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Interim Internal Purchasing Guidelines > 5 Contract Pricing > 5.2 Cost Principles
1. This section contains the cost principles used in determining and
negotiating the costs that will be allowed under Postal Service
contracts.
2. These principles apply to:
(a) Determining costs that will be allowed under cost-reimbursement
contracts and subcontracts;
(b) Determining or negotiating cost or price when required by a
contract clause; and
(c) Pricing contracts and subcontracts, and their modifications, when
cost analysis is done (see 5.1.2.c).
5.2.1.b Other Standards. The standards and regulations of the Cost Accounting
Standards Board (4 CFR 331, et seq.) do not apply to the Postal Service.
5.2.2.a Total Cost. The total cost of a contract is the sum of allowable direct and
indirect costs allocated to the contract that will be (or have been) incurred,
less any allowable credits. Any generally accepted method of determining or
estimating costs may be used if it is equitable and applied consistently.
5.2.2.b Direct Costs. Any cost that can be specifically identified with contract work is
a direct cost of the contract. Direct costs are identified specifically with a
contract. Costs are direct, then, if they are segregated from other supplier
costs and recorded in accounts that identify them with the contract.
5.2.2.c Indirect Costs. Indirect costs are those necessary for the supplier to operate
as a business, but that cannot be readily segregated as direct costs. Indirect
costs may be allowable even if a direct or indirect relationship to the contract
cannot be shown.
5.2.2.d Credits. A credit is the portion of income, rebate, allowance, or other credit
relating to an allowable cost received by or accruing to the supplier.
5.2.3.a Determining Allowability. To be allowed, costs must be:
1. Reasonable;
2. Allocable to the contract;
3. Consistent with generally accepted accounting principles;
4. Appropriate to the specific purchase;
5. Consistent with the requirements and terms and conditions of the
contract; and
6. Not unallowable (see 5.2.5).
5.2.3.b Reasonableness. A cost is reasonable if it is a type of cost and amount that
does not exceed what a prudent person would incur conducting competitive
business. In determining the reasonableness of a specific cost, consider:
1. Whether it is a type of cost generally recognized as ordinary and
necessary for conducting business or performing the contract;
2. Restraints imposed by generally accepted business practices,
arm's-length bargaining, and federal and state laws and regulations;
3. What a prudent business person, considering his or her responsibilities
to owners, employees, customers, the Postal Service, and the public at
large, would do under the circumstances; and
4. Any deviations from the supplier's established business practices that
may unjustifiably increase costs.
5.2.3.c Allocability. A cost is allocable to a contract if it:
1. Is incurred specifically for the contract;
2. Benefits both the contract and other work, and can be distributed
among them in reasonable proportion to the benefits received; or
3. Is necessary to the overall operation of the business, although a direct
relationship to the contract cannot be shown.
5.2.4.a General. Because the reasonableness or allocability of costs may be hard to
determine in some cases, the contracting officer and the supplier should
agree in advance on how special or unusual costs will be treated under a
contract.
1. Examples of costs for which advance agreements may be particularly
important are:
(a) Compensation for personal services including, but not limited to,
allowances for off-site pay, incentive pay, location allowances,
hardship pay, and cost-of-living differentials;
(b) Use charges for fully depreciated assets;
(c) Deferred maintenance costs;
(d) Independent research and development costs;
(e) Royalties and other costs for use of patents;
(f) Selling and distribution costs;
(g) Travel and relocation costs;
(h) Cost of idle facilities and idle capacity;
(i) Costs of automatic data processing equipment;
(j) Severance pay to employees on support-services contracts;
(k) Plant reconversion;
(l) Professional services (for example, legal, accounting, and
engineering);
(m) General administrative costs (such as corporate, division, or
branch allocations attributable to general management,
supervision, and conduct of the supplier's business as a whole,
particularly in construction, job-site, architect-engineer, and
facilities contracts);
(n) Plant and equipment costs; and
(o) Costs of public relations and advertising.
2. Advance agreements may be negotiated with a particular supplier for a
single contract, a group of contracts, or all the contracts of one or more
purchasing activities.
3. Advance agreements may be negotiated either before or during a
contract but should be negotiated before the costs are incurred.
Advance agreements must be in writing, signed by both parties, and
incorporated into any current and future contracts to which they apply.
An advance agreement must contain a statement of its applicability and
duration.
4. Advance agreements may not provide for treating costs inconsistent
with this chapter.
5. The absence of an advance agreement on any cost will not, in itself,
affect the reasonableness or allocability of the cost.
5.2.5.a Categories of Unallowable Costs. The following categories of costs are not
allowable:
1. Public relations and advertising costs, except for costs of:
(a) Responding to inquiries concerning company policies and
activities;
(b) Essential communication with the public, press, stockholders,
creditors, and customers, including communications on matters of
public concern;
(c) Participating in community-service activities, such as blood-bank
drives, charity drives, and disaster assistance (but not
contributions to civil defense funds and projects);
(d) Recruiting personnel needed to work under the contract;
(e) Acquiring scarce items for contract performance; and
(f) Disposing of scrap or surplus materials acquired for contract
performance.
2. Bad debts, including actual or estimated losses arising from
uncollectable accounts receivable from customers and other claims,
and any costs directly associated with bad debts such as collection and
legal costs.
3. Contributions or donations, including cash, property, and services,
except as provided in a.1(c).
4. Dividends or payments and distribution of profits.
5. Entertainment costs, including amusement, diversion, social activities,
and costs directly associated with entertainment such as tickets to
shows or sporting events, meals, lodging, rentals, transportation, and
gratuities. Entertainment costs include membership in social, dining, or
country clubs or other organizations having the same purpose,
regardless of whether the cost is reported as taxable income to the
employees.
6. Fines and penalties resulting from violations of federal, state, local, or
foreign laws and regulations, except when incurred as a result of
complying with specific terms and conditions of the contract or written
instructions from the contracting officer.
7. Life insurance on the lives of officers, partners, or proprietors, unless
the insurance represents additional compensation.
8. Interest on loans (however represented), bond discounts, costs of
financing and refinancing capital, and the costs of preparing and issuing
prospectuses and stock rights.
9. Lobbying:
(a) Including:
(1) Attempts to influence the outcome of any federal, state, or
local election, referendum, initiative, or similar procedure
through contributions, endorsements, publicity, or similar
activities.
(2) Establishing, administering, contributing to, or paying the
expenses of a political party, campaign, political action
committee, or other organization established for the
purpose of influencing the outcomes of elections.
(3) Any attempt to influence the introduction of federal or state
legislation, or the enactment or modification of any pending
federal or state legislation through communication with any
member or employee of Congress or a state legislature
(including efforts to influence state or local officials to
engage in similar lobbying activity), or with any government
official or employee in connection with a decision to sign or
veto legislation.
(4) Any attempt to influence the introduction of federal or state
legislation, or the enactment or modification of pending
federal or state legislation by preparing, distributing, or
using publicity or propaganda, or by urging members of the
general public to contribute to or participate in any mass
demonstration, march, rally, fund-raising drive, lobbying
campaign, or letter-writing or telephone campaign.
(5) Legislation-liaison activities, including attendance at
legislative sessions or committee hearings, gathering
information regarding legislation, and analyzing the effect of
legislation, when the activities are in support of, or in
knowing preparation for, an effort to engage in unallowable
activities.
(b) But not including:
(1) Providing a technical and factual presentation of information
on a topic directly related to performing the contract in a
hearing testimony, statement, or letter to Congress or a
state legislature, or subdivision, member, or staff member of
either, in response to a documented request (including a
Congressional Record notice requesting testimony or
statements for the record at a regularly scheduled hearing)
made by the recipient member, legislative body or
subdivision, or a cognizant staff member. Costs for
transportation, lodging or meals associated with this
exception are not allowed unless incurred for the purpose of
offering testimony at a regularly scheduled Congressional
hearing in response to a written request made by the chair
or ranking minority member of the committee or
subcommittee conducting the hearing.
(2) Any lobbying to influence state or federal legislation in order
to directly reduce contract cost, or to impair the supplier's
obligation to perform the contract.
(3) Any activity specifically authorized by statute to be
undertaken with funds from the contract.
10. Losses on other contracts (including the supplier's contribution under
cost-sharing contracts).
11. Taxes:
(a) Federal income and excess-profits taxes.
(b) Taxes in connection with financing, refinancing, refunding
operations, or reorganizations.
(c) Taxes from which exemptions are available to the supplier
directly, or available to the supplier based on a Postal Service
exemption, except when the purchase team determines that the
administrative burden of obtaining the exemption outweighs the
benefits to the Postal Service. The term "exemption" means
freedom from taxation in whole or in part, and includes a tax
abatement or reduction resulting from the method of assessment,
calculation, or other reason.
(d) Special assessments on land that represent capital
improvements.
(e) Taxes (including excise taxes) on real or personal property, or on
the value, use, possession or sale of property, used solely in
connection with work on contracts that are not with the Postal
Service or the government.
(f) Taxes on accumulated funding deficiencies of, or prohibited
transactions involving, employee deferred compensation plans
under section 4971 or 4975 of the Internal Revenue Code of
1954, as amended.
(g) Income tax accruals designed to account for the tax effect of
differences between taxable income and pretax income as
reflected by the supplier's accounting and financial statements.
12. Costs incurred in defending against any combination of the actions
below when brought by the government against a supplier, its agents or
employees, when the charges involve fraud or similar criminal offenses
(including filing of a false certification) on the part of the supplier, its
agents or employees, and result in conviction (including conviction
entered on a plea of nolo contendere), judgment against the supplier,
its agents or employees, or a decision to debar or suspend, or are
resolved by consent or compromise (when charges of fraud are
resolved by consent or compromise, the parties may agree on the
extent of allowability of defense costs as a part of the resolution). The
actions include:
(a) Criminal or civil investigation, grand jury proceedings, or
prosecution;
(b) Civil litigation; or
(c) Administrative proceedings such as suspension or debarment.
13. Costs incurred against Postal Service claims or appeals or the
prosecution of claims or appeals against the Postal Service.
5.2.5.b Excluding Unallowable Costs. Costs that are expressly or mutually agreed to
be unallowable, including directly associated costs, must be excluded from
any contract billing, claim, or proposal. A directly associated cost is a cost
generated solely as a result of another cost, which would not have been
incurred if the other cost had not been incurred. When an unallowable cost is
incurred, its directly associated costs are also unallowable.
5.2.6.a General. Terminating a contract generally causes costs or the need for
special treatment of costs that would not have arisen if the contract had not
been terminated. This part describes cost principles that apply to
terminations. They should be used in conjunction with the other cost
principles in this section.
5.2.6.b Common Items. The cost of items that can reasonably be used in the other
work by the supplier are not allowable unless the supplier submits evidence
that the items could not be otherwise used without sustaining a loss. The
purchase team should consider the supplier's plans and orders for current
and planned work when determining if items can reasonably be used on
other work.
5.2.6.c Costs Continuing After Termination. Costs that cannot be discontinued
immediately after termination are generally allowed. However, any costs
continuing after termination because of the negligent or willful failure of the
supplier to discontinue them are not allowable.
5.2.6.d Startup Costs. Reasonable startup and preparatory costs are generally
allowed. When included in the settlement proposal as a direct charge, they
must not also be included in overhead. Startup costs for one contract must
not be allocated to others.
5.2.6.e Loss of Useful Value. The loss of the useful value of special tooling,
machinery, and equipment is generally allowed, provided:
1. The special tooling, machinery and equipment cannot reasonably be
used in the supplier's other work;
2. The Postal Service's interest is protected by transferring title or other
means the purchase team decides is appropriate; and
3. The loss of useful value under any one terminated contract must be
proportionate to the terminated portion of the contract and other Postal
Service contracts for which the special tooling, machinery, and
equipment were acquired.
5.2.6.f Rent Under Unexpired Leases. Rental costs under unexpired leases, less the
residual value of the leases, are generally allowed when shown to have been
reasonably necessary for the performance of the terminated contract, if:
1. The amount of rent claimed does not exceed the reasonable-use value
of the property leased for the period of the contract and any further
period that may be reasonable; and
2. The supplier makes all reasonable efforts to terminate, assign, settle, or
otherwise reduce the cost of the lease.
5.2.6.g Alterations of Leased Property. The cost of alterations and reasonable
restorations required by the lease may be allowed when the alterations are
necessary to perform the contract.
1. Settlement expenses, including the following, are generally allowable:
(a) Accounting, legal, clerical, and similar costs reasonably
necessary for:
(1) Preparing and presenting settlement claims to the
contracting officer, including supporting data; and
(2) Terminating and settling subcontracts.
(b) Reasonable costs of storing, transporting, protecting, and
disposing of property acquired or produced for the contract.
(c) Indirect costs related to salary and wages incurred as settlement
expenses under (a) and (b). Normally, these costs must be limited
to payroll taxes, fringe benefits, occupancy costs, and immediate
supervision costs.
2. If settlement expenses are significant, an account or work order must
be established to identify and accumulate them separately.
5.2.6.i Subcontractors' Claims. Subcontractors' claims, including the allocable
portion of claims common to both the contract and other work of the supplier,
are generally allowable. A share of the supplier's indirect expenses may be
allocated to settlements with subcontractors, provided that the amount is
reasonably proportionate to the relative benefits received. If share of indirect
expenses is allocated, it must exclude the same and similar costs claimed
directly or indirectly as settlement expenses.
5.2.7 Construction and Architect-Engineer Contracts
1. The cost principles of this section apply to contracts for construction
(including alteration or repair) of buildings and to architect-engineer
contracts, except as provided below.
2. Advance agreements (see 5.2.4) are particularly important in
construction and architect-engineer contracts because of the widely
varying factors encountered, such as the nature, size, duration, and
location of construction projects. Advance agreements must be
considered for costs such as home office overhead, partners'
compensation, consultants, and equipment use.
5.2.7.b Allowable Costs for Construciton Equipment. Allowable ownership and
operating costs of construction equipment must be determined as follows:
1. Actual cost data must be used when ownership and operating costs of
construction equipment can be determined from the supplier's
accounting records. When they cannot, the contract may specify using
a published schedule of predetermined rates to determine costs.
2. Predetermined schedules of equipment use-rates provide average
ownership and operating rates for construction equipment. The
allowance for ownership costs should include the cost of depreciation
and may include facility costs and capital cost of money. The allowance
for operating costs may include costs for such items as fuel, filters, oil,
and grease; servicing, repairs, and maintenance; and tire wear and
repair. Costs of labor, mobilization, demobilization, overhead, and profit
are generally not included in schedules, and separate consideration
may be necessary.
3. When a schedule of predetermined use-rates is used to determine
direct costs, all costs of equipment in the schedule must be eliminated
from other direct and indirect costs. If the supplier's accounting system
provides allocations for site or home office overhead, all costs included
in the equipment allowances may need to be included in any cost base
before computing the supplier's overhead rate. When work is
suspended under a contract clause, the allowance for equipment
ownership may not exceed the amount for standby cost determined by
the schedule or contract provision.
5.2.7.c Renting Construction Equipment. Reasonable costs of renting construction
equipment are allowed as follows:
1. Minor repair and maintenance costs incidental to operating rented
equipment that are not included in the rental rate are allowed.
2. Costs incidental to major repair and overhaul of rental equipment are
not allowed.
3. Charges for construction equipment rented from any division,
subsidiary, or organization under common control are allowed if it is the
supplier's established practice, and if no part of the cost duplicates any
other allowed cost.
5.2.7.d Costs at the Job Site. Costs incurred at the job site incidental to performing
the work, such as the cost of supervision, timekeeping and clerical work,
engineering, utilities, suppliers, material handling, and restoration and
cleanup are allowed as direct or indirect costs, provided the accounting
practice used is the supplier's established practice for all work.
5.2.7.e Temporary Use of Land and Structures. Rental and other costs, less any
applicable credits, for the temporary use of land or structures, are allowed.
Costs of constructing temporary structures, less any applicable credits, are
also allowed.
5.2.8.a General. The cost principles of this section apply to contracts under which
Postal Servcie facilities are provided to a supplier or subcontractor for use in
performing one or more related contracts for supplies or services, except as
provided below.
5.2.8.b Advance Agreement. Advance agreements (see 5.2.4) should be made for
indirect costs that will be applied to the facilities purchase. To reach an
equitable agreement, the supplier's usual method of allocating indirect cost
may be modified and adjustments may be made to the indirect costs and the
way they are distributed.
5.2.8.c Overhead. Indirect manufacturing and plant overhead costs primarily incurred
or generated by direct labor or maintenance labor operations may not be
allocated to the purchase of existing facilities.
5.2.8.d Maintenance. Contracts providing for installing new facilities or renovating
existing facilities might involve the use of the supplier's plant-maintenance
labor, as distinguished from direct labor engaged in producing the company's
normal products. In such cases, only the indirect costs associated with the
classes of labor needed to perform the facilities work may be allocated. A
facilities contract involving only plant-maintenance labor would not have costs
allocated for supervising production workers, depreciation, maintenance of
production equipment, or the storage of raw materials and finished goods.
5.2.8.e Other Indirect Costs. When a facilities contract calls for construction,
production, or rebuilding of equipment or other items involved in the regular
course of the supplier's business using the supplier's direct labor and
manufacturing processes, the indirect costs normally allocated to all that work
may be allocated to the facilities contract.
5.2.8.f Prices. If items that are the supplier's usual commercial products (or minor
modifications of them) are acquired under the facilities contract, the Postal
Service must not pay more for them than the supplier's
most-favored-customer price or the price of other suppliers for like quantities
of the same or similar items, whichever is lower.
In determining contract costs for research and development, training, and
other work performed by educational institutions, use Office of Management
and Budget (OMB) Circular No. A-21, Cost Principles for Educational
Institutions, in effect on the date of the contract.
5.2.10.a General. A nonprofit organization is a business:
1. Exempt from federal income tax under section 502 of the Internal
Revenue Code;
2. Organized and operated exclusively for charitable, scientific, or
educational purposes;
3. No part of whose net earnings go to a private shareholder or individual;
and
4. That does not attempt or carry on propaganda, as a substantial part of
its activities, to influence legislation or participate in any political
campaign on behalf of any candidate for public office.
5.2.10.b Principles. In determining allowable costs under contracts performed by
nonprofit organizations, use Office of Management and Budget (OMB)
Circular No. A-122, Cost Principles for Nonprofit Organizations, in effect on
the date of the contract.
In determining allowable costs under contracts with state, local, and federally
recognized Indian tribal governments, use Office of Management and Budget
(OMB) Circular No. A-87, Cost Principles for State and Local Governments,
in effect on the date of the contract.
1. This part describes guidelines for establishing billing rates and final
indirect cost rates to:
(a) Reimburse indirect costs under cost-reimbursement contracts;
(b) Determine progress payments under fixed-price contracts; and
(c) Negotiate the final price of fixed-price incentive contracts.
2. An indirect cost rate is the ratio of indirect costs to direct labor,
manufacturing, or other cost basis over the same period expressed as
a percentage or dollar factor.
3. Billing rates are temporary indirect-cost rates established for
reimbursement.
1. A billing rate may be adjusted pending establishment of final indirect
cost rates.
(a) The final indirect cost rate is a rate the supplier and Postal
Service agree will not change. It is usually established after the
close of the supplier's fiscal year (unless a different period is
agreed to). For cost-reimbursement contracts with educational
institutions for research and development, the rate may be
predetermined by establishing it for a future period on the basis of
cost experience with similar contracts and supporting data.
(b) A billing rate is established based on a recent review, audit,
previous experience, or similar data. It should be as close as
possible to the final indirect cost rate, adjusted for unallowable
costs. When the dollar value of a contract using a billing rate does
not warrant a detailed billing-rate proposal, the rate may be set by
adjusting the previous year's indirect costs to eliminate
unallowable and nonrecurring costs and reflect new or changed
conditions.
2. After billing rates are set, they may be revised prospectively or
retroactively by mutual agreement, at either party's request, to prevent
substantial overpayment or underpayment.
3. The elements of indirect cost and the bases used to calculate billing
rates determine the distribution of indirect costs and the bases of
distribution in the final settlement.
1. Under Clause 2-30, Allowable Cost and Payment, suppliers must
submit a final indirect-cost rate proposal to the contracting officer or
contracting officer's representative reflecting actual costs during the
period, together with cost or pricing data.
2. The contracting officer or the contracting officer's representative will
negotiate an indirect cost rate agreement after analyzing the proposal
and prepare a negotiation memorandum describing the basis for the
agreement.
3. The indirect cost rate agreement, when signed by the supplier and
contracting officer, is considered incorporated into the contract.
Under cost-reimbursement contracts with educational institutions, the Postal
Service uses indirect cost rates established in Office of Management and
Budget (OMB) Circular No. A-21, Cost Principles for Educational Institutions.
The Circular assigns each educational institution to a single government
agency for the negotiation of indirect cost rates. The agencies and
educational institutions are listed in the Directory of Federal Contract Audit
Offices, available from:
US GOVERNMENT PRINTING OFFICE
SUPERINTENDENT OF DOCUMENTS
WASHINGTON DC 20402-9371
5.2.12.e Nonprofit Organizations. See 5.2.10.
5.2.12.f State, Local, and Indian Tribal Governments. See 5.2.11.
5.2.12.g Cost-Sharing Rates. Cost-sharing contracts (see 2.4.4.d) may call for the
supplier to share contract costs by accepting indirect cost rates lower than
the anticipated actual rates. In such cases, a negotiated indirect-cost rate
ceiling may be incorporated into the contract.
5.2.12.h Ceilings on Indirect Cost Rates
1. In some cases, it may be prudent to provide a final indirect cost rate
ceiling in a contract, as when the supplier:
(a) Is a new company and there is no past or recent record of
incurred indirect costs;
(b) Has a recent record of rapidly increasing indirect costs due to a
declining volume of sales without a similar decline in indirect
costs; and
(c) Seeks to enhance its competitive position by basing its proposal
on indirect costs rates lower than those that may be reasonably
expected to occur, causing a cost overrun.
2. In such cases, a ceiling covering the final indirect cost rates may be
negotiated and specified in the contract.
3. When a ceiling is used, the contract must also provide that:
(a) The Postal Service will not be obligated to pay any additional
amount if the final indirect cost rates exceed the ceiling; and
(b) If the final indirect cost rates are less than the ceiling, the
negotiated rates will be reduced to the lower rates.
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