5 Contract Pricing
5 Contract Pricing 185
5.1 Price Evaluation 185
5.1.1 General 185
5.1.1.a Use. 185
5.1.1.b Responsibilities 185
5.1.2 Analyzing Proposals 185
5.1.2.a Price Analysis 185
5.1.2.b Adequate Price Competition 186
5.1.2.c Cost Analysis 186
5.1.2.d Technical Analysis. 187
5.1.2.e Cost or Pricing Data 188
5.1.2.f Profit 188
5.1.2.g Defective Cost or Pricing Data 189
5.1.2.h Clauses. 190
5.2 Cost Principles 191
5.2.1 General 191
5.2.1.a Use 191
5.2.1.b Other Standards. 191
5.2.2 Contract Costs 191
5.2.2.a Total Cost. 191
5.2.2.b Direct Costs. 191
5.2.2.c Indirect Costs. 191
5.2.2.d Credits. 191
5.2.3 Allowed Costs 191
5.2.3.a Determining Allowability. 191
5.2.3.b Reasonableness. 192
5.2.3.c Allocability. 192
5.2.4 Advance Agreement on Costs 192
5.2.4.a General. 192
5.2.4.b Applicability 192
5.2.5 Unallowable Costs 193
5.2.5.a Categories of Unallowable Costs. 193
5.2.5.b Excluding Unallowable Costs. 196
5.2.6 Termination Costs 196
5.2.6.a General. 196
5.2.6.b Common Items. 196
5.2.6.c Costs Continuing After Termination. 196
5.2.6.d Startup Costs. 196
5.2.6.e Loss of Useful Value. 197
5.2.6.f Rent Under Unexpired Leases. 197
5.2.6.g Alterations of Leased Property. 197
5.2.6.h Settlement Expenses 197
5.2.6.i Subcontractors' Claims. 197
5.2.7 Construction and Architect-Engineer Contracts 198
5.2.7.a General 198
5.2.7.b Allowable Costs for Construction Equipment. 198
5.2.7.c Renting Construction Equipment. 198
5.2.7.d Costs at the Job Site. 199
5.2.7.e Temporary Use of Land and Structures. 199
5.2.8 Facilities Contracts 199
5.2.8.a General. 199
5.2.8.b Advance Agreements. 199
5.2.8.c Overhead. 199
5.2.8.d Maintenance. 199
5.2.8.e Other Indirect Costs. 199
5.2.8.f Prices. 199
5.2.9 Educational Institutions 199
5.2.10 Nonprofit Organizations 200
5.2.10.a General. 200
5.2.10.b Principles. 200
5.2.11 State, Local, and Indian Tribal Governments 200
5.2.12 Indirect Cost Rates 200
5.2.12.a General 200
5.2.12.b Billing Rates 200
5.2.12.c Determination Procedure 201
5.2.12.d Educational Institutions 201
5.2.12.e Nonprofit Organizations. 202
5.2.12.f State, Local, and Indian Tribal Governments. 202
5.2.12.g Cost-Sharing Rates. 202
5.2.12.h Ceilings on Indirect Cost Rates 202
5 Contract Pricing
5.1 Price Evaluation
5.1.1.a Use. This section describes policies and procedures for evaluating initial
contract and subcontract prices, and for pricing contract modifications.
5.1.1.b Responsibilities
1. The purchase team must ensure that contract prices are fair and
reasonable by:
(a) Evaluating proposed prices using the methods of price analysis or
cost analysis as described in this section;
(b) Pricing each contract separately and independently, and not
considering proposed price reductions, profits, or losses under
other contracts; and
(c) Excluding amounts for specified contingencies in contracts if they
provide for price adjustments based on the contingency.
2. The contracting officer represents the purchase team in dealings with
suppliers and offerors and serves as the pricing expert on the purchase
team. Consequently, the contracting officer has the ultimate authority
for pricing decisions. Depending on the complexity and dollar value of
the purchase, however, the purchase team should also seek pricing
advice and assistance from specialists in contracting, finance, law,
contract auditing, quality assurance, engineering, traffic management,
and contract pricing. If specialized assistance is not available, contact
the Inspection Service. The purchase team should have the appropriate
specialists attend negotiations when matters of significance involving
complex problems will be addressed.
5.1.2 Analyzing Proposals
5.1.2.a Price Analysis
1. Price analysis is the process of examining and evaluating a proposed
price without evaluating its separate cost elements and profit. It is the
preferred method of proposal analysis.
2. Price is cost plus any fee or profit applicable to the type of contract.
3. Price analysis must always be performed, and should be relied on
entirely in all but a few situations.
4. One or more of the following pricing techniques may be used:
(a) Comparing proposed prices received in response to a solicitation.
(b) Comparing previously proposed prices and contract prices with
current proposed prices for the same or similar items in
comparable quantities.
(c) Applying rough yardsticks (such as dollars per pound or per
horsepower) to highlight significant inconsistencies that warrant
additional price analysis.
(d) Comparing proposed prices with prices in published catalogs or
lists, market prices, indexes, and discount or rebate
arrangements.
(e) Comparing proposed prices with independent Postal Service cost
estimates (see 2.1.4.b.5).
(f) Ascertaining that the price is set by law or regulation.
(g) Comparing proposed prices with prices for the same or similar
items obtained through market research.
5. Whenever adequate price competition has been obtained, comparing
proposed prices with Postal Service estimates will ordinarily suffice to
meet price-analysis requirements.
5.1.2.b Adequate Price Competition
1. Price competition exists if two or more independent and capable
suppliers submit priced proposals meeting the solicitation's
requirements.
2. If price competition exists, it is presumed adequate, unless:
(a) The low offeror has such a decided market advantage that it is
practically immune from competition; or
(b) The purchase team determines that the lowest price is not fair
and reasonable.
1. Cost analysis is the process of examining the separate elements of cost
and profit in an offeror's or supplier's cost or pricing data, to form an
opinion about the degree to which they represent what the contract
should cost.
2. Cost analysis is normally done only when there is not adequate price
competition and no method of price analysis will ensure that prices are
fair and reasonable. It should be limited to cost elements needing close
analysis to protect the Postal Service's interest. When a limited number
of cost elements will provide a reasonable analysis, the contracting
officer should obtain only the data needed to support such an analysis.
3. Cost analysis involves, as appropriate:
(a) Verifying cost or pricing data and evaluating cost elements,
including:
(1) The necessity for and reasonableness of proposed costs,
including allowances for contingencies;
(2) Projecting the offeror's cost trends, on the basis of current
and historical cost or pricing data;
(3) A technical analysis of the estimated labor, material, tooling,
and facilities required and the reasonableness of scrap and
spoilage factors; and
(4) Applying audited or negotiated indirect-cost rates and labor
rates.
(b) Evaluating the effect of the offeror's current practices on future
costs. In conducting this evaluation, the purchase team must
ensure that the effects of inefficient or uneconomical past
practices are not projected into the future. In pricing production of
recently-developed, complex equipment, the purchase team
should make a trend analysis of basic labor and materials even in
periods of relative price stability.
(c) Comparing costs proposed by the offeror for individual cost
elements with:
(1) Actual costs previously incurred by the same offeror;
(2) Previous cost estimates from the offeror or from other
offerors for the same or similar items;
(3) Independent Postal Service cost estimates; and
(d) Analyzing supplier make-or-buy decisions in evaluating
subcontract costs.
(e) Verifying that the offeror's cost submissions are in accordance
with the cost principles in 5.2.
(f) Reviewing submissions to ensure that data needed to make the
supplier's proposal accurate, complete, and current has not been
submitted or identified in writing. If there is such data, the
contracting officer must attempt to obtain it. If it cannot be
obtained, satisfactory allowance for the incomplete data must be
negotiated.
5.1.2.d Technical Analysis. Technical analysis is the process of examining proposals
to determine the need for and reasonableness of resources proposed under
a contract. Technical analysis should be performed by engineering,
management, or specialists as necessary to assist in price analysis or cost
analysis. Technical analysis of proposals may range from evaluating technical
proposals according to evaluation factors in a solicitation, to extensive
analysis of materials, labor hours and labor mix, special tooling and facilities,
and other cost factors.
5.1.2.e Cost or Pricing Data
1. Cost or pricing data includes more than historical accounting data. It
includes all the facts affecting cost estimates and costs incurred that
can be expected to significantly affect price negotiations. Cost or pricing
data may also include:
(a) Supplier quotations;
(b) Nonrecurring costs;
(c) Information on changes in production methods and in production
or purchasing volume;
(d) Data supporting business projections, objectives, and related
operating costs;
(e) Unit-cost trends such as those associated with labor efficiency;
(f) Make-or-buy decisions;
(g) Resource estimates to meet business goals;
(h) Information on management decisions that could have a
significant bearing on costs; and
(i) Historical costs for the same or similar items.
2. Cost or pricing data must be obtained before awarding a
noncompetitive contract or modification whenever price analysis is
insufficient to determine reasonableness of price. Only the data needed
to make the determination should be obtained. Before agreeing on
price, the contracting officer must have the supplier update the data to
the latest dates for which data is reasonably available.
3. The contracting officer must have offerors or suppliers obtain cost or
pricing data for proposed subcontracts or subcontract modifications
when needed to determine the reasonableness of a proposed contract
or subcontract price (including negotiated final pricing actions such as
termination settlements and total final price agreements for fixed-price
incentive contracts). The offeror or supplier is responsible for doing the
price or cost analysis for subcontracts, and including the results as part
of its cost or pricing data. In unusual circumstances, to ensure that
analysis is adequate, the contracting officer may require the offeror or
supplier to submit the subcontract data along with its own data. This
does not reduce the offeror's or supplier's responsibility to do the
subcontract cost or price analysis and negotiate fair and reasonable
subcontract prices.
4. If cost or pricing data are needed and the offeror or supplier refuses to
provide the necessary data in spite of a repeated request, the
contracting officer must withhold award or modification and refer the
matter to the next higher level of contracting authority. The ultimate
disposition must be documented.
1. Do not use predetermined percentages or limitations on profit.
2. Do not analyze profit when there is adequate price competition, or
where price analysis will ensure that prices are fair and reasonable.
3. When cost analysis is required for price negotiations, profit must be
analyzed. Profit should be analyzed with the objective of rewarding
suppliers for financial and other risks they assume; resources they use;
and the organizational, performance, and management capabilities
they employ. The complexity of materials required, the extent of
subcontracting, the ratio of indirect costs to direct costs, and the
contribution of capital investments to contract performance should also
be considered.
4. If pricing is for a change or modification that requires essentially the
same type and mix of work as the basic contract, and the dollar value is
relatively small compared to the total contract amount, the profit or fee
may be based on the basic contract's rate.
5.1.2.g Defective Cost or Pricing Data
1. If, before agreeing on price, the purchase team learns that any cost or
pricing data is inaccurate, incomplete, or not current, the contracting
officer must immediately notify the offeror or supplier, regardless of
whether the defective data increases or decreases the contract price.
The contracting officer must then negotiate using any new data
submitted or making allowance for the incorrect data, documenting the
file accordingly.
2. If, after award, cost or pricing data is found to be inaccurate,
incomplete, or not current as of the date of final agreement on price,
the Postal Service is entitled to a price adjustment, including profit or
fee, for any significant amount by which the price increased due to
defective data. This is ensured by the clauses in 5.1.2.h. To arrive at a
price adjustment, the purchase team must consider:
(a) When the cost or pricing data became reasonably available to the
supplier;
(b) The extent to which the Postal Service relied on defective data;
and
(c) Any understated cost or pricing data submitted to support price
negotiations, up to the amount of the Postal Service's claim
against the initial pricing of the same contract or change order
(however, it need not be in the same cost categories such as
materials, direct labor, or indirect costs).
3. If, after award, the purchase team learns or suspects that the data
furnished was not accurate, complete, or current, the contracting officer
must have an audit conducted. The purchase team may not reprice the
contract solely because profit was greater than forecast or because a
specified contingency failed to materialize.
4. Whenever a postaward audit indicates defective pricing, the purchase
team must determine if the data submitted was defective and the
purchase team relied on it. Before making such a determination, the
contracting officer should give the supplier an opportunity to support the
accuracy, completeness, and currency of data in question. The
contracting officer must prepare a memorandum indicating the
purchase team's determination concerning whether the submitted data
was accurate, complete, and current as of the date of final agreement
on price, if the purchase team relied on the data, and the results of any
contractual action taken. The contracting officer must send one copy to
the Inspection Service, one copy to the auditor if the audit was not
performed by the Inspection Service, and one copy to the supplier.
5. If both a supplier and subcontractor submitted cost or pricing data, the
Postal Service has the right, under the clauses in h, to reduce the prime
contract price if it was significantly increased because a subcontractor
submitted defective data. This right applies whether the data supported
subcontract cost estimates or supported firm agreements between
subcontractor and supplier.
6. If an audit discloses defective subcontractor cost or pricing data, the
information necessary to support a reduction in prime contract and
subcontract prices may be available only from within the Postal Service.
To the extent necessary to secure a prime contract price reduction, the
contracting officer should make this information available to the supplier
or appropriate subcontractor upon request. If releasing the information
would compromise Postal Service security or disclose trade secrets or
confidential business information, the contracting officer may release it
only under conditions that will protect it from improper disclosure. The
information made available must be limited to information used as the
basis for reducing the price of the prime contract. To provide an
opportunity for the supplier to take corrective action, the contracting
officer should give the supplier reasonable advance notice before
deciding to reduce the price of the prime contract.
(a) When a supplier uses defective subcontract data in arriving at the
price but later awards the subcontract to a lower-priced
subcontractor (or does not subcontract for the work), any
adjustment to the price of the prime contract due to defective
subcontract data is limited to the difference (plus applicable
indirect cost and profit markups) between the subcontract price
used for pricing the prime contract and either the actual
subcontract price or the actual cost to the supplier, if not
subcontracted, providing the data on which the actual subcontract
price is based is not itself defective.
(b) Under cost-reimbursement contracts and fixed-price incentive
contracts, the basis for not allowing or recognizing costs under
the clauses in h will be that payments to subcontractors are
higher than they would have been if the subcontractor data had
not been defective.
5.1.2.h Clauses. Whenever cost or pricing data may be required in negotiating a
contract, or the subsequent modification of a contract, the contract must
include:
1. Clause 5-1, Price Reduction for Defective Cost or Pricing Data.
2. Clause 5-2, Subcontractor Cost or Pricing Data.
5.2 Cost Principles
1. This section contains principles for 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 Contract Costs
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 Allowed Costs
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 their 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 Advance Agreement on Costs
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 Unallowable Costs
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.
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 Termination Costs
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.dStartup 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.
5.2.6.h Settlement Expenses
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.iSubcontractors' 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 a 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 Construction 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, supplies, material handling, and restoration and cleanup
are allowed as direct or indirect costs, provided the accounting practice used
is 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 Facilities Contracts
5.2.8.a General. The cost principles of this section apply to contracts under which
Postal Service 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 Agreements. 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.
5.2.9 Educational Institutions
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 Nonprofit Organizations
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.
5.2.11 State, Local, and Indian Tribal Governments
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.
5.2.12 Indirect Cost Rates
1. This part describes procedures 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.
5.2.12.c Determination Procedure
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.
5.2.12.d Educational Institutions
1. 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-88, Indirect Cost Rates,
Audit, and Audit Follow Up at 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:
ATTENTION OTD
DEFENSE CONTRACT AUDIT AGENCY
CAMERON STATION
ALEXANDRIA VA 22314-6178
2. Payment for reimbursable indirect costs may be made on the basis of
predetermined, final indirect cost rates if they have been established by
the agency. If predetermined rates are used, the rates and bases must
be included in the contract's schedule, and the contract must include
Clause 5-3, Predetermined Indirect Cost Rates.
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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