
  M = period (in months of capital use)
  a = fixed and working capital employed
  b = transfer price less profit
  c = total company annual cost of sales and transfers
  P = profit amount to include in transfer price
  
  It should be noted that satisfactory price support originating from the transferor must be capable of being verified by reference to instances of transactions in similar goods either between the Canadian subsidiary or its parent and a third party, or between unrelated parties.
3. In situations other than (i) and (ii) above, profit must not be allowed on the transfer price component of the total costs of the final product sold to Canada.
Where necessary, common ownership control must be determined by reference to the latest issue of appropriate trade surveys (e.g. Financial Post Survey of Industrials, Moody's Industrials, etc.), as confirmed by means of a certification from the company as to control (use SACC Manual clause A9112C for this purpose). Ownership control is presumed in cases where at least 50 percent of the voting rights are held by the affiliate.

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10.60 Special Production Tooling and Special Test Equipment

(2010-01-11)

No profit is allowed on Special Production Tooling (SPT) or Special Test Equipment (STE) which is purchased by a contractor for use under a contract, or purchased or otherwise acquired by its subcontractors for use under approved subcontracts.
When the production of the end product involves prior or concurrent expenditures for SPT or STE under a separate agreement, or pursuant to a clause in a contract or subcontract, a profit of up to 5 percent may be allowed on all SPT fabricated in a plant owned or operated by a contractor.
No profit is allowed on the cost of purchased equipment incorporated or built into the STE.
Expenditures incurred by a contractor in connection with purchased SPT or STE (other than the cost of such tooling or equipment) are usually recovered as preproduction expenses or factory overhead.
Administrative overhead is not accepted on STE.

Purchased tooling should be included in the cost of sales base for the distribution of administrative overhead.
Since the cost of SPT or STE represents part of the cost of the end product being acquired by a client, payment is made out of the client's funds appropriated for the purchase of that end product.
SPT may be acquired on a firm price or a cost reimbursable basis irrespective of the price arrangement for the end product for which the tooling is required.
When SPT is to be provided on a cost basis:
1. the cost of such tooling is to be in accordance with the Contract Cost Principles 1031-2;
2. a dollar limit is to be placed on the cost of the tooling with the provision that the cost is not to exceed this limit until further authorization is obtained.

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10.65 Calculation of Profit on Negotiated
Contracts

(2010-01-11)

The policy and guidelines for the calculation of the amount of profit applicable to negotiated contracts and parts thereof with Canadian suppliers, for both goods and services are detailed in 10.65(b) to 10.65.35. Contracts valued under $50,000 do not require negotiation of profit under this section.
There are differences in the guidelines for contracts with total costs between $50,000 and $249,999, and for contracts with total costs of $250,000 or more.

For agency and resale outlets, the procedures for profit determination in 10.50.15 apply.
When for any reason it is not possible to establish an acceptable basis of price by competition or a fair and reasonable price assessment, the price must be negotiated. The object of price negotiation is to duplicate a fair market price, while establishing a realistic division of responsibilities and risks between the contractor and Canada.
A fair market price for non-competitive contracts for the procurement of goods or services (other than commercial goods or services) must be negotiated. The object of such negotiation is to arrive at a price which is considered to be fair and reasonable in the circumstances based upon an estimate of the costs, to be incurred in the performance of the contract, computed in accordance with the Contract Cost Principles 1031-2, plus a fair profit. A fair profit is an amount no greater than that calculated under this section.

There are the following exceptions:
1. Generally, all contracts placed on behalf of the Canadian Commercial Corporation (CCC). However, if the ultimate client for the CCC contract is the United States Department of Defense or National Aeronautics and Space Administration (NASA) or the United Kingdom Ministry of Defence, the profit may be calculated in accordance with this section.
2. Contracts or parts thereof for which the price is based on catalogues, price lists or fee schedules where only discounts are subject to negotiation.
Profit levels will vary:
1. to recognize the cost of money associated with the capital employed by the contractor in performance of the contract;
2. to recognize the levels of general business and contractual risk assumed by the contractor in performance of the contract.
The calculation of the amount of profit attributable to each of the above factors must normally be made in accordance with the following guidelines.

10.65.1 Return on Capital Employed

(2010-01-11)

The return on capital employed will be determined in two parts:

return on fixed capital employed, and
return on working capital employed.

The determination is different for contracts with total costs between $50,000 and $249,999 and for contracts with total costs of $250,000 or more. (See 10.65.10.)

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10.65.5 Return on Fixed Capital Employed (between $50,000 and $249,999)

(2010-01-11)

For contracts with total costs between $50,000 and $249,999, the return on fixed capital employed is calculated as follows:
If machinery and/or equipment owned by the contractor are used on a regular basis in the manufacture of the product(s) or provision of the service(s) being acquired under the contract, an amount equivalent to 1 percent of total allowable costs will be awarded as a return on fixed capital employed.

10.65.10 Return on Working Capital Employed (between $50,000 and $249,999)

(2010-01-11)

The following rates applied to the total contract costs will be used to provide for a return on working capital employed:

if there is no provision for progress payments, advance payments or milestone payments - 3 percent;
if there is a provision for progress payments or milestone payments - 1.5 percent;
if there is a provision for advance payments - 1.5 percent (NOTE: The profit factor of 1.5 percent will apply only to total costs less amount of advance payments.);
if there is a provision for both progress payments and advance payments - 0 percent.

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10.65.15 Return on Fixed Capital Employed ($250,000 or more)

(2010-01-11)

For contracts with total costs of $250,000 or more, the return on fixed capital employed is calculated as follows:
The provision of a return on fixed capital employed is intended not only to compensate contractors for the cost of money associated with the fixed capital employed on the contract but also to encourage investment in new capital equipment, the result of which is generally greater productivity and consequently reduced costs to Canada.
1. For the purpose of this section, the fixed capital employed is defined as the net book value of fixed assets, less:
  1. land and any intangible assets,
  2. any fixed assets not in use such as idle plant, and
  3. any surplus value arising from re-appraisal.
2. The determination of fixed capital employed will be as follows:
  1. Determine the percentage:
    (A/B) x 100%
    
    A = overhead recovery base allocated to the contract
    B = total budgeted amount of recovery base
  2. Apply the percentage in (A) to the net book value of fixed assets.
    Such determination will be performed in accordance with the format set out in Annex 10.1.
3. The rate of return to be applied to the fixed capital employed applicable to the contract will be 1.7 times the corporate bond rate, which will be published monthly by the Policy, Risk, Integrity and Strategic Management Sector (PRISMS). The rate used will be the latest rate published at the date that the contractor's price proposal is firmed up. In the event that the published rate at the time of contract award has changed by more than one full point, up or down, this rate will be used to recompute the return.
4. The rate used in the contractor's price proposal will be the latest figure published at the time the price proposal is submitted. In order to conform to (iii) above, it is necessary that the following clause be included in the price proposal:
  "The price quoted includes an amount of profit using a corporate bond rate of ____ percent. In the event that the corporate bond rate, as published by the Policy, Risk, Integrity and Strategic Management Sector, at the time of contract award, has changed by more than one full point, up or down from this rate, the price will be adjusted to reflect such rate."

10.65.20 Return on Working Capital Employed ($250,000 or more)

(2010-01-11)

The amount of working capital employed applicable to a particular contract is defined as all allowable contract costs (exclusive of depreciation where considered significant) less contract revenue (exclusive of profit).
For contracts with total costs of $250,000 or more, the return on working capital employed is calculated as follows:
1. During negotiations, a schedule of the estimated net working capital for the contract, as defined above, on a month-by-month basis, will be determined and agreed to between the contracting officer and the contractor.
2. The rate of return to be applied to the cumulative monthly amounts of working capital is defined below. However, as this is an annual rate of return, one-twelfth only of the rate is applicable to each monthly amount. For ease of calculation, the equivalent formula, to be used for determining the return on working capital employed on a particular contract, is as follows:
  (A/12) x B
  
  A = sum of the cumulative monthly working capital amounts
  B = prescribed rate
3. The rate of return to be applied to working capital employed applicable to the contract will be the chartered bank prime rate. PRISMS will publish this rate weekly. The rate used will be the latest rate published at the date that the contractor's price proposal is firmed up. In the event that the published rate at the time of contract award has changed by more than one full point, up or down, this rate will be used to recompute the return.
4. The rate used in the contractor's price proposal will be the latest figure published at the time the price proposal is submitted. The following clause must be included in the price proposal:
  "The price quoted includes an amount of profit using the chartered bank prime rate of _____ percent. In the event that the chartered bank prime rate, as published by the Policy, Risk, Integrity and Strategic Management Sector, at the time of contract award, has changed by more than one full point, up or down from this rate, the price will be adjusted to reflect such rate."
Specific guidelines in regard to the cost base for purposes of all profit calculations are as follows:
1. Direct material costs should include the costs of all materials purchased specifically for the contract together with the costs of any other materials issued specifically for the contract from the contractor's own inventories except Accountable Advance (AA) spares embodied. Direct materials must not include the value of Government Furnished (GF) nor Contract Issue (CI) materials. However, direct labour and overhead costs associated with the acquisition, stocking and handling of GF and CI materials and AA spares embodied may be included under the appropriate cost element for profit purposes.
2. Overhead in this context includes not only plant or factory overhead, but engineering, material handling, general and administrative or any other overheads as appropriate to and allowable on the contract.
3. All other allowable costs are those costs not considered to be direct material, direct labour or overhead but nevertheless are an appropriate and allowable direct charge to the contract. Royalty payments and the goods and services tax or the harmonized sales tax, although they may be an appropriate and allowable direct charge to the contract, must not be included for the purpose of profit calculation.
For more information, contracting officers should consult Annex 10.2.

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10.65.25 General Business Risk

(2010-01-11)

The award of profit under this factor is intended to recognize the level of effort a contractor makes in the management of all the resources required to perform the contract in an efficient and economical manner.
The level of effort is considered to vary according to the elements of cost and is reflected in the following rates of profit to be applied to the costs in each element:
1. direct materials: 1.5 percent
2. subcontracts: 2 percent
3. accountable advance spares embodied: 2 percent
4. direct labour: 4 percent
5. overhead: 4 percent
6. all other allowable costs: 1.5 percent

10.65.30 Contractual Risk

(2010-01-11)

The rates of profit to be paid for contractual risk will depend upon the basis of payment selected for each individual line item of the contract, or part thereof, and the cost base associated with each distinct basis of payment.
The basis of payment determines the maximum level of profit, and requires the following consideration of different factors in arriving at the appropriate profit level.
1. firm price and firm base price with economic price adjustments (7 percent maximum) - consider:
  1. the ability of Canada to state its requirements in the form of a well-defined specification;
  2. the ability of the contractor to convert Canada's specification into a comprehensive statement of work;
  3. the ability of Canada and the contractor to precost the statement of work;
  4. the duration of the contract and its effect on the predictability of labour and material costs and overhead distribution, taking into account whether protection in this regard is provided to the contractor by the inclusion in the contract of a provision for economic price adjustment (firm base price with economic price adjustments basis of payment);
  5. whether the final determination of the firm price takes place before or after a portion of the contract period has elapsed.
2. fixed time rate with ceiling price (4.5 percent maximum) and without ceiling price (3.5 percent maximum) - consider:
  1. the duration of the contract and its effect on the predictability of the labour and overhead rates;
  2. if a ceiling price is included, the familiarity of the contractor with the work being performed under the contract resulting from the previous manufacture of the same or similar products, or the provision of the same or similar services;
  3. whether the final determination of the fixed time rates takes place before or after a portion of the contract period has elapsed.
3. cost reimbursable with incentive fee (4.5 percent maximum) - consider:
  1. the degree to which the difference between the target fee and the maximum fee will provide an incentive for more effective cost control and contract performance by the contractor;
  2. whether the agreement on target costs and target fee was reached before or after a portion of the contract period has elapsed.
  To calculate the bonus on target incentive fee contracts: the maximum fee for cost reimbursable with incentive fee contracts must consist of the target fee plus an added amount which brings the total profit for the General Business Risk and Contractual Risks Factors to a maximum of 10 percent of target costs.
4. cost reimbursable with fixed fee with ceiling price (4.5 percent maximum) and without ceiling price (1 percent maximum) - consider:
  1. the reliability of the cost estimate used for determining the fixed fee, taking into account the duration of the contract and its effect on the predictability of costs, and provided that no "swing points" at which the fixed fee will be renegotiated are included in the contract;
  2. if a ceiling price is included, the familiarity of the contractor with the work being performed under the contract resulting from the previous manufacture of the same or similar products, or the provision of the same or similar services;
  3. whether the fixed fee was determined before or after a portion of the contract period has elapsed.
5. cost reimbursable with no fixed fee and no ceiling price (0 percent): there is no business or contractual risk.

10.65.35 Total Profit

(2010-01-11)

The total amount of profit awarded under all factors must in no event exceed 20 percent of the total contract costs.
The amount of profit for all factors should be calculated separately and included in the price of each line item with a distinct basis of payment in the contract (see examples in Annex 10.1.1 and Annex 10.3).

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Annex 10.1: Determination of Fixed Capital Employed Applicable to a Contract

(2010-01-11)

Contracts of $250,000 and more
Line No.	Details	A	B	C	D	E	F	Total
1.	Amounts for depreciation.
2.	Net Book Value of Fixed Assets as at beginning of fiscal year. $
3.	Re-allocation of cost centres to other cost centres as required by the entrepreneur's cost accounting system. $
4.	Adjusted Net Book Value of Fixed Assets by cost centres. $
5.	Bases used for recovery of overhead.
6.	Total amount of each overhead recovery base for the fiscal year.
7.	Amount of each overhead recovery base allocated to this contract.
8.	Percentage of Line 7 to Line 6. %
9.	Net Book Value of Fixed Assets applicable to the contract. Line 8 by Line 4. $

Notes:

Line 1: Amounts for depreciation taken from the contractor's overhead budget in total or by cost centre as agreed during negotiations.
Line 2: Total amount of the Net Book Value of Fixed Assets (excluding land, and any intangible assets) as found in the contractor's balance sheet as at the end of the fiscal year previous to that being negotiated. If this balance sheet is not available at the time of negotiations, the amount may be estimated. Subsequently, the amount is allocated to cost centres either in accordance with the contractor's records or, if not recorded, in accordance with the depreciation amounts at Line 1 (allocation required only in the event that depreciation by cost centre was agreed during negotiations).
Line 3: The necessary re-allocation of the amounts at Line 2 if required by the contractor's cost accounting system.
Line 4: The amounts for Net Book Value of Fixed Assets at Line 2 as adjusted by Line 3.
Line 5: The base for recovery of overhead costs in total or for each cost centre as per the contractor's cost accounting system.
Line 6: The total amount of each overhead recovery base included in the contractor's budget for the fiscal year as agreed during negotiation.
Line 7: The amount for each overhead recovery base allocated to the particular contract as agreed during negotiations.
Line 8: The percentage of Line 7 to Line 8.
Line 9: The amounts determined by applying the percentages at Line 8 to the amount for the Net Book Value of Fixed Assets at Line 4. The total amount on this line is the equivalent of the Fixed Capital Employed Applicable to the contract in the particular fiscal year.

If the contract period extends over more than one of the contractor's fiscal years, the calculation will have to be made for each fiscal year involved, and the sum of the Fixed Capital Employed Applicable to the contract determined for each fiscal year will be the equivalent of the Total Fixed Capital Employed Applicable to the particular contract.

If a contractor does not accumulate overhead by cost centre, the above calculation should be done in total only.

Two examples of the calculation could be found in Annex 10.1.1.

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Annex 10.1.1: Examples to Determine the Fixed Capital Employed

(2010-01-11)

(Contracts of $250,000 and more)

Examples of Calculation

Example 1 - Assumptions:

The period of contract performance is from April 1, 1982 to March 31, 1983.
The contractor's fiscal year ends on March 31.

The contractor accumulates costs in 5 cost centres and the amount of depreciation included in the agreed budget in the first year 1982/83 are as follows:

Cost Centre	Amount of Depreciation
Repair and Overhaul	$28,500
Material Handling	$500
G & A	$1,000
Engineering	$3,000
Occupancy	$7,000

The costs accumulated in the Occupancy cost centre are subsequently re-allocated to all other cost centres on the basis of area occupied which is as follows:

Cost Centre	Re-allocated Percentage
Repair and Overhaul	65%
Material Handling	15%
G & A	10%
Engineering	10%
Occupancy	100%

The costs accumulated in the Engineering cost centre are subsequently re-allocated to the Repair and Overhaul cost centre.
The Net Book Value of Fixed Assets (excluding land and any intangible assets) appearing in the contractor's balance sheet as at March 31, 1982 is $285,000.

The recovery base in each cost centre and the amounts thereof for fiscal year 1982/83 are as follows:

Cost Centre	Recovery Base
Repair and Overhaul - Direct Labour Costs	$600,000
Material Handling - Total Material Costs	$1,500,000
G & A - Costs of Production	$3,500,000

The amounts of each recovery base allocated to this contract are:

Cost Centre	Recovery Base
Repair and Overhaul	$272,700
Material Handling	$750,000
G & A	$1,602,900

Example 1

Details F/Y 1982/83	Cost Centres
Details F/Y 1982/83	Repair Overhaul $	Material Handling $	G & A $	Engineering $	Occupancy $	Total $
1. Amounts for depreciation by Cost Centre.	28,500	500	1,000	3,000	7,000	40,000
2. Net Book Value of Fixed Assets as at March 31, 1982.	203,063	3,562	7,125	21,375	49,875	285,000
3. Re-allocation of cost centres.
Occupancy	32,419	7,481	4,988	4,987	(49,875)	--
Engineering	26,362	--	--	(26,362)	--	--
4. Adjusted Net Book Value of Fixed Assets by cost centres.	261,844	11,043	12,113	--	--	285,000
5. Bases for recovery of overhead.	Direct Labour Costs	Total Material Costs	Costs of Production
6. Total amount of each overhead recovery base for Fiscal Year 1982/83.	600,000	1,500,000	3,500,000
7. Amount of each overhead recovery base for Fiscal Year 1982/83 allocated to this contract.	272,700	750,000	1,602,000
8. Percentage of Line 7 to Line 6.	45.5%	50.0%	45.8%
9. Net Book Value of Fixed Assets Applicable to the contract Line 8 x Line 4.	119,139	5,522	5,548			130,209
	FIXED CAPITAL EMPLOYED APPLICABLE TO CONTRACT					$130,209

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Example 2 - Assumptions:

The period of contract performance is from July 1, 1982 to December 31, 1983.
The contractor's fiscal year ends on December 31.

The contractor accumulates costs in 6 cost centres and the amounts for depreciation included in the agreed budget for each fiscal year are:

Cost Centre	F/Y 1982$	F/Y 1983$
Manufacturing	30,000	35,000
Engineering	6,000	5,900
Material Handling	5,000	4,500
G & A	3,500	4,000
Inspection	1,000	900
Occupancy	10,000	9,500
Total	55,500	59,800

The costs accumulated in the Occupancy cost centre are subsequently re-allocated to all other cost centres on the basis of area occupied which is as follows:

Cost Centre	Re-Allocated Percentage
Manufacturing	50%
Engineering	15%
Material Handling	15%
G & A	10%
Inspection	10%
Total	100%

The costs accumulated in the Inspection cost centre are subsequently re-allocated to the Manufacturing cost centre.
The Net Book Value of Fixed Assets (excluding land and any intangible assets) appearing on the contractor's balance sheet as at December 31, 1981 is $400,000, and estimated for the year ending December 31, 1982 is $405,000.

The recovery base for overhead in each cost centre and the amount thereof for each fiscal year are as follows:

Cost Centre	F/Y 1982	F/Y 1983
Manufacturing - Direct Labour Costs	$300,000	$440,000
Engineering - Direct Labour Hours	100,000 hours	100,000 hours
Material Handling - Total Material Costs	$700,000	$650,000
G & A - Costs of Production	$3,500,000	$3,700,000

The amounts of each recovery base allocated to this contract in each fiscal year are:

Cost Centre	F/Y 1982	F/Y 1983
Manufacturing	$65,000	$110,000
Engineering	6,000 hours	600 hours
Material Handling	$75,000	$125,000
G & A	$350,000	$484,000

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Fiscal Year Ending December 31, 1982 (1st Year)

Example 2 (cont'd)

Details F/Y 1982/83	Cost Centres
Details F/Y 1982/83	Manufac- turing $	Engineer- ing $	Material Handling $	G & A $	Inspec- tion $	Occup- ancy $	Total $
1. Amounts for depreciation by Cost Centre	30,000	6,000	5,000	3,500	1,000	10,000	55,500
2. Net Book Value of Fixed Assets as at March 31, 1981	216,218	43,244	36,036	25,225	7,207	72,070	400,000
3. Re-allocation of cost centres
Occupancy	36,035	10,810	10,811	7,207	7,207	(72,070)	--
Inspection	14,414	--	--	--	(14,414)	--	--
4. Adjusted Net Book Value of Fixed Assets by cost centres	266,667	54,054	46,847	32,432	--	--	400,000
5. Bases for recovery of overhead	Direct Labour Costs	Direct Labour Hours	Total Material Costs	Cost of Production
6. Total Amount of each overhead recovery basis for Fiscal Year 1982	300,000	100,000 hours	700,000	3,500,000
7. Amount of each overhead recovery base for Fiscal Year 1982 allocated to this contract	65,000	6,000 hours	75,000	350,000
8. Percentage of Line 7 to Line 6	21.7%	6.0%	10.7%	10.0%
9. Net Book Value of Fixed Assets Applicable to this contract in Fiscal Year 1982. Line 8 x Line 4.	57,867	3,243	5,013	3,243			69,366
FIXED CAPITAL EMPLOYED APPLICABLE TO THIS CONTRACT							$69,366

Fiscal Year Ending December 31, 1983 (2nd Year)

Example 2 (cont'd…)

Details F/Y 1983	Cost Centres
Details F/Y 1983	Manufac- turing $	Engineer- ing $	Material Handling $	G & A $	Inspec- tion $	Occup- ancy $	Total $
1. Amounts for depreciation by Cost Centre	35,000	5,900	4,500	4,000	900	9,500	59,800
2. Net Book Value of Fixed Assets as at March 31, 1982	237,041	39,958	30,476	27,091	6,095	64,339	405,000
3. Re-allocation of cost centres
Occupancy	32,169	9,651	9,651	6,434	6,434	(64,339)
Inspection	12,529	--	--	--	(12,529)	--	--
4. Adjusted Net Book Value of Fixed Assets by cost centres	281,739	49,609	40,127	33,525	--	--	405,000
5. Bases for recovery of overhead	Direct Labour Costs	Direct Labour Hours	Total Material Costs	Cost of production
6. Total Amount of each overhead recovery base for Fiscal Year 1983	440,000	100,000 hours	650,000	3,700,000
7. Amount of each overhead recovery base for Fiscal Year 1983 allocated to this contract	110,000	600 hours	125,000	484,000
8. Percentage of Line 7 to Line 6	25.0%	0.6%	19.2%	13.1%
9. Net Book Value of Fixed Assets Applicable to this contract in Fiscal Year 1983. Line 8 x Line 4	70,435	298	7,704	4,392			82,829
FIXED CAPITAL EMPLOYED APPLICABLE TO THIS CONTRACT							82,829

Summary

Fixed Capital	Amount
Fixed Capital Employed Applicable to this Contract - F/Y 1982	$69,366
Fixed Capital Employed Applicable to this Contract - F/Y 1983	$82,829
Total	$152,195

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Example 3 - Assumptions:

Contract is for Repair and Overhaul in Plant and by Mobile Repair Party (MRP)

Bases of Payment are:

Cost Centre	Basis of Payment
Repair and Overhaul in Plan	- Fixed Time Rate
Mobile Repair Party	- Fixed Time Rate
Company Furnished Materials	- Actual Costs plus Mark Up
Accountable Advances (AA) Spares Embodied	- Mark Up only

Contract Period is 12 months.

Total Negotiated Contract Costs are:

Cost Centre	Labour Cost	Negotiated Contract Cost
Company Furnished Materials		$300,000
AA Spares Embodied		(450,000)
In-Plant Repair and Overhaul:
Direct Labour	30,000 hours @ $9 per h	270,000
Overhead	30,000 hours @ $18 per h	540,000
Mobile Repair Party
Direct Labour	300 hours @ $9 per h	2,700
Overhead	300 hours @ $9 per h	2,700
Material Handling
On Company Furnished Materials	$300,000 @ 5%	15,000
On AA Spares Embodied	$450,000 @ 5%	22,500
G & A
On Company Furnished Materials	$300,000 @ 10%	30,000
On AA Spares Embodied	$450,000 @ 10%	45,000
On In-Plant Repair and Overhaul	$810,000 @ 10%	81,000
On MRP	$5,400 @ 10%	540
On Material Handling Costs	$37,500 @ 10%	3,750
Total Contract Costs		$1,313,190

Examples of Profit Calculations

Summary of Contract Costs		$	$
(a) Company Furnished Materials
Laid Down Costs		300,000
Plus 5% Material Handling		15,000
		315,000
Plus 10% G & A		31,500	346,500
(b) Accountable Advance Spares Embodied:
Laid Down Costs		(450,000)
Plus 5% Material Handling		22,500
		472,500
Plus 10% G & A		47,250	69,750
(c) Repair and Overhaul:
Labour 30,000 hours	@ $27.00 per hour	810,000
Plus 10% G & A	2.70	81,000	891,000
Costing Rate	29.70
(d) Mobile Repaid Party:
Labour 300 hours	@ $18.00 per hour	5,400
Plus 10% G & A	1.80	540	5,940
Costing Rate	19.80	Total	1,313,190
Company Furnished Materials			300,000
Direct Labour			272,700
Plant Overhead			542,700
Material Handling Overhead			37,500
			1,152,900
G & A			160,290
Total			1,313,190

Fixed Capital Employed applicable to the contract is $130,209 (see Example 1 in this Annex) broken down as follows:

Cost Centre	Amount	Percentage	Fixed Capital Employed
Company Furnished Materials	$346,500	27.8%	$36,198
Repair and Overhaul	891,000	71.7%	93,360
Mobile Repair Party	5,940	0.5%	651
Total	$1,243,440	100.0%	$130,209

Latest Bond Rate published by the Director, Acquisition Program Integrity Secretariat (APIS), is 10%.

Working Capital Employed applicable to the contract is $290,376 (see Example 1 in Annex 10.2), broken down as follows:

Cost Centre	Amount	Percentage	Working Capital Employed
Company Furnished Materials	$346,500	27.8%	$80,724
Repair and Overhaul	891,000	71.7%	208,200
Mobile Repair Party	5,940	0.5%	1,452
Total	$1,243,440	100.0%	$290,376

Latest Chartered Bank Prime Rate published by the Director, APIS, is 11%.
The contractor has been performing this or similar Repair and Overhaul work for a number of years, and the contract price was negotiated and agreed to prior to work commencing. As a result, the rate for contractual risk on the fixed time rate work is assessed at 3%.

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Profit on Company Furnished Materials

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit Amount $
Return on Capital Employed	Fixed Capital Employed	36,198	1.7 x 10%	6,154
	Working Capital Employed Applicable to Contract	80,724	11	8,880
	Total	116,922		15,034
General Business Risk	Direct Materials	300,000	1.5	4,500
	Material Handling Overhead	15,000	4	600
	G & A	31,500	4	1,260
	Total Costs	346,500		6,360
Contractual Risk	Cost Reimbursable - No Ceiling	300,000	0	--
	Material Handling Overhead and G & A - Fixed Rates	46,500	3	1,395
	Total Costs	346,500		1,395
Total Profit = 6.6% of Total Costs			$22,834
Mark Up for Company Furnished Materials
Laid Down Cost		$100.00
Material Handling @ 5%		5.00
		105.00
G & A @ 10%		10.50
		115.50
Profit @ 6.6%		7.62
Mark Up 23.12%		$123.12

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Profit on Accountable Advance Spares Embodied

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit $
Return on Capital Employed	N/A	--	--	--
General Business Risk	General AA Spares	450,000	2	9,000
	Material Handling Overhead	22,500	4	900
	G & A	47,250	4	1,890
	Total Costs	519,750		11,790
Contractual Risk	Cost Reimbursable - No Ceiling Risk Price Basis of Payment	519,750	0	--
Total Profit = 2.3% Total Costs			$11,790
Mark Up for AA Spares Embodied
Laid Down Costs		$100.00
Material Handling @ 5%		5.00
		105.00
G & A @ 10%		10.50
		115.50
Profit @ 2.3%		2.66
Mark Up 18.25%		$118.16

Profit on Repair and Overhaul

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit Amount $
Return on Capital Employed	Fixed Capital Employed Applicable to Contract	93,360	1.7 x 10%	15,871
	Working Capital Employed Applicable to Contract	208,200	11	22,902
	Total Capital Employed	301,560		38,773
General Business Risk	Direct Labour	270,000	4	10,800
	Plan Overhead	540,000	4	21,600
	G & A	81,500	4	3,240
	Total Costs	891,000		35,640
Contractual Risk	Fixed Time Rate Basis of Payment	891,000	3	26,730
Total Profit = 11.4% of Total Costs			$101,143
Fixed Time Rate for Repair and Overhaul
Direct Labour		$9.00 per hour
Plant Overhead		18.00 per hour
		27.00 per hour
G & A @ 10%		2.70 per hour
		29.70 per hour
Profit @ 11.4%		3.39 per hour
Selling Price		$33.09 per hour

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Profit on Mobile Repair Party

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit Amount $
Return on Capital Employed	Fixed Capital Employed Applicable to Contract	651	1.7 x 10%	111
	Working Capital Employed Applicable to Contract	1,452	11	160
	Total Capital Employed	2,103		271
General Business Risk	Direct Labour	2,700	4	108
	Plan Overhead	2,700	4	108
	G & A	540	4	22
	Total Costs	5,940		238
Contractual Risks	Fixed Time Rate Basis of Payment	5,940	3	178
Total Profit = 11.6% of Total Costs			$687
Fixed Time Rate for Mobile Repair Party
Direct Labour		$9.00 per hour
Plant Overhead		9.00 per hour
		18.00 per hour
G & A @ 10%		1.80 per hour
Costing Rate		19.80 per hour
Profit @ 11.6%		2.30 per hour
Selling Price		$22.10 per hour

Profit Summary

	Company Furnished Material $	AA Spares Embodied $	Repair and Overhaul $	Mobile Repair Party $	Total $
Total Costs	346,500	69,750	891,000	5,940	1,313,190
Return on Capital Employed % of Total Costs	15,034 4.3%	--	38,773 4.4%	271 4.6%	54,078 4.1%
General Business Risk % of Total Costs	6,360 1.8%	11,790 16.6%	35,640 4.0%	238 4.0%	54,028 4.1%
Contractual Risk % of Total Costs	1,395 0.4%	--	26,730 3.0%	178 3.0%	28,303 2.2%
Total/All Factors % of Total Costs	22,789 6.6%	11,790 16.6%	101,143 11.4%	6,871 1.6%	136,409 10.4%

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Example 4 - Assumptions:

The contract is for the design, manufacture and supply of 24 widgets.
The basis of payment is a firm unit price per widget.
The contract performance period is 18 months.

Total negotiated Contract Costs are:

Cost Centre	Negotiated Contract Cost
Direct Materials	$200,000
Subcontracts	40,000
Direct Labour	254,000
Overhead	340,000
G & A Overhead	116,000
Royalties	10,000
Total	$960,000

Fixed Capital Employed applicable to the contract is $152,195 (see Example 2 in this Annex).
The latest Bond Rate published by the Director, Acquisition Program Integrity Secretariat (APIS), is 10%.
Working Capital Employed applicable to the contract is $298,667 (see Example 2 in Annex 10.2).
The latest Chartered Bank Prime Rate published by the Director, APIS, is 11%.
The widgets are of a completely new design, as requested by the government, and the contractor is assuming maximum risk in agreeing to a firm price. However, the price was only reached 3 months after the commencement of work. Therefore, the rate of profit for contractual risk was assessed at 6.5%.

The G & A overhead contains an amount of $20,000 for allowable Research and General Development.

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit Amount $
Return on Capital Employed	Fixed Capital Employed Applicable to Contract	152,195	1.7 x 10%	25,873
	Working Capital Employed Applicable to Contract	298,667	11	32,852
	Total Capital Employed	450,862		58,726
General Business Risk	Direct Materials	200,000	1.5	3,000
	Subcontracts	40,000	2	800
	Direct Labour	254,000	4	10,160
	Overhead	456,000	4	18,240
	Other Allowable Costs (Royalties)	10,000	--	--
	Total Allowable Costs	960,000		32,200
Contractual Risk	Total Allowable Costs less Royalties	950,000	6.5	61,750
Total Profit = 15.9% of Total Costs			$152,676
Total Cost		$960,000
Profit		152,676
Total		$1,112,676
		= $46,361.50 per widget

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Annex 10.2: Examples to Determine the Working Capital Employed

(2010-01-11)

Contracts of $250,000 and more

Examples of Calculation

Example 1 - Assumptions:

The contract period is 12 months.
Total contract costs are $1,313,190 of which $26,500 is for depreciation.
Costs incurred are on an even basis month by month.
Progress payments at 85% are paid monthly.
The time between forwarding the invoice and receipt of payment is 1 month.

Month	Allowable Contract Cost excluding Depreciation $	Contract Revenue Less Profit $	Monthly Working Capital Employed $	Cumulative Monthly Working Capital Employed $
1	107,224	--	107,224	107,224
2	107,224	--	107,224	214,448
3	107,224	93,017	14,207	228,655
4	107,224	93,018	14,206	242,861
5	107,224	93,017	14,207	257,068
6	107,224	93,018	14,206	271,274
7	107,224	93,017	14,207	285,481
8	107,224	93,018	14,206	299,687
9	107,224	93,017	14,207	313,894
10	107,224	93,018	14,206	328,100
11	107,224	93,017	14,207	342,307
12	107,206	93,018	14,208	356,515
13	--	93,017	(93,017)	263,498
14	--	289,998	(289,998)	(26,500)
	1,286,690	1,313,190	(26,500)	3,484,512

Working Capital Employed Applicable to the Contract for profit purposes -
$3,484,512 ÷ 12 = $290,376

Example 2 - Assumptions:

Contract period is 18 months.
Contract is for the design, manufacture and supply of 24 widgets at a cost per widget of $40,000 for total costs of $960,000.
The total costs include an amount of $84,000 for depreciation.
Costs are incurred on a month by month basis as shown in the attached schedule.
Invoices are made on delivery and the delivery schedule is as follows:
1 widget in each of the 8^th, 9^th and 10^th months.
2 widgets in each of the 11^th and 12^th months.
3 widgets in each of the 13^th through 17^th months inclusive.
2 widgets in the 18^th month.

The time between forwarding the invoice and receipt of payment is 1 month.

Month	Allowable Contract Cost excluding Depreciation $	Contract Revenue Less Profit $	Monthly Working Capital Employed $	Cumulative Monthly Working Capital Employed $
1	24,000	--	24,000	24,000
2	24,000	--	24,000	48,000
3	30,000	--	30,000	78,000
4	30,000	--	30,000	108,000
5	40,000	--	40,000	148,000
6	40,000	--	40,000	188,000
7	60,000	--	60,000	248,000
8	60,000	--	60,000	308,000
9	60,000	40,000	20,000	328,000
10	60,000	40,000	20,000	348,000
11	70,000	40,000	30,000	378,000
12	70,000	80,000	(10,000)	368,000
13	60,000	80,000	(20,000)	348,000
14	60,000	120,000	(60,000)	288,000
15	60,000	120,000	(60,000)	228,000
16	50,000	120,000	(70,000)	158,000
17	40,000	120,000	(80,000)	78,000
18	38,000	120,000	(82,000)	(4,000)
19	--	80,000	(80,000)	(84,000)
	876,000	960,000	(84,000)	3,584,000

Working Capital Employed Applicable to the Contract for profit purposes -
$3,584,000 ÷ 12 = $298,667

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Annex 10.3: Examples of Profit Calculations

(2010-01-11)

Negotiated Contracts with total costs between $50,000 and $249,999

Example 1 - Assumptions:

The contract is for the investigation of certain phenomena and the preparation and delivery of a report.
The basis of payment is cost reimbursable with a fixed fee.
The contractor performance period is 10 months.

The Estimated Contract Costs are:

Cost Centre	Contract Cost
Direct Materials	$500
Subcontracts	$20,000
Direct Labour	$40,000
Overhead	$40,000
Total	$100,500

No machinery or equipment owned by the contractor is used in performance of the contract.
No advance, progress or milestone payments are to be made to the contractor.
The contractor has little familiarity with the work to be performed from past experience and the fixed fee was agreed before the work on the contract commenced, therefore the maximum of 1% for Contractual Risk has been given.

No research and general development nor product development costs are applicable and allowable to the contract.

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit $
Return on Capital Employed	Fixed Capital Employed	N/A		--
Return on Capital Employed	Working Capital Employed (No advance, progress or milestone payments)	100,500	3	3,015
General Business Risk	Direct Materials	500	1.5	8
	Subcontracts	20,000	2	400
	Direct Labour	40,000	4	1,600
	Overhead	40,000	4	1,600
	Total Allowable Costs	100,500		3,608
Contractual Risk	Total Allowable Costs	100,500	1	1,005
Total Profit = 7.6% of Total Costs				$7,628
Amount of Fixed Fee				$7,628

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Example 2 - Assumptions:

Contract is for Repair and Overhaul in Plant.

Basis of Payment are:

Cost Centre	Basis of Payment
Repair and Overhaul in Plant	- Fixed Time Rate
Company Furnished Materials	- Actual Costs plus Mark Up
Accountable Advance Spares Embodied	- Mark Up Only

Contract Period is 12 months.

Total Negotiated Contract Costs are:

Cost Centre	Labour Cost	Negotiated Contract Cost
Company Furnished Materials		$50,000
A.A. Spares Embodied	$100,000
In Plant Repair and Overhaul:
Direct Labour	5,000 hours @ $8 per hour	40,000
Overhead	5,000 hours @ $16 per hour	80,000
Material Handling
On Company Furnished Materials	$50,000 @ 6%	3,000
On A.A. Spares Embodied	$100,000 @ 6%	6,000
G & A
On Company Furnished Materials	$50,000 @ 9%	4,500
On A.A. Spares Embodied	$100,000 @ 9%	9,000
On In Plant Repair and Overhaul	$120,000 @ 9%	10,800
On Material Handling Costs	$9,000 @ 9%	810
Total Contract Costs		$204,110

Summary of Contract Costs	$	$	$
a) Company Furnished Materials:
Laid Down Costs		50,000
Plus 6% Material Handling		3,000
		53,000
Plus 9% G & A		4,770	57,770
b) Accountable Advance Spares Embodied:
Laid Down Costs (LDC)	100,000
Plus 6% Material Handling (MH) on LDC		6,000
Plus 9% G & A on LDC plus MH		9,540	15,540
c) Repair and Overhaul:
Labour 5,000 hours @ $24 per hour		120,000
Plus 9% G & A		10,800	130,800
Total			204,110
Company Furnished Materials			50,000
Direct Labour			40,000
Plant Overhead			80,000
Material Handling Overhead			9,000
			179,000
G & A			25,110
Total			204,110

Machinery and equipment owned by the contractor is used in performance of the contract.
Progress payments are to be made on the contract.
The duration of the contract is twelve months and no difficulty has been experienced in predicting labour and overhead rates. Furthermore, the fixed time rate was only negotiated and agreed two months after work commenced. Therefore the rate of profit for Contractual Risk is assessed at 22%.

No research and development costs are applicable and allowable on the contract.

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit $
Return on Capital Employed	Fixed Capital Employed	57,770	1	578
	Working Capital Employed (Progress Payments to be made)	57,770	1.5	867
		Total		1,445
General Business Risk	Direct Materials	50,000	1.5	750
	Material Handling Overhead	3,000	4	120
	G & A	4,770	4	191
	Total Allowable Costs	57,770		1,061
Contractual Risk	Material Cost Reimbursable No Ceiling	50,000	0	--
	Material Handling Overhead and G & A Fixed Rates	7,770	2.5	194
	Total Costs	57,770		194
Total Profit= 4.7% of Total Costs				$2,700
Mark Up to CF Materials
Laid Down Cost		$100.00
Material Handling @ 6%		6.00
		106.00
G & A @ 9%		9.54
		115.54
Profit @ 4.7%		5.43
Mark Up 21%		$120.97

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Profit on A.A. Spares Embodied

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit Amount $
Return on Capital Employed	Fixed Capital Employed	N\A	--	--
Return on Capital Employed	Working Capital Employed	N\A	--	--
General Business Risk	A.A. Spares	100,000	2	2,000
	Material Handling Overhead	6,000	4	240
	G & A	9,540	4	382
	Total Allowable Costs	115,540	--	2,622
Contractual Risk	Cost Reimbursable - No Ceiling Basis of Payment	--	--	--
Total Profit= 2.3% of Total Costs			$2,622
Mark Up for A.A. Spares Embodied
Laid Down Cost		$100.00
Material Handling @ 6%		6.00
		106.00
G & A @ 9%		9.54
		115.54
Profit @ 2.3%		2.66
Mark Up 18.2%		$118.20

Profit on Repair and Overhaul

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit Amount $
Return on Capital Employed	Fixed Capital Employed	130,800	1	1,308
	Working Capital Employed (Progress Payments to be made)	130,800	1.5	1,962
		Total		3,270
General Business Risk	Direct Labour	40,000	4	1,600
	Plant Overhead	80,000	4	3,200
	G & A	10,800	4	432
	Total Costs	130,800		5,232
Contractual Risk	Fixed Time Rate Basis of Payment	130,800	2.5	3,270
Total Profit = 9.0% of Total Costs			$11,772
Fixed Time Rate for Repair and Overhaul
Direct Labour		$8.00 per hour
Plant Overhead		16.00 per hour
		24.00 per hour
G & A @ 9%		2.16 per hour
Costing Rate		26.16 per hour
Profit @ 9.0%		2.35 per hour
Selling Rate		$28.51 per hour

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Profit Summary

	Company Furnished Material $	AA Spares Embodied $	Repair and Overhaul $	Total $
Total Costs	57,770	15,540	130,800	204,110
Return on Capital Employed	1,445	--	3,270	4,715
% of Total Costs	2.5%	--	2.5%	2.3%
General Business Risk	1,061	2,622	5,232	8,915
% of Total Costs	1.8%	16.9%	4.0%	4.4%
Contractual Risk	194	--	3,270	3,464
% of Total Costs	3.4%	--	2.5%	1.7%
Total all Factors	2,700	2,622	11,772	17,094
% of Total Costs	4.7%	16.9%	9.0%	8.4%

Example 3 - Assumptions:

The contract is for the manufacture and supply of 180 widgets.
The basis of payment is a firm unit price per widget.
The contract performance period is 9 months.

The Negotiated Contracts Costs are:

Cost Centre	Negotiated Contract Cost
Direct Materials	$15,000
Direct Labour	20,000
Overhead	45,000
G & A	10,000
Subtotal	90,000
Royalties	3,000
Total	$93,000

Machinery and equipment owned by the contractor is used in performance of the contract.
No advance, progress or milestone payments are to be made to the contractor.

The contractor has manufactured these particular widgets, which are to his own specifications, for a number of years. As a result a reasonable rate contractual risk is considered to be 5.5%.

Profit Factor	Measurement Base
	Details	Amount $	Profit Rate %	Profit $
Return on Capital Employed	Fixed Capital Employed	90,000	1	900
	Working Capital Employed (No advance, progress or milestone payments)	90,000	3	2,700
	Total			3,600
General Business Risk	Direct Materials	15,000	1.5	225
	Direct Labour	20,000	4	800
	Overhead	45,000	4	1,800
	G & A	10,000	4	400
	Royalties	3,000	c	--
	Total Costs	93,000		3,225
Contractual Risk	Total Allowable Costs less Royalties	90,000	5.5	4,950
Total Profit = 12.7% of Total Costs			$11,775
Total Cost			$93,000
Profit			11,775
			$104,775
			= $582.08 per widget

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Annex 10.4: Reasons for the non-applicability of certain costs when utilizing Contract Cost Principles 1031-2

(2010-01-11)

The following costs are considered non-applicable to government contracts when utilizing contract cost principles 1031-2 for the reasons given.

Allowances for interest on invested capital, bonds, debentures, bank or other loans together with related bond discounts and finance charges.
Interest on borrowing, however represented, is not an acceptable cost. There are several reasons for this. In the first place, it is impossible to know how much of a contractor's capital should be properly provided by equity capital and how much by borrowed capital. If it were fair to allow interest on the borrowed capital (the financial reward to the lender), it would also seem fair to allow dividends (the financial reward to the investor). As dividends are recognized as a distribution of profits and therefore not an item of cost, so too with interest. Another consideration is the determination of what a contractor's capital properly should be, regardless of what it may actually happen to be. If interest were to be an acceptable cost, then a contractor financed by bonds, debentures or long term loans would be in an advantageous position compared to a contractor financed by the sale of equity. The government recognizes the cost-of-money (interest) associated with capital employed, however financed, as a factor in the calculation of profit.
Legal, accounting and consulting fees in connection with financial re-organization, security issues, capital stock issues, obtaining of patents and licences and prosecution of claims against Canada.
A distinction should be drawn between the occasional expenses in relation to the raising of capital referred to here, which are not an acceptable cost, and the normal recurring expenses associated with the day-to-day management and recording of capital transactions, which are an acceptable cost. The latter expenses include those arising from the registry and transfer of share capital when they form part of the activity of the company secretary, costs of share holders' meetings, normal proxy solicitations, reports to shareholders, submission of required reports to government agencies, reasonable directors' fees and incidental expenses of directors and for committee meetings.
Losses on investments, bad debts and expenses for the collection thereof
Since interest on capital invested in a contractor's business is not considered a business operating cost, neither is interest received by a contractor from funds invested outside the business considered a necessary credit against business operating costs. However, it also follows that any losses sustained by a contractor from these outside investments are not considered to be a business operating cost and thus are not acceptable on government contracts.

Since the government as a debtor always pays its just debts, while it is only the commercial customers who have bad debts on a contractor's books, the losses due to bad debts and the expenses of collection thereof are not an acceptable cost to government contracts.
Losses on other contracts
An excess of costs over income on a contract is not acceptable as a cost to any other contract. This principle also applies to application by a contractor of preferred overhead rates to certain contracts. Where this occurs, the excess of actual overhead over the preferred overhead amount will not be absorbed by government contracts.
Federal and provincial income taxes, excess profit taxes or surtaxes and/or special expenses in connection therewith
In general, taxes which a contractor is required to pay and which are computed in accordance with sound accounting principles are acceptable costs, except for those included under this heading and/or other taxes in connection with financing, refinancing or re-organizing.

On the other hand, all tax refunds, federal or provincial, are not required to be applied to reduce any related expenses.
Provisions for contingencies
A contingency liability is a liability which could arise on the happening of some event which may or may not occur. The initial provision or increase of funding for a contingent liability is considered to be a setting aside of earned profits to meet possible liabilities against future profits and not a business operating cost and therefore not an acceptable cost to government contracts.

There is one exception to the above and that is in respect of the acceptability of costs for the provision of warranties. In any firm price contract, a contractor may include as a cost a reasonable amount to be set aside as a provision for the absorption of expenses associated with warranties given under the terms of the contract. In determining a reasonable amount, the following factors should be taken into account:
1. the amounts provided for warranty expenses should be separate for each distinctive product or family of products;
2. the amounts provided should reflect, where available, the previous performance of the product(s) in regard to warranty, using an average of three to five years;
3. the cost of any provision for warranty charged to a specific contract should reflect any difference in the warranty period from that normally granted by a contractor on the product(s); and
4. the costs should be net of any warranty contract sales to other customers.
Premiums for life insurance on the lives of officers and/or directors where proceeds accrue to the contractor.
Similarly, proceeds from such life insurance need not be applied to reduce any cost to the contractor.

Premiums on this type of insurance are not acceptable in government contracts since Canada does not derive any benefit therefrom.
Amortization of unrealized appreciation of assets.
See Annex 10.5.2, "Depreciation".
Depreciation of assets paid for by Canada.
See Annex 10.5.2, "Depreciation".
Fines and penalties.
The amounts of fines and penalties imposed by federal, provincial or local authorities are not an acceptable cost to government contracts, for to accept such amounts would be tantamount to the government's supporting financially the offense which gives rise to the imposition of a fine or penalty.
Expenses and depreciation of excess/idle facilities.
For this purpose, excess/idle facilities means the sum of all fixed assets appearing in a contractor's books of account which are not in use or for which no use is anticipated within a reasonable period. The expenses associated with the maintenance and/or the amounts of depreciation attributable to such fixed assets are not acceptable costs to government contracts.

The expenses and/or depreciation of excess/idle facilities, as defined above, which the government has ordered retained for defence purpose, should be charged to a separate contract set up for that purpose.
Unreasonable compensation for officers and employees.
The extra costs associated with the above are not an acceptable charge to government contracts.
Product development or improvement expenses not associated with the product being acquired under the contract.
See Annex 10.5.7, "Research and Development Expenses".
Advertising, except reasonable advertising of an industrial or institutional character placed in trade, technical or professional journals for the dissemination of information for the industry or institution.
1. Assuming that a contractor's employees enhance their knowledge by reading trade, technical or professional journals, and, in turn, government contracts benefit from this increased knowledge by way of increased efficiency and productivity, and that the advertising supports these publications, the expenses of advertising in this manner are an acceptable cost to government contracts, provided:
  - it is in the nature of institutional or support advertising only, and not in the form of display advertising;
  - it does not advertise a particular product or service of a contractor;
  - it is placed in trade, technical or institutional journals (financial publications are primarily for investors, not for an industry or trade; and so do not qualify); and
  - the cost is reasonable.
2. Expenses associated with the help wanted advertisements are an acceptable cost, provided they are reasonable and only for the purpose of recruiting personnel.
3. The expenses associated with advertising through any media for other than (1) and (2) above, are not an acceptable cost to government contracts. For this purpose, advertising media are: magazines, newspapers, television and radio programs or "commercials", brochures, direct mail, outdoor advertising, conventions, exhibits, free goods and samples.
Entertainment expenses.
Although expenses for amusement, diversion, social activities and incidentals relating thereto are not acceptable, the expenses associated with meetings and conferences, when called for the dissemination of technical information or discussion of production problems and the like, are acceptable. These latter expenses may include those for meals, transportation, rental of meeting places and other incidentals provided they are reasonable.
Donations, except those to charities registered under the Income Tax Act.
Donations, except those to political parties, are an acceptable cost provided they comply with the Income Tax regulations and are taken into overhead in the period they are paid rather than pledged.
Dues and other memberships other than regular trade and professional associations.
The expenses associated with membership, either of the company as a whole or individual officers or employees in associations whose prime purpose is to provide entertainment or recreation, are not an acceptable cost to government contracts.
Fees, extraordinary or abnormal, for professional advice in regard to technical, administrative or accounting matters, unless approval from the Contracting Authority is obtained.
The fees associated with obtaining this assistance are not an acceptable cost, unless a contractor demonstrates, to the satisfaction of the contracting officer, the circumstances giving rise to the need for this assistance.

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Annex 10.5.1: Cost Interpretation Bulletin - Number 01

(2010-01-11)

Excess Facilities

Section 07 (k) of Contract Cost Principles 1031-2 provides that the expenses and depreciation of excess facilities shall be considered non-applicable costs to the contract.

This Bulletin explains the costs that should be considered for the purpose of the application of the above section.

Definition

For the purpose of this Bulletin:

"Facilities" in this context 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.

Interpretation

The costs that are associated with facilities that are excess to the contractor's current needs should be examined to determine if these costs are non-applicable.

In examining these costs, the following factors should also be considered:

Vacant, or largely vacant space;
Inactive or unused equipment;
Idle capacity required for stand-by purposes;
Indirect supporting staff no longer required either in full or part;
Other costs such as maintenance, repair, rent, property taxes, insurance, depreciation, etc.;
Management costs that should be reduced because of the reduction in active facilities.

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Annex 10.5.2: Cost Interpretation Bulletin - Number 02

(2010-01-11)

Depreciation

Section 04 (2) (e) of Contract Cost Principles 1031-2 provides that Indirect Costs (Overhead) may include a reasonable provision for depreciation.

This Bulletin explains what is meant by a reasonable provision for depreciation for the purpose of the application of the above section.

Definitions

For the purpose of this Bulletin:

"Depreciation" is the gradual exhaustion of the service capacity of fixed assets which is not restored by maintenance practices. It is the consequence of such factors as use, obsolescence, inadequacy, and decay.

"Depreciation Base" is the asset laid down cost less estimated residual value, if any, plus applicable costs of installation and preparation for use.

"Depreciation Accounting" is an accounting procedure in which the cost of a fixed asset less the estimated residual value, if any, is distributed over its estimated useful life in a systematic and rational manner.

"Renewal (Replacement) Accounting" is the accounting procedure in which no charge for expense is made for a fixed asset until replacement occurs; the cost of the replacement rather than the cost of the original asset is then charged to expense.

"Retirement Accounting" is an accounting procedure in which no charge to expense is made for a fixed asset until it is removed from service; the original cost is charged to overhead in the year the asset is retired.

"Capital Cost Allowance" is a deduction, akin to depreciation, allowed in computing income for tax purposes.

"Straight Line Depreciation" is the depreciation amount computed by dividing the depreciation base by the estimated number of periods of service life.

"Diminishing, Declining or Reducing Balance Depreciation" is the depreciation amount computed by a constant fraction of the depreciated cost so that the depreciation base is written off by the estimated date of retirement.

"Production Depreciation" is the depreciation amount computed by that portion of the depreciation base that the production, or use during the period, bears to the total estimated production or use to be obtained from the asset.

"Sum-of-the years'-digits Depreciation" is the depreciation amount whereby the depreciation base is allocated to the individual years on a reducing basis, by multiplying it by a fraction in which the numerator is the number of years + 1 of estimated life remaining, and the denominator is the sum of the series of numbers representing the years in the total estimated life.

"Asset Laid Down Cost" is the cost incurred by a contractor to acquire an asset. This includes the supplier's invoice price (less trade discount) plus any applicable charges for transportation, exchange, customs duties, brokerage duties and applicable taxes.

Interpretation

To be considered reasonable any provision for depreciation should be determined in accordance with the following.

The amount should be calculated using one of the following methods on a consistent basis:
- a. Capital Cost Allowance;
- b. Straight Line;
- c. Diminishing, Declining or Reducing Balance;
- d. Production;
- e. Sum-of-the-years' digits.
but for this purpose the following two methods are not acceptable:
- f. Renewal (Replacement) Accounting; and
- g. Retirement Accounting.
The amount calculated using Capital Cost Allowance (CCA) rates should be no higher than the basic CCA rates published by Canada Revenue Agency (CRA) for income tax purposes. From time to time, CRA permits the use of accelerated CCA rates for income tax purposes, but they are not permitted for 1031-2 purposes.
The total amount of depreciation for any one asset should not exceed 100 percent of that asset's original cost.
In general, depreciation should be calculated and included in the cost of production only for accounting periods subsequent to the asset being put into use. During the first year of use, the depreciation amount may be based on the exact fraction of the fiscal year, or by using the half-year convention, if that is the contractors practice. This latter method assumes that all capital acquisitions take place at mid-year.
Assets purchased specifically for use on contracts should be capitalized and depreciated using the contractor's normal method, unless title is taken by Canada, or Canada pays for the asset under an Assistance Program.
Canada's funding in any form, including direct or indirect benefits such as the investment tax credits and contribution for capital assistance, should be accounted for using the cost reduction approach. The amount of all such funds received by, or credited to the contractor's account should be deducted from the related purchase price of the assets, with any depreciation or amortization calculated on the net amount.
Leasehold improvement costs are similar to capital additions and for depreciation purposes should be amortized over the lesser of the expected useful life of the leasehold improvement or the non-renewable term of the lease.

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Annex 10.5.3: Cost Interpretation Bulletin - Number 03

(2010-01-11)

Lease Costs

Under the terms of Contract Cost Principles 1031-2 lease costs are applicable costs for inclusion in a contractor's overhead or as direct charge to the contract, if they are reasonable.

This Bulletin explains what is meant by reasonable lease costs.

Definitions

For the purpose of this Bulletin:

"Lease" is the conveyance by a lessor to a lessee of the right to use a tangible asset usually for a specific period of time in return for rent.

"Operating Lease" is a lease in which the lessor does not transfer substantially all the benefits and risks incident to the ownership of the property.

"Capital Lease" is a lease that transfers substantially all the benefits and risks incident to ownership from the lessor to the lessee.

"Executory Costs" are costs related to the operation of the leased property (e.g. insurance premiums, maintenance costs, and property taxes).

"Interest Rate Implicit in the Lease" is the discount rate that, at the inception of the lease, causes the aggregate present value of:

the minimum lease payments excluding that portion of the payments representing executory costs to be paid by the lessor and any profit on such costs; and
the unguaranteed residual value accruing to the benefit of the lessor, to be equal to the fair value of the leased property to the lessor at the inception of the lease.

"Rate for incremental borrowing" is the interest rate that, at the inception of the lease, the lessee would have incurred to borrow, over a similar term and with similar security for the borrowing, the funds necessary to purchase the leased asset.

"Unguaranteed Residual Value" is that portion of the residual value of leased property which is not guaranteed or is solely guaranteed by a related party to the lessor.

Interpretation

To be considered reasonable any lease cost should be determined in accordance with the following.

The type of lease must be correctly identified as either an operating lease or a capital lease. In the case of an operating lease, the actual rental cost paid is considered to be a reasonable cost. In the case of a capital lease, the depreciation amount calculated on the capitalized value of the asset in the lease over the lease term or economic life of the asset, is considered to be a reasonable cost.
A lease should be classified as a capital lease if one of the following criteria are met:
1. the lease specifies the transfer of the property to the lessee by the end of the lease term; or
2. the lease contains a bargain purchase option; or
3. the lease term is such that the lessee will receive substantially all of the economic benefits from the use of the leased property over its life span, which will normally occur if the lease term covers 75% or more of the economic life of the leased property; or
4. the present value of the minimum lease payments, excluding any executory costs, is equal to substantially all (usually 90% or more) of the fair value of the leased property at the inception of the lease; the discount rate to be used in determining the present value of the minimum lease payments for this purpose should be the lower of the lessee's rate for incremental borrowing and the interest rate used in the lease, if known.
For a capital lease, the value at which it will be capitalized should be the lower of the present value of the minimum lease payments as described in 2 d) or the fair value of the asset (usually this is the purchase value of the asset).

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Annex 10.5.4: Cost Interpretation Bulletin - Number 04

(2010-01-11)

Travel Costs

Under the terms of Contract Cost Principles 1031-2 reasonable travel costs are applicable costs for inclusion in a contractor's overhead or as a direct charge to contract.

This Bulletin explains the conditions to be met before any specific travel costs are charged directly to the contract.

Definition

For the purpose of this Bulletin:

"Travel Costs" are the costs for transportation, lodging, meals and incidental expenses incurred by a contractor's personnel on official company business. 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.

Interpretation

In order for travel costs to be acceptable as direct costs to a contract, the following conditions must be met:
1. such costs are directly attributable to the performance of the work under the contract;
2. the practice of charging travel costs to a contract is consistently followed in the costing of both government and non-government work; and
3. all directly charged travel costs are eliminated from indirect costs allocated to government contracts.
A reasonable amount/percentage may be added to travel costs allocated directly to a contract to cover applicable G & A costs, provided it is the contractor's usual and consistent practice to do so.

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Annex 10.5.5: Cost Interpretation Bulletin - Number 05

(2010-01-11)

Head Office Expense

Under the terms of Contract Cost Principles 1031-2 expenses allocated to a contractor which is a segment of an organization by the Head Office of that organization are applicable costs for inclusion in the contractor's overhead provided that the amount allocated is reasonable.

This Bulletin explains the method to be used in the allocation of Head Office expenses in order for the amount allocated to be considered reasonable.

Definitions

For the purpose of this Bulletin:

"Head Office" is an office responsible for the policy direction and management of two or more, but not necessary all, segments of an organization.

"Segment" is one of two or more branches, divisions, product departments, plants, or other subdivisions of an organization reporting directly to a parent/head office, usually identified with responsibility for profit and/or producing a product or service.

Interpretation

For the allocation of any expenses to be acceptable, a Head Office/Segment relationship must exist, generally with company policies describing the basis of allocation for these expenses.
For the allocation of the expenses to be considered reasonable all, or any combination of the following three methods should be used.
1. Directly Chargeable - Those expenses included within the Head Office expense pool to be allocated which can be identified as having been incurred specifically and totally for one particular segment. Such expenses should be allocated directly to the particular segment, to the extent practicable.
2. Separately Allocated - Those individual, or groups of expenses which are allocated only to a limited group of corporate segments. Such expenses are not usually incurred for specific segments but possess objective, measurable relationships to the segments and should be grouped in homogeneous pools for subsequent allocation on a basis which represents these objective, measurable relationships.
3. Residual - These represent the remaining expenses which are allocated to all, or most corporate segments on an overall basis. These expenses should be allocated to segments using a base or bases which represent the total activity of the segments (see 3. below).
  A three part exercise for allocation, as described above, would only be necessary where the dollars concerned were material. In less significant situations, a combination of the Directly Chargeable and the Residual methods might suffice. In low-dollar value situations, the Residual method alone might be appropriate.
There are many and varied bases which might be used to allocate residual expenses. However, to be accepted and considered reasonable, the base(s) selected must be representative and consistently applied to all segments of the organization. The following are examples of bases for allocation which are often used:
1. Number of personnel in each segment of the organization.
2. Dollar value of production in each segment of the organization.
3. Cost of goods sold in each segment of the organization.
4. Total sales in each segment of the organization.
Allocations derived from an arbitrary forecasted distribution base are not considered acceptable. Historical and present cost data used to derive the allocation base, along with future economic conditions should be considered and documented.

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Annex 10.5.6: Cost Interpretation Bulletin - Number 06

(2010-01-11)

Pension Costs

Section 04(2)(c) of Contract Cost Principles 1031-2 states in part, that "indirect costs may include such items as fringe benefits (the contractor's contribution only)" in overhead pools.

Pension costs are normally included as a fringe benefit in a contractor's overhead pools. This interpretation explains the determination and measurement of pension costs.

Definitions

For the purposes of this Bulletin:

"Actuarial Assumptions" are presumptions about future events that will affect pension costs and obligations. These include theories concerning mortality, withdrawal, disability, retirement, changes in compensation, interest on accrued pension benefits, investment earnings, and asset appreciation or depreciation.

"Actuarial Cost Methods" are methods used to determine the cost of providing pension plan benefits and to allocate that cost to specific time periods.

"Current Service Cost" is the cost of anticipated future retirement benefits accrued during any year usually determined on an actuarial basis; it represents the aggregate estimated cost for one year's service by each employee who is a member of the plan.

"Defined Benefit Pension Plan" specifies either the benefits to be received by employees after retirement or the method for determining those benefits.

"Defined Contribution Pension Plan" is one in which the employer's contributions are fixed, usually as a percentage of compensation, and allocated to specific individuals. The pension benefit for each employee is the amount that can be provided at retirement based on the accumulated contributions made on that individual's behalf and investment earnings on those contributions.

"Experience Gain or Loss" is the measure of the difference between the expected and actual experience of the plan.

"Past Service Cost" is the estimated cost of future retirement benefits accrued in the years prior to the adoption of a pension plan; these costs are normally charged to operations over a reasonable period of years.

"Pension Plan" is any arrangement (contractual or otherwise) by which a program is established to provide retirement income to employees.

Interpretation

The reasonableness of these proposed pension cost amounts should be determined in accordance with the following:

The terms and conditions of the plan are determinant factors in measuring the obligations.
The amount of pension cost for a cost accounting period is periodically determined by use of an actuarial cost method which measures separately each of the components of pension costs.
Each Actuarial Assumption used to measure pension cost must be separately identified and represent the contractor's best estimates of anticipated experience under the plan, taking into account past experience and reasonable expectations.
Either Defined Contribution Pension Plans or Defined Benefit Pension Plans are acceptable in the calculation of pension costs in accordance with Government Contract Cost Principles 1031-2.
Under Defined Contribution Pension Plans the employer's responsibility is simply to make a contribution each year based on the formula established in the plan. The pension cost for a cost accounting period will normally be the current and past service cost.

Accounting for Defined Benefit Pension Plans is quite complex, because the benefits are defined in terms of uncertain future variables, an appropriate funding pattern must be established to assure that enough funds will be available at retirement to meet the benefits promised. The pension cost for a cost accounting period will normally be the aggregate of current service, plus past service, plus interest, minus expected return on plan assets, plus or minus experience gains/losses.

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Annex 10.5.7: Cost Interpretation Bulletin - Number 07

(2010-01-11)

Research and Development Expenses

Paragraph 04 (02) (h) of Contract Cost Principles 1031-2 states that: "general research and development expenses as considered applicable by Canada" may be included in Indirect Costs (Overhead). Paragraph 7 (m) of Contract Cost Principles 1031-2 states that: "product development or improvement expenses not associated with the product being acquired under the contract" are considered non-applicable costs to the contract.

This Bulletin explains the difference between General Research and Development Expenses and Product Development or Improvement expenses in the light of these two sections of Contract Cost Principles 1031-2. It also explains the treatment required for each of the different type of expenses in a contractor's cost accounting practices for acceptability in contracts.

Definitions

For the purpose of this Bulletin:

"General Research and Development" is a planned investigation undertaken with the hope of gaining new scientific or technical knowledge and understanding. Such investigation may, or may not be directed towards a specific practical aim or application.

"Product Development and/or Improvement" is a systematic program of work, going beyond basic and applied research which is directed towards the creation of a new or improved product, system, component or material, substantially in a marketable form, but excluding any manufacture beyond completion of the new and improved product's prototype.

Interpretation

Company funded research and development should be divided into two distinct expenditure categories:
1. General Research and Development; and
2. Specific Product Development and/or Product Improvement.
General Research and Development
1. The expenditures relating to general research and development should be included in overhead and allocated to the contractor's total business activity which would exclude those items such as resale activity, warranty, etc., within the current fiscal year.
Specific Product - Product Development/Product Improvement
1. The Costs within these categories of research should not be included in overhead at the time it is incurred. Proper treatment of these expenditures would be to extract them from overhead pools and segregate these costs for later recovery against product sales.
2. Negotiators should consider, as an aspect of their negotiations, overhead applications to these product development costs. In the case of G & A overhead, either the costs are applied at the time that the Product Development Costs are incurred, or at the time the Product Development Costs are recovered against product sales. For guidance on the timing of application of G & A overhead costs, negotiators may look at other G & A recovery applications made to Product Development by the company.
3. The recovery of the contractor's product development costs should, in the majority cases, be accomplished through the amortization of these product development costs against the sales of the family of products to which the product development pertained.
4. The contractor may recover these expenses on the relevant product sales, including government sales, even if the related expenditures have been written off to the profit and loss account in the year originally incurred. However, in this case the contractor must maintain sufficient records to demonstrate the costs to be recovered and also to substantiate that these costs had not already been recovered in overhead.
The following are examples of activities that typically would be excluded from any general research and development and product development project:
1. engineering follow-through in an early production phase;
2. quality control during commercial production, including routine product testing;
3. trouble-shooting in connection with breakdowns during production;
4. routine, or periodic alterations to existing products, production lines, manufacturing processes, and other ongoing operations, even though such alterations may represent improvement;
5. adoption of an existing capability to a particular requirement, or customer's need, as part of a continuing commercial activity;
6. routine tools, jigs, mould, and dies design;
7. activity, including design and construction engineering, related to the construction, relocation, rearrangement, or facilities start-up, or equipment, whose sole use is for a particular R&D project, unless specifically approved by the technical authority;
8. all market research activities, including those directed at market development, verification, identification, demonstration, preference, and customer acceptance development;
9. pre-production and proposal costs;
10. cost overruns on previous firm price development contracts.
General Research and Development (R&D) - Other Factors
1. Costs acceptable as general research and development must relate to projects classified as basic research, or applied research. Costs applicable to Product Development projects partially funded by Canada are not acceptable as general research and development costs. Product Development is not considered an overhead item and is recovered by a separate product development expenditure recuperation rate.
2. In those instances where the general research and development expenditures are the majority of the total G & A cost pool, this fact must be highlighted in the cost rate negotiation report, or a separate general research and development overhead rate developed.
3. Significant differences between the negotiated and actual costs incurred must be taken into consideration when reviewing audited costs, or negotiating future years general research and development costs.
Product Development (PD) - Other Factors
1. Company funded product development will inevitably produce non-marketable products which would not allow these costs to be recovered on related product sales. However, there may be marketable by-products or product advances made.
Product Development Amortization
1. Contractors proposing to amortize PD costs of the product developed against future sales to Canada, must submit an annual cost schedule to the responsible Directorate.

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Annex 10.5.8: Cost Interpretation Bulletin - Number 08

(2010-01-11)

Bid and Proposal Expenses

Under paragraph 04 (02) (g) of Contract Cost Principles 1031-2, selling and marketing expenses which could be considered to include amongst other things, Bid and Proposal Expenses, are listed as one of the items generally considered to be indirect costs. However, in some instances contractors follow a consistent practice of charging Bid and Proposal Expenses of a successful Bid or Proposal direct to the resulting contract.

This Bulletin explains the criteria under which the direct charging of Bid and Proposal Expenses to resulting contracts is acceptable to PWGSC.

Definition

For the purpose of this Bulletin:

"Bid and Proposal Expenses" are the costs incurred in preparing, submitting, and supporting bids and proposals, (whether or not solicited), on potential contracts, including:

direct administrative effort, for the physical preparation of the technical proposal documents, and also the technical and non-technical effort for the preparation and publication of cost data, and other administrative data necessary to support the contractor's bids and proposals;
technical effort, incurred to specifically support a contractor's bid, or proposal, including the system and concept formulation studies, and the development of engineering and production data; and,
purchased services and supplies incurred to specifically support a bid or proposal.

Interpretation

Bid and Proposal Expenses are acceptable to PWGSC as a direct charge to resulting contracts in cases of proposals resulting in subsequent contract negotiations, provided that the bid and proposal expenses are clearly denoted in the proposal and contract documents as forming part of the agreed contract price.

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Annex 10.5.9: Cost Interpretation Bulletin - Number 09

(2010-01-11)

Selling and Marketing Expenses

Paragraph 04 (02) (g) of Contract Cost Principles 1031-2 permits selling and marketing expenses associated with the product or service being acquired under a PWGSC contract, providing they are reasonably and properly incurred, to be an acceptable cost to the contract.

This Bulletin explains what constitutes reasonable selling and marketing expenses and how an appropriate share of these expenses for allocation to an PWGSC contract is to be determined.

Interpretation

In determining the reasonableness of selling and marketing expenses, consideration shall be given to:
1. the nature and amount of these expenses in the light of the expenses which a prudent individual would incur in the conduct of a competitive business;
2. the proportionate amounts expended as between government and commercial business;
3. the trend and comparability of the contractor's current period cost in relation with prior periods;
4. the general level of such costs within a contractor's industrial sector;
5. the nature and extent of the sales effort in relation to the cost thereof and to the contract value.
Selling and Marketing Expenses may include reasonable product demonstration expenses incurred for attendance at trade shows and fairs. However, the following expenses are considered non-applicable:
1. Entertainment Expenses, i.e. expenses for amusement, diversion, social activities and incidentals relating thereto. However, expenses associated with meetings and conferences, when called for the dissemination of technical information or discussion of production problems and the like, including the reasonable cost of meals, transportation, rental of meeting places and other incidentals, are acceptable.
2. Advertising Expenses, except for expenses referred to in 1031-2 as being acceptable, i.e. those expenses associated with reasonable advertising of an industrial or institutional character placed in trade, technical or professional journals for the dissemination of information for the industry or institution.
3. Costs of retained lobbyists, as described in the Appendix M, Lobbyists and Contracting, of the Treasury Board Contracting Policy, who are paid on a contingency fees basis.
4. Unreasonable Commissions to Selling Agents.
5. Unspecified Payments to a Third Party.
6. Depreciation or Write-off Costs of Demonstration Equipment.
Allocation to Contracts
To enable a reasonable and justifiable share of selling and marketing expenses to be charged against PWGSC contracts, the following practice should generally be adopted:
1. selling and marketing expenses should be clearly identified by a contractor as distinct from other indirect costs to the extent, where warranted, of creating a separate cost pool for these expenses;
2. where a contractor manufactures more than one particular product or provides more than one particular service, the selling and marketing expenses specifically identifiable with each particular product or service should be allocated directly thereto with any general expenses being prorated equitably across all products or services; and then
3. a pro-rata share of the selling and marketing expenses allocated in accordance with b) above to the particular products or services or family of products or services being acquired under the PWGSC contract included in the applicable overhead costs of the contract.

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Annex 10.5.10: Cost Interpretation Bulletin - Number 10

(2010-01-11)

Severance Payments

Contract Cost Principles 1031-2 state that: "The total cost of the Contract must be the sum of the applicable direct and indirect costs which are, or must be reasonably and properly incurred and/or allocated, in the performance of the Contract, less any applicable credits." Such costs may include severance payments to employees.

This Bulletin explains which severance payments and the amount there of that may be an acceptable cost to the contract.

Definition

For the purpose of this Bulletin:

"Severance Pay" means a cash settlement or paid leave granted to employees upon termination of employment for various reasons, or upon retirement. Remuneration for earned vacation credits or compensation for unused sick leave credits is not considered as severance pay. Other payments excluded from severance pay are return of contributions made to pension plans or retirement savings programs.

Interpretation

Severance payments should be calculated using one of the following criteria in order to be considered as an allowable cost:
1. in accordance with an employment contract, collective agreement or enacted legislation; or
2. according to an established company policy; or
3. based on the merits of a particular case.
In order for the allowable severance payment to be deemed reasonable any amount associated with the following should not be included:
1. profit sharing;
2. commissions;
3. patent or other rights.

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Annex 10.5.11: Cost Interpretation Bulletin - Number 11

(2010-01-11)

Pension Plan Refunds

On occasion, there exist credits due to refunds to contractors from companies handling their pension plans. This situation could be as a result of large lay offs of employees, plan terminations and related interest on funds invested.

The accounting issue that arises from these terminations is whether a gain should be recognized when these assets revert back to the company.

Definitions

For the purpose of this Bulletin:

"Pension Plan Settlement" occurs when an employer legally discharges the obligation for accrued pension benefits either by transferring assets directly to plan participants in exchange for their rights to pension benefits or by purchasing annuity contracts in which a third party unconditionally undertakes to pay all accrued pension benefits.

"Pension Plan Curtailment" occurs when the expected years of future service to be rendered by the existing employee group is reduced significantly or when benefits will not be earned by employees for some or all future periods.

Interpretation

The pension refund amounts to be deducted from overhead expenditures used to determine costing rates should be the contractor's share of the expected pension credits.
Upon a pension plan settlement or curtailment, the employer may have eliminated obligations with respect to the plan, any gains or losses on the transaction, including any unauthorized amounts related to previous plan amendments.
Changes in assumption and experience gains and losses, should be recognized immediately.
On the other hand, if an employer settles only a part of the accrued pension benefits, a portion of any gains or losses including any unamortized amounts should be recognized immediately.

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Annex 10.5.12: Cost Interpretation Bulletin - Number 12

(2010-01-11)

Company Funded Costs

Contract Cost Principles 1031-2 refer to "costs which are, or must be reasonably and properly incurred and/or allocated, in the performance of the contract, less any applicable credits."

This bulletin explains the establishment of costs when government assistance has been provided related to costs of fixed assets, research, and product development.

Definitions

For the purpose of this Bulletin:

"Company Funded Costs" are expenditures made from funds over which the enterprise has spending power and which were not provided to the company through the terms of a related agreement or understanding.

"Grant" is an unconditional payment made to a recipient, usually for a specific purpose, for which the donor will not receive any royalties, goods, or services.

"Contribution" is a conditional transfer payment under an auditable agreement for which the donor will not receive any royalties, goods, or services.

"Contribution Arrangement" is an undertaking between a donor department or agency and a prospective recipient of a contribution, describing the obligations of each, and the terms and conditions of payments and which contain conditions for royalties from resulting sales. The arrangement may be as informal as an exchange of letters.

Interpretation

The Company Funded Costs that shall be considered applicable for contracts negotiated in accordance with 1031-2 are:

Fixed Assets

Government Assistance towards the acquisition of fixed assets shall be deducted from the fixed asset acquisition cost and the relevant depreciation thereof calculated on the net asset amount. Depreciation on the net amount may be included in the applicable overhead for cost recovery on contracts.

Research and Development

Government Assistance in the form of Investment Tax Credits shall not be deducted from the related research and development expenditures when determining the applicable costs.

Product Development

Government Assistance, as well as third party funded assistance, towards a specific product development shall be netted against the relevant product development costs to arrive at the portion to be recovered over the sale of that product or family of products.

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Annex 10.5.13: Cost Interpretation Bulletin - Number 13

(2010-01-11)

Executive Compensation

Paragraph 04 (2) (f) of Contract Cost Principles 1031-2 states that indirect costs may include: "general and administration expenses: including remuneration of executive and corporate officers…". However, section 07 (1) identifies "unreasonable compensation for officers and employees" as a non-applicable cost. There are many different considerations that may affect the amount a particular individual may be receiving.

This cost interpretation provides guidelines on the determination and allowability of executive compensation expenses that are included in a contractor's overhead expenditures.

Interpretation

Items included in a total compensation plan for any executive, not necessarily all allowable costs, usually consist of four basis elements, these are:
1. Salary: reflects the extent of experience and sustained level of performance for a job, or position.
2. Benefits: deals with the provision of time off with pay, employee services, health care services, allowable insurance protection and retirement incentives.
3. Performance Incentives: rewards the extent of accomplishment agreement targets.
4. Perquisites: benefits which are designed only to apply to executives, such as housing loans; these are in addition to benefits offered to other employees.
Guidelines for considering what is reasonable executive compensation are:
1. compensation paid to executives in similar positions, compared to related executive pay scales surveys;
2. the executive's previous experience, experience in other positions within the company and similar appointments in other companies;
3. comparison of the compensation paid for the nature and scope of the work, or service, as defined in the contract of service and/or the position description;
4. the size and complexity and the corporate management structure;
5. the company's general salary policy should be reviewed to ascertain the compensation is uniformly paid, according to set criteria;
6. in the case of smaller contractors with a limited number of officers, the amount of compensation paid to executives in the previous year should be reviewed, as a substantial increase over the prior year tends to indicate compensation may be excessive, further investigation should be made to determine whether the executives' salaries are for services rendered, rather than a re-distribution of the business's profits;
7. compensation paid to executives through related party transactions.

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Annex 10.5.14: Cost Interpretation Bulletin - Number 14

(2010-01-11)

Mobile Repair Party Requirements

Section 5 of Contract Cost Principles 1031-2 recognizes that indirect costs should be accumulated and allocated based on a principle of similarity of costs in the pool and a causal relationship to the contracts to which the costs are allocated.

Repair work is normally carried out in a contractor's plant but, on occasion, it is necessary in meeting the requirements of a customer department, to have repair work performed at other locations.

This cost interpretation provides guidelines on the determination of overhead expenses applicable to Mobile Repair Party requirements.

Definition

For the purpose of this Bulletin:

"Mobile Repair Party" is the individual, or group of individuals, performing work away from the contractor's plant.

Interpretation

The overhead rate on Mobile Repair Party work normally will be at the full plant rate, however, it should be noted that under the three conditions below, the overhead rate could be different:

where the estimated hours to be expended for Mobile Repair Party work exceed 5% of the estimated total direct labour hours for both commercial and defence repair and overhaul work during the contract period; or
where the estimated hours to be expended for Mobile Repair Party work are less than 5%, but the contracting officer considers that a significant number of direct labour employees are hired for Mobile Repair Party work only; or
where the contractor maintains adequate cost records to permit the calculation and negotiation of a separate Mobile Repair Party rate.

In the circumstances contemplated under alternatives a) and b) above, an overhead rate should be negotiated to reflect the reduced costs applicable to Mobile Repair Party work.

Notwithstanding the Cost Interpretation on Travel Costs, all travel costs for direct personnel for Mobile Repair Party requirements, should be charged to the contract directly and not included in any overhead pool.

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Annex 10.5.15: Cost Interpretation Bulletin - Number 15

(2010-01-11)

Environmental Costs

According to Section 04 of Contract Cost Principles 1031-2 "Indirect Costs" are: "those costs which, though necessarily having been incurred during the performance of the Contract for the conduct of the Contractor's business in general, cannot be identified and measured as directly applicable to the performance of the Contract."

An element that is becoming a more significant portion of indirect costs is environmental costs. This cost interpretation provides guidelines on applicable environmental costs included in a Contractor's indirect costs.

Definition

For the purposes of this Bulletin:

"Environmental costs" are the costs incurred by an entity to prevent, abate , or remediate damage to the environment or to deal with the conservation of renewable and non-renewable resources.

Interpretation

Any direct or indirect benefits, for example, tax credits, insurance benefits, or government assistance, should be accounted for using the cost reduction approach. The amount of all such benefits received by or credited to the contractor's account should be deducted from the related environmental cost and any amortization of the cost should be calculated on the net amount.
Notwithstanding the other sections of this bulletin, no fines, or penalties, or any other non applicable cost as determined under Section 07 of Contract Cost Principles 1031-2 are allowable.
Environmental costs can be grouped according to the periods when the cost is incurred and the periods that the cost relates to.
1. Current period operations.
  An example of this type of cost is the disposal of waste from current period operations.
  
  These costs should be allowed and allocated on the appropriate base in the current period.
2. Current period past operations.
  An example is clean up costs for activities that occurred previously.
  
  Any current period cost that is a material amount should be deferred and amortized over a reasonable number of future periods.
3. Current period future operations.
  An example is depreciable equipment purchased to control hazardous emissions.
  
  These costs should be amortized over the periods for which benefits are expected from the costs incurred.

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Annex 10.5.16: Cost Interpretation Bulletin - Number 16

(2010-01-11)

Take-out Rates

Section 05 of Contract Cost Principles 1031-2 states:

"Indirect costs must be accumulated in appropriate indirect cost pools, reflecting a contractor's organizational or operational lines and these pools subsequently allocated to contracts in accordance with the following two principles:

the costs included in a particular indirect cost pool should have a similarity of relationship with each contract to which that indirect cost pool is subsequently distributed; further, the costs included in an indirect cost pool should be similar enough in their relationship to each other that the allocation of the total costs in the pool provides a result which would be similar to that achieved if each cost within that pool were separately distributed;
the allocation basis for each indirect cost pool should reflect, as far as possible, the causal relationship of the pooled costs to the contracts to which these costs are distributed".
This bulletin provides interpretation on how take out rates reflect the allocation of specific cost from indirect cost pools to suit the related costs and circumstances of the contracts. However, a fair level of overhead, or G & A costs must be charged to the particular products or services in question."

Definition

For the purpose of this Bulletin:

"Take-Out Rate" is the negotiated rate applied for the recovery of overhead costs on goods and services which do not form the major portion of the company's business but are in themselves significant relative to a government contract. The resulting rate, in most cases, should be somewhat less than that which applies to other work processed through the company's facilities.

Interpretation

Take-out rates may be established to apportion overhead expenses on a reasonable and justifiable basis on goods and services which requires less overhead effort than the company's regular activity.
The task of identifying where and when a take-out rate is applicable is left to the discretion of the negotiators, who are in the best position to establish the need, based on the information available at the time.
Some of the areas for applications of take-out rates are:
1. Subcontracts;
2. Drop shipments, other resale and high value purchases;
3. Mobile repair party and field services;
4. Other specialized applications such as for travel and living that are charged directly to a contract.
The purpose of a take out rate is to allocate costs to a contract. Other overhead recovery rates must not include any of the costs of any contracts that are subject to take out rates. This means that take out rates that are established without taking into account the full costs of specific situations may result in unrecovered overhead as this overhead cannot be recovered on other contracts. As an example; this situation can arise if a contract is established using a take out rate that is set to limit the total price of the contract and the rate is not sufficient to allow full cost recovery.

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Annex 10.5.17: Cost Interpretation Bulletin - Number 17

(2010-01-11)

Government Supplied Materiel

Paragraph 05 (a) of Contract Cost Principles 1031-2 deals with the allocation of indirect costs according to the principles of "similarity of relationship" and the "causal relationship of pooled costs". Applying these principles requires consideration of both the nature of activities giving rise to the costs and when different activities occur.

The purpose of this cost interpretation is to provide guidance in determining when material handling and general and administrative costs relating to government supplied material are allowable items for cost reimbursement.

Definitions

For the purpose of this Bulletin:

"Accountable Advance Spares" are non-catalogued materiel owned by the government and manufactured or purchased by contractors in accordance with agreements between contractors and the government. Accountable Advance Spares are used in the repair and overhaul of government equipment.

"Laid-Down Cost" is the cost incurred by a contractor to acquire a specific product. This includes the invoice price (less trade discounts) charged to the contractor plus any applicable charges for transportation, exchange, custom duties, and brokerage charges.

"Government-Supplied Materiel" (GSM): Material supplied to a contractor by a government department or agency for incorporation into the end product.

Interpretation

Material handling costs related to the storing and transferring out of storage are allocated to the GSM when they are embodied.
General and Administrative (G & A) overhead expenses and material handling costs that are applicable should be allocated as a cost associated with the embodiment of government supplied material in the year when the materials are embodied. When transfers of GSM, for example from accountable advance spares inventory, are made to Canada for asset disposal, the general and administrative overhead expenses and material handling costs that are applicable are allocated at the time of transfer.
When the contractor stores GSM for Canada, the cost of the items being stored would normally include the laid-down cost of the purchased GSM; or the applicable direct material, direct labour, factory overhead and G & A applicable to the manufacturing operation of the manufactured GSM.

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Annex 10.5.18: Cost Interpretation Bulletin - Number 18

(2010-01-11)

Incentive Remuneration Profit Sharing Plans

Section 04 of Contract Cost Principles 1031-2 explains indirect costs. This section's paragraph 2. (c) indicates that fringe benefits (the contractor's contribution only) are to be included as indirect costs (overhead). A fringe benefit type that may not be an overhead cost for 1031-2 purposes is amounts paid under Incentive Remuneration Profit Sharing Plans. The reason these amounts are not considered costs is that normally these plans are considered as a distribution of a portion of earnings to employees. Earnings that are profits or a distribution of retained earnings are not costs. However, since the purpose of these plans is to remunerate employees, it is often argued that payments under these plans should be considered costs.

This cost interpretation is to determine the features of Incentive Remuneration-Profit Sharing Plans that may be considered as allowable cost items in accordance with 1031-2.

Definition

Incentive Remuneration Profit Sharing are plans designed to link the performance of employees to the achievement or organizational objectives, through the provision of additional compensation from the distribution of a defined share of the organization's net profit.

Interpretation

Incentive Remuneration Profit Sharing Plans may be considered as an allowable cost element providing:

The plan includes a documented sharing arrangement, with all employees, and the incentive amounts payable by the employer must be computed with reference to earned profits.
The company pays employees directly or provides the funds for the employee profit sharing plan to a trustee in trust for the benefit of the employees who are members of the plan.
The amount of cost will not exceed the amount of payment made to the employees or the plan trustee.
The cost is recognized only in the year the employee provides services to earn benefits under the plan.
The entire amount recognized as cost must be disbursed to employees (or paid to the trustee) in the fiscal year when the benefits were earned or shortly after the end of the fiscal year (within a few months, but well before the end of the fiscal year following the one for which plan benefits were based).
Any funds payable by the trustee to the employer for over contributions or funds that the plan may earn; shall be used to reduce the current year cost unless these earned funds or over contributions are paid directly by the employer to the employees within that current fiscal year. (see Annex 10.5.11).
Compensation to owners of closely held corporations, partners, sole proprietors, or members of their immediate families should be in accordance with the personal service rendered rather than a distribution of profits. (see Annex 10.5.13).

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Annex 10.5.19: Cost Interpretation Bulletin - Number 19

(2010-01-11)

Purchased Labour -- Personnel Procured From Outside Sources

In accordance with sections 03, 04 and 05 of Contract Cost Principles 1031-2, Purchased Labour Costs are considered either as Direct Costs or may be viewed as Direct Labour Costs.

Definitions

For the purpose of this Bulletin:

"Purchased Labour Costs" are the costs incurred by a contractor/entity for temporary personnel procured from the outside for skills such as engineers, technical writers, technicians, craftsmen. Purchased Labour normally attract different indirect costs. Care must be taken to ensure that they are not accounted for as the contractor's employees.

Interpretation

Contractors' cost accounting method for purchased labour and overhead allocation thereon varies depending on the circumstances under which purchased labour costs are incurred.
For example,
1. some contractors classify purchased labour as direct labour costs when the work is performed in the contractor's facilities under their supervision and otherwise meets section 03(b) of 1031-2 definition of direct labour costs. These contractors cost direct labour using either the purchased labour rate or average labour rate incurred by their own employees for comparable work. However differences between the average labour rate incurred by the contractor's own employees and purchased labour prices are treated as overhead costs and are allocated accordingly.
2. other contractors classify purchased labour as subcontract costs.
Purchased labour must share in an allocation of certain indirect expenses where there is a causal or beneficial relationship, and the allocation method must be consistent with the contractor's disclosed cost accounting practices.
The accounting treatment for purchased labour must be evaluated on a case-by-case basis with consideration given to the materiality of costs involved and the overall effect of the accounting treatment on final cost objectives. Acceptance or rejection of the contractor's treatment of purchased labour must be based upon
1. the causal and beneficial relationship of indirect expenses and purchased labour, and
2. the nature of the employer/consultant relationship.
The preferred cost accounting method for purchased labour is to have a separate direct cost for this activity with an appropriate allocation of applicable overhead. Other methods devised are acceptable providing the accounting method is considered reasonable and justifiable and meets the relevant Contract Cost Principles 1031-2.

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Annex 10.6.1: Cost Notification 01 - TPC Royalty Amount for Cost Rate Negotiations

(2010-01-11)

Background

Technology Partnership Canada (TPC) has contributed sums per TPC Project Agreements which carry provisions for the possible repayment of these contributions per Royalty repayment terms in these accords.

In most cases, these royalty repayment terms are tied to the sale of the potential product/project that TPC contributed the funds for. The term and repayment percentage varies per the understanding.

Issue

In the agreements that were reviewed, the royalty payments to TPC to be made by the firm, in most instances, exceed the original contribution amount providing that the project has viable sales of the development project.

The annual rate negotiation with a firm will be faced with a potential royalty repayment cost in the overhead rate calculation in the year that the repayment is required and made to TPC.

Cost Recovery Position For Annual Rate Negotiation Negotiations

For annual rate negotiation purposes, the recovery amount allowed on contracts shall be limited to the original TPC contribution per the agreement. The amount in excess of the original contribution shall be considered a separate element outside the rate negotiations and will not be an allowable contract cost.

The amount of the recovery shall be determined by the original TPC agreement. For contributions that are product specific, a product development recovery rate will be established. For non-product specific agreements, the recovery will be made through a General and Administrative Overhead and shall be recovered over a reasonable amount of time.

References

Treasury Board Accounting Standard 3.2 - Transfer Payments (Grants and Contributions) www

1031-2, Contract Cost Principles, of the Standard Acquisition Clauses and Conditions Manual

Annex 10.4: Reasons for the Non-applicability of Certain Cost when Utilizing Contract Cost Principles 1031-2.

Annex 10.5.7: Research and Development Expenses - Number 07

Annex 10.5.12: Company Funded Costs - Number 12

CICA 3290 Contingencies

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Annex 10.6.2: Cost Notification 02 - Goodwill

(2010-01-11)

Definitions

For the purpose of this Notification:

Goodwill is the excess of the cost of an acquired enterprise over the net of the amounts assigned to assets acquired and liabilities assumed. This is an unidentifiable intangible asset, which 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.

Notification:

Goodwill represents the value paid by a contractor on a business enterprise purchase in excess of the fair value of the acquired firm's assets less the assumed liabilities. This amount is based on the anticipated growth and earnings of the newly acquired company and thus is an intangible asset.

Any cost for amortization, expensing, write-off, or write-down of this intangible asset called goodwill (however represented) is unallowable.

References

1031-2, Contract Cost Principles, of the Standard Acquisition Clauses and Conditions Manual

Annex 10.2: Reasons for the non-applicability of certain cost when utilizing Contract Cost Principles 1031-2

CICA 3062 Goodwill

FAR 31.205-49 Goodwill www

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Chapter 10 - Cost and Profit

Table of Contents

10.1 General Information

10.5 Establishing Costs

10.10 Travel and Living Expenses

10.15 Prices for Out of Plant Services of Individuals

10.20 Surplus Materials in Cost Reimbursable Contracts

10.25 Costing of Lease Transactions

10.30 Service Contracts

10.35 Joint Ventures

10.40 Research and Development Contracts with Universities and Colleges

10.45 Non-competitive Contracts with Non-profit Organizations, excluding Universities and Colleges

10.50 Non-competitive Acquisitions of Manufactured Products and Repair and Overhaul Services, from Agency and Resale Outlets

10.50.1 Non-competitive Requirements of Commercial Goods and/or Services

10.50.5 Non-competitive Requirements of Non-commercial Goods and/or Services

10.50.10 Agency and Resale Outlets - Additional Requirements

10.50.15 Price Analysis

10.55 Transfer Pricing

10.60 Special Production Tooling and Special Test Equipment

10.65 Calculation of Profit on Negotiated Contracts

10.65.1 Return on Capital Employed

10.65.5 Return on Fixed Capital Employed (between $50,000 and $249,999)

10.65.10 Return on Working Capital Employed (between $50,000 and $249,999)

10.65.15 Return on Fixed Capital Employed ($250,000 or more)

10.65.20 Return on Working Capital Employed ($250,000 or more)

10.65.25 General Business Risk

10.65.30 Contractual Risk

10.65.35 Total Profit

Annex 10.1: Determination of Fixed Capital Employed Applicable to a Contract

Annex 10.1.1: Examples to Determine the Fixed Capital Employed

Examples of Calculation

Example 1 - Assumptions:

Example 1

Example 2 - Assumptions:

Fiscal Year Ending December 31, 1982 (1st Year)

Example 2 (cont'd)

Fiscal Year Ending December 31, 1983 (2nd Year)

Example 2 (cont'd…)

Summary

Example 3 - Assumptions:

Profit on Company Furnished Materials

Profit on Accountable Advance Spares Embodied

Profit on Repair and Overhaul

Profit on Mobile Repair Party

Profit Summary

Example 4 - Assumptions:

Annex 10.2: Examples to Determine the Working Capital Employed

Examples of Calculation

Example 1 - Assumptions:

Example 2 - Assumptions:

Annex 10.3: Examples of Profit Calculations

Negotiated Contracts with total costs between $50,000 and $249,999

Example 1 - Assumptions:

Example 2 - Assumptions:

Profit on A.A. Spares Embodied

Profit on Repair and Overhaul

Profit Summary

Example 3 - Assumptions:

Annex 10.4: Reasons for the non-applicability of certain costs when utilizing Contract Cost Principles 1031-2

Annex 10.5.1: Cost Interpretation Bulletin - Number 01

Excess Facilities

Definition

Interpretation

Annex 10.5.2: Cost Interpretation Bulletin - Number 02

Depreciation

Definitions

Interpretation

Annex 10.5.3: Cost Interpretation Bulletin - Number 03

Lease Costs

Definitions

Interpretation

Annex 10.5.4: Cost Interpretation Bulletin - Number 04

10.65 Calculation of Profit on Negotiated
Contracts