Subchapter E—General Contracting Requirements

Federal Acquisition Regulation 27.000 SUBCHAPTER E—GENERAL CONTRACTING REQUIREMENTS

PART 27—PATENTS, DATA, AND 27.303 Contract clauses. 27.304 Procedures. COPYRIGHTS 27.304–1 General. 27.304–2 Contracts placed by or for other Sec. Government agencies. 27.000 Scope of part. 27.304–3 Contracts for construction work or Subpart 27.1—General architect-engineer services. 27.304–4 Subcontracts. 27.101 Applicability. 27.304–5 Appeals. 27.102 [Reserved] 27.305 Administration of patent rights 27.103 Policy. clauses. 27.104 General guidance. 27.305–1 Patent rights follow-up. 27.305–2 Follow-up by contractor. Subpart 27.2—Patents 27.305–3 Follow-up by Government. 27.200 Scope of subpart. 27.305–4 Conveyance of invention rights ac- 27.201 Authorization and consent. quired by the Government. 27.201–1 General. 27.305–5 Publication or release of invention 27.201–2 Clauses on authorization and con- disclosures. sent. 27.306 Licensing background patent rights 27.202 Notice and assistance. to third parties. 27.202–1 General. 27.202–2 Clause on notice and assistance. Subpart 27.4—Rights in Data and 27.203 Patent indemnification of Govern- ment by contractor. Copyrights 27.203–1 General. 27.400 Scope of subpart. 27.203–2 Clauses for sealed bid contracts (ex- 27.401 Definitions. cluding construction). 27.203–3 Negotiated contracts (excluding 27.402 Policy. construction). 27.403 Data rights—general. 27.203–4 Clauses for negotiated contracts 27.404 Basic rights in data clause. (excluding construction). 27.405 Other data rights provisions. 27.203–5 Clause for construction contracts 27.406 Acquisition of data. and for dismantling, demolition, and re- 27.407 Rights to technical data in successful moval of improvements contracts. proposals. 27.203–6 Clause for Government waiver of in- 27.408 Cosponsored research and develop- demnity. ment activities. 27.204 Reporting of royalties—anticipated 27.409 Solicitation provisions and contract or paid. clauses. 27.204–1 General. 27.204–2 Solicitation provision for royalty Subpart 27.5—[Reserved] information. 27.204–3 Patents—notice of Government as a licensee. Subpart 27.6—Foreign License and 27.205 Adjustment of royalties. Technical Assistance Agreements 27.206 Refund of royalties. 27.206–1 General. 27.601 General. 27.206–2 Clause for refund of royalties. AUTHORITY: 40 U.S.C. 486(c); 10 U.S.C. Chap- 27.207 Classified contracts. ter 137; and 42 U.S.C. 2473(c). 27.207–1 General. 27.207–2 Clause for classified contracts. SOURCE: 49 FR 12974, Mar. 30, 1984, unless 27.208 Use of patented technology under the otherwise noted. North American Free Trade Agreement. 27.209 Use of patented technology under the 27.000 Scope of part. General Agreement on Tariffs and Trade This part prescribes policies, proce- (GATT). dures, and contract clauses pertaining Subpart 27.3—Patent Rights Under to patents and directs agencies to de- Government Contracts velop coverage for Rights in Data and Copyrights. 27.300 Scope of subpart. 27.301 Definitions. 27.302 Policy.

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Subpart 27.1—General (f) The Government honors the rights in data resulting from private develop- 27.101 Applicability. ments and limits its demands for such rights to those essential for Govern- The policies, procedures, and clauses ment purposes. prescribed by this part 27 are applica- (g) The Government honors rights in ble to all agencies. Agencies are au- patents, data, and copyrights, and com- thorized to adopt alternate policies, plies with the stipulations of law in procedures, and clauses, but only to using or acquiring such rights. the extent determined necessary to (h) Generally, the Government re- meet the specific requirements of laws, quires that contractors obtain permis- executive orders, treaties, or inter- sion from copyright owners before in- national agreements. Any agency ac- cluding privately-owned copyrighted tion adopting such alternate policies, works in data required to be delivered procedures, and clauses shall be cov- under Government contracts. ered in published agency regulations. [49 FR 12974, Mar. 30, 1984, as amended at 50 27.102 [Reserved] FR 1743, Jan. 11, 1985; 50 FR 52429, Dec. 23, 1985] 27.103 Policy. The policies pertaining to patents, Subpart 27.2—Patents data, and copyrights are set forth in 27.200 Scope of subpart. this part 27 and the related clauses in part 52. This subpart prescribes policy with respect to— 27.104 General guidance. (a) Patent infringement liability resulting from work performed by or for (a) The Government encourages the the Government; maximum practical commercial use of (b) Royalties payable in connection inventions made while performing Gov- with performing Government con- ernment contracts. tracts; and (b) Generally, the Government will (c) Security requirements covering not refuse to award a contract on the patent applications containing classi- grounds that the prospective contrac- fied subject matter filed by contractor may infringe a patent. tors. (c) Generally, the Government encourages the use of inventions in per- 27.201 Authorization and consent. forming contracts and, by appropriate contract clauses, authorizes and con- 27.201–1 General. sents to such use, even though the in- (a) In those cases where the Govern- ventions may be covered by U.S. pat- ment has authorized or consented to ents and indemnification against in- the manufacture or use of an invention fringement may be appropriate. described in and covered by a patent of (d) Generally, the Government should the United States, any suit for in- be indemnified against infringement of fringement of the patent based on the U.S. patents resulting from performing manufacture or use of the invention by contracts when the supplies or services or for the United States by a contrac- acquired under the contracts normally tor (including a subcontractor at any are or have been sold or offered for sale tier) can be maintained only against by any supplier to the public in the the Government in the U.S. Claims commercial open market or are the Court and not against the contractor same as such supplies or services with or subcontractor (28 U.S.C. 1498). To en- relatively minor modifications. sure that work by a contractor or sub- (e) The Government acquires supplies contractor under a Government con- or services on a competitive basis in tract may not be enjoined by reason of accordance with part 6, but it is impor- patent infringement, the Government tant that the efforts directed toward shall give authorization and consent in full and open competition not improp- accordance with this regulation. The erly demand or use data relating to pri- liability of the Government for dam- vate developments. ages in any such suit against it may,

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however, ultimately be borne by the ficer shall use the basic clause. Also, contractor or subcontractor in accord- when a proposed contract involves ei- ance with the terms of any patent in- ther R&D or supplies and materials, in demnity clause also included in the addition to construction or architect- contract, and an authorization and engineer work, the contracting officer consent clause does not detract from shall use the basic clause. any patent indemnification commit- (c) If the solicitation or contract is ment by the contractor or subcontrac- for communication services with a tor. Therefore, both a patent indem- common carrier and the services are nity clause and an authorization and unregulated and not priced by a tariff consent clause may be included in the schedule set by a regulatory body, the same contract. contracting officer shall use the clause (b) The contracting officer shall not include in any solicitation or con- with its Alternate II. tract— [49 FR 12974, Mar. 30, 1984, as amended at 60 (1) Any clause whereby the Govern- FR 34758, July 3, 1995] ment expressly agrees to indemnify the contractor against liability for patent 27.202 Notice and assistance. infringement; or (2) Any authorization and consent 27.202–1 General. clause when both complete perform- The contractor is required to notify ance and delivery are outside the Unit- the contracting officer of all claims of ed States, its possessions, and Puerto infringement that come to the contrac- Rico. tor’s attention in connection with performing a Government contract. The 27.201–2 Clauses on authorization and consent. contractor is also required, when requested, to assist the Government with (a) The contracting officer shall in- any evidence and information in its sert the clause at 52.227–1, Authoriza- possession in connection with any suit tion and Consent, in solicitations and contracts (including those for con- against the Government, or any claims struction; architect-engineer services; against the Government made before dismantling, demolition, or removal of suit has been instituted, on account of improvements; and noncommon carrier any alleged patent or copyright in- communication services), except when fringement arising out of or resulting using simplified acquisition procedures from the contract performance. or both complete performance and delivery are outside the United States, 27.202–2 Clause on notice and assist- its possessions, and Puerto Rico. Al- ance. though the clause is not required when The contracting officer shall insert simplified acquisition procedures are the clause at 52.227–2, Notice and As- used, it may be used with them. sistance Regarding Patent and Copy- (b) The contracting officer shall in- right Infringement, in supply, service, sert the clause with its Alternate I in or research and development solicita- all R&D solicitations and contracts (in- tions and contracts (including con- cluding those for construction and ar- struction and architect-engineer con- chitect-engineer services calling exclu- tracts) which anticipate a contract sively for R&D work or exclusively for value above the simplified acquisition experimental work), unless both com- threshold, except when complete per- plete performance and delivery are out- formance and delivery are outside the side the United States, its possessions, United States, its possessions, and and Puerto Rico. When a proposed contract involves both R&D work and sup- Puerto Rico, unless the contracts indi- plies or services, and the R&D work is cate that the supplies or other the primary purpose of the contract, deliverables are ultimately to be the contracting officer shall use this shipped into one of those areas. alternate. In all other proposed con- [60 FR 34758, July 3, 1995] tracts involving both R&D work and supplies or services, the contracting of-

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27.203 Patent indemnification of Gov- (4) When the contract is awarded ernment by contractor. using simplified acquisition procedures. 27.203–1 General. (5) When the contract is solely for ar- (a) To the extent set forth in this sec- chitect-engineer work (see part 36). tion, the Government requires reim- [49 FR 12974, Mar. 30, 1984, as amended at 50 bursement for liability for patent in- FR 1743, Jan. 11, 1985; 50 FR 52429, Dec. 23, fringement arising out of or resulting 1985; 60 FR 34759, July 3, 1995] from performing construction contracts or contracts for supplies or serv- 27.203–2 Clauses for sealed bid con- ices that normally are or have been tracts (excluding construction). sold or offered for sale by any supplier (a) Except when prohibited by 27.203– to the public in the commercial open 1(b) above, the contracting officer shall market or that are the same as such insert the clause at 52.227–3, Patent In- supplies or services with relatively demnity, in sealed bid contracts for minor modifications. Appropriate supplies or services (excluding con- clauses for indemnification of the Gov- struction and dismantling, demolition, ernment are prescribed in the following and removal of improvements), if the subsections. contracting officer determines that the (b) A patent indemnity clause shall supplies or services (or such items with not be used in the following situations: relatively minor modifications) nor- (1) When the clause at 52.227–1, Au- mally are or have been sold or offered thorization and Consent, with its Al- for sale by any supplier to the public in ternate I, is included in the contract, the commercial open market. Also the except that in contracts calling also clause may be included as authorized for supplies of the kind described in in 27.203–1(b)(2)(i). paragraph (a) above, a patent indem- (b) In solicitations and contracts (ex- nity clause may be used solely with re- cluding those for construction) that spect to such supplies. call in part for specific components, (2) When the contract is for supplies spare parts, or services (or such items or services (or such items with rel- with relatively minor modifications) atively minor modifications) that that normally are or have been sold or clearly are not or have not been sold or offered for sale by any supplier to the offered for sale by any supplier to the public in the commercial open market, public in the commercial open market. the contracting officer may use the However, a patent indemnity clause clause with its Alternate I or II, as ap- may be included in (i) sealed bid con- propriate. The choice between Alter- tracts to obtain an indemnity regard- nate I (identification of excluded ing specific components, spare parts, or items) and Alternate II (identification services so sold or offered for sale (see of included items) should be based upon 27.203–2(b) below), and (ii) contracts to simplicity, Government administrative be awarded (either by sealed bid or ne- convenience and ease of identification gotiation) if a patent owner contends of the items. that the acquisition would result in (c) In solicitations and contracts for patent infringement and the prospec- communication services and facilities tive contractor, after responding to a where performance is by a common solicitation that did not contain an in- carrier, and the services are unregu- demnity clause, is willing to indemnify lated and are not priced by a tariff the Government against such infringe- schedule set by a regulatory body, use ment either (A) without increase in the basic clause with its Alternate III. price on the basis that the patent is in- [49 FR 12974, Mar. 30, 1984, as amended at 50 valid or not infringed, or (B) for other FR 1743, Jan. 11, 1985; 50 FR 52429, Dec. 23, good reasons. 1985] (3) When both performance and delivery are to be outside the United States, 27.203–3 Negotiated contracts (exclud- its possessions, and Puerto Rico, unless ing construction). the contract indicates that the supplies A patent indemnity clause is not re- or other deliverables are ultimately to quired in negotiated contracts, (except be shipped into one of those areas. construction contracts covered at

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27.203–5), but may be used as discussed where performance is by a common in 27.203–4 below. A decision to omit a carrier, and the services are unregu- patent indemnity clause in a nego- lated and are not priced by a tariff tiated fixed-price contract described in schedule set by a regulatory body, the this subsection should be based on a clause shall be used with its Alternate price consideration to the Government III. for forgoing the indemnification rights normally received by commercial pur- 27.203–5 Clause for construction con- chasers of the same supplies or serv- tracts and for dismantling, demoli- ices. tion, and removal of improvements contracts. [49 FR 12974, Mar. 30, 1984, as amended at 51 FR 2665, Jan. 17, 1986] Except as prohibited by 27.203–1(b), the contracting officer shall insert the 27.203–4 Clauses for negotiated con- clause at 52.227–4, Patent Indemnity— tracts (excluding construction). Construction Contracts, in solicita- (a) The contracting officer may in- tions and contracts for construction or sert the clause at 52.227–3, Patent In- that are fixed-price for dismantling, demnity— demolition, or removal of improve- (1) As authorized in 27.203–1(b)(2)(ii); ments. If it is determined that the con- and struction will necessarily involve the (2) Except as prohibited by 27.203– use of structures, products, materials, 1(b), in solicitations anticipating nego- equipment, processes, or methods that tiated contracts (and such contracts) are nonstandard, noncommercial, or for supplies or services (excluding con- special, the contracting officer may ex- struction and dismantling, demolition, pressly exclude them from the patent and removal of improvements), if the indemnification by using the basic contracting officer determines that the clause with its Alternate I. supplies or services (or such items with relatively minor modifications) nor- 27.203–6 Clause for Government waiv- mally are or have been sold or offered er of indemnity. for sale by any supplier to the public in If, in the Government’s interest, it is the commercial open market. Ordi- appropriate to exempt one or more spe- narily, the contracting officer, in con- cific United States patents from the sultation with the prospective contrac- patent indemnity clause, the contract- tor, should be able to determine wheth- ing officer shall obtain written ap- er the supplies or services being pur- proval from the agency head or des- chased normally are or have been sold ignee and shall insert the clause at or offered for sale by any supplier to 52.227–5, Waiver of Indemnity, in solici- the public in the commercial open mar- tations and contracts in addition to ket. (For negotiated construction con- the appropriate patent indemnity tracts, see 27.203–5). clause. The contracting officer shall (b) In solicitations and contracts document the contract file with a copy that call in part for specific compo- of the written approval. nents, spare parts, or services (or such items with relatively minor modifica- 27.204 Reporting of royalties—antici- tions) that normally are or have been pated or paid. sold or offered for sale by any supplier to the public in the commercial open 27.204–1 General. market, the contracting officer may (a) (1) To determine whether royal- use the clause with its Alternate I or ties anticipated or actually paid under II, as appropriate. The choice between Government contracts are excessive, Alternate I (identification of excluded improper, or inconsistent with any items) and Alternate II (identification Government rights in particular inven- of included items) should be based upon tions, patents, or patent applications, simplicity, Government administrative contracting officers shall require pro- convenience, and the ease of identifica- spective contractors to furnish certain tion of the items. royalty information and shall require (c) In solicitations and contracts for contractors to furnish certain royalty communication services and facilities reports. Contracting officers shall take

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appropriate action to reduce or elimi- 27.204–2 Solicitation provision for roy- nate excessive or improper royalties. alty information. (2) Royalty information shall not be The contracting officer shall insert a required (except for information under solicitation provision substantially as 27.204–3) in sealed bid contracts unless shown in 52.227–6, Royalty Information, the need for such information is ap- in any solicitation that may result in a proved at a level above that of the con- negotiated contract for which royalty tracting officer as being necessary for information is desired or for which cost proper protection of the Government’s or pricing data is obtained under 15.804. interests. If the solicitation is for communica- (b) Any solicitations that may result tion services and facilities by a com- in a negotiated contract for which roy- mon carrier, use the provision with its alty information is desired or for which Alternate I. cost or pricing data is obtained (see FAR 15.804) should contain a provision [49 FR 12974, Mar. 30, 1984, as amended at 56 requesting information relating to any FR 15153, Apr. 15, 1991] proposed charge for royalties. If the re- 27.204–3 Patents—notice of Govern- sponse to a solicitation includes a ment as a licensee. charge for royalties, the contracting officer shall, before award of the con- (a) When the Government is obli- tract, forward the information relating gated to pay a royalty on a patent be- to the proposed payments of royalties cause of a license agreement between to the office having cognizance of pat- the Government and a patent owner ent matters for the contracting activ- and the contracting officer knows (or ity concerned. The cognizant office has reason to believe) that the licensed shall promptly advise the contracting patent will be applicable to a prospec- officer of appropriate action. Before tive contract, the Government should award, the contracting officer shall furnish information relating to the take action to protect the Govern- royalty to prospective offerors since it ment’s interest with respect to such serves the interest of both the Govern- royalties, giving due regard to all per- ment and the offerors. In such situa- tinent factors relating to the proposed tions, the contracting officer should in- contract and the advice of the cog- clude in the solicitation a notice of the nizant office. license, the number of the patent, and (c) The contracting officer, when con- the royalty rate recited in the license. sidering the approval of a subcontract, (b) When the Government is obli- shall require and obtain the same roy- gated to pay such a royalty, the solici- alty information and take the same ac- tation should also require offerors to tion with respect to such subcontracts furnish information indicating whether in relation to royalties as required for or not each offeror is a licensee under prime contracts under paragraph (b) of the patent or the patent owner. This this subsection. However, consent need information is necessary so that the not be withheld pending receipt of ad- Government may either (1) evaluate an vice in regard to such royalties from offeror’s price by adding an amount the office having cognizance of patent equal to the royalty, or (2) negotiate a matters. price reduction with an offeror-licensee (d) The contracting officer shall for- when the offeror is licensed under the ward the royalty information and/or same patent at a lower royalty rate. royalty reports received to the office (c) If the Government is obligated to having cognizance of patent matters pay a royalty on a patent involved in for the contracting activity concerned the prospective contract, the contract- for advice as to appropriate action. ing officer shall insert in the solicitation, substantially as shown, the provi- [49 FR 12974, Mar. 30, 1984, as amended at 52 sion at 52.227–7, Patents—Notice of FR 19803, May 27, 1987; 56 FR 15152, Apr. 15, Government Licensee. 1991]

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27.205 Adjustment of royalties. spective litigation on the validity of a (a) If at any time the contracting of- patent or patents or on the enforce- ficer has reason to believe that any ability of an agreement (upon which royalties paid, or to be paid, under an the contractor or subcontractor bases existing or prospective contract or sub- the asserted obligation) to pay the roy- contract are inconsistent with Govern- alties to be included in the target or ment rights, excessive, or otherwise contract price. improper, the facts shall be promptly 27.206–2 Clause for refund of royalties. reported to the office having cognizance of patent matters for the con- The contracting officer shall insert tracting activity concerned. The cog- the clause at 52.227–9, Refund of Royal- nizant office shall review the royalties ties, in negotiated fixed-price contracts thus reported and such royalties as are and solicitations contemplating such reported under 27.204 and 27.206 and, in contracts if the contracting officer de- accordance with agency procedures, termines that circumstances make it shall either recommend appropriate ac- questionable whether or not substan- tion to the contracting officer or, if au- tial amounts of royalties will have to thorized, shall take appropriate action. be paid by the contractor or a sub- (b) In coordination with the cog- contractor at any tier. nizant office, the contracting officer shall promptly act to protect the Gov- 27.207 Classified contracts. ernment against payment of royalties 27.207–1 General. on supplies or services— (1) With respect to which the Govern- (a) Unauthorized disclosure of classi- ment has a royalty-free license; fied subject matter, whether in patent (2) At a rate in excess of the rate at applications or resulting from the issu- which the Government is licensed; or ance of a patent, may be a violation of (3) When the royalties in whole or in 18 U.S.C. 792 et seq. (Espionage and Cen- part otherwise constitute an improper sorship), and related statutes, and may charge. be contrary to the interests of national (c) In appropriate cases, the contract- security. ing officer in coordination with the (b) Upon receipt from the contractor cognizant office shall obtain a refund of a patent application, not yet filed, pursuant to any refund of royalties that has been submitted by the con- clause in the contract (see 27.206) or ne- tractor in compliance with paragraph gotiate for a reduction of royalties. (a) or (b) of the clause at 52.227–10, Fil- (d) For guidance in evaluating infor- ing of Patent Applications—Classified mation furnished pursuant to 27.204 and Subject Matter, the contracting officer 27.205(a) above, see 31.205–37 and 31.311– shall ascertain the proper security 34. See also 31.109 regarding advance classification of the patent application. understandings on particular cost Upon a determination that the applica- items, including royalties. tion contains classified subject matter, the contracting officer shall inform the 27.206 Refund of royalties. contractor of any instructions deemed necessary or advisable relating to 27.206–1 General. transmittal of the application to the When a fixed-price contract is nego- United States Patent Office in accord- tiated under circumstances that make ance with procedures in the National it questionable whether or not substan- Industrial Security Program Operating tial amounts of royalties will have to Manual. If the material is classified Se- be paid by the contractor or a sub- cret or higher, the contracting officer contractor, such royalties may be in- shall make every effort to notify the cluded in the target or contract price, contractor of the determination within provided the contract specifies that the 30 days, pursuant to paragraph (a) of Government will be reimbursed the the clause. amount of such royalties if they are (c) In the case of all applications not paid. Such circumstances might in- filed under the provisions of this sec- clude, for example, either a pending tion 27.207, the contracting officer, Government anti-trust action or pro- upon receiving the application serial

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number, the filing date, and the infor- (1) An invention used or manufac- mation furnished by the contractor tured by or for the Federal Govern- under paragraph (d) of the clause at ment, except that the patent owner 52.227–10, Filing of Patent Applica- must be notified whenever the agency tions—Classified Subject Matter, shall or its contractor, without making a promptly submit that information to patent search, knows or has demon- personnel having cognizance of patent strable reasonable grounds to know matters in order that the steps nec- that an invention described in and cov- essary to ensure the security of the ap- ered by a valid U.S. patent is or will be plication may be taken. used or manufactured without a li- (d) A request for the approval re- cense; and ferred to in paragraph (c) of the clause (2) The existence of a national emer- at 52.227–10, Filing of Patent Applica- gency or other circumstances of ex- tions—Classified Subject Matter, must treme urgency, except that the patent be considered and acted upon promptly owner must be notified as soon as it is by the contracting officer in order to reasonably practicable to do so. avoid the loss of valuable patent rights (d) Section 6(c) of Executive Order of the Government or the contractor. 12889 provides that the notice to the patent owner does not constitute an [49 FR 12974, Mar. 30, 1984, as amended at 61 admission of infringement of a valid FR 31617, June 20, 1996] privately owned patent. (e) When addressing issues regarding 27.207–2 Clause for classified con- compensation for the use of patented tracts. technology, Government personnel The contracting officer shall insert should be advised that NAFTA uses the the clause at 52.227–10, Filing of Patent term ‘‘adequate remuneration.’’ Execu- Applications—Classified Subject Mat- tive Order 12889 equates ‘‘remunera- ter, in all classified solicitations and tion’’ to ‘‘reasonable and entire com- contracts and in all solicitations and pensation’’ as used in 28 U.S.C. 1498, the contracts where the nature of the work statute which gives jurisdiction to the or classified subject matter involved in U.S. Court of Federal Claims to hear the work reasonably might be expected patent and copyright cases involving to result in a patent application con- infringement by the U.S. Government. taining classified subject matter. (f) Depending on agency procedures, either the technical/requiring activity 27.208 Use of patented technology or the contracting officer shall ensure under the North American Free compliance with the notice require- Trade Agreement. ments of NAFTA Article 1709(10). A (a) The requirements of this section contract award should not be sus- apply to the use of technology covered pended pending notification to the by a valid patent when the patent hold- right holder. er is from a country that is a party to (g) When questions arise regarding the North American Free Trade Agree- the notice requirements or other mat- ment (NAFTA). ters relating to this section, the con- (b) Article 1709(10) of NAFTA gen- tracting officer should consult with erally requires a user of technology legal counsel. covered by a valid patent to make a [61 FR 31648, June 20, 1996] reasonable effort to obtain authorization prior to use of the patented tech- 27.209 Use of patented technology nology. However, NAFTA provides that under the General Agreement on this requirement for authorization may Tariffs and Trade (GATT). be waived in situations of national (a) Article 31 of Annex 1C, Agreement emergency or other circumstances of on Trade-Related Aspects of Intellec- extreme urgency, or public non- tual Property Rights, to GATT (Uru- commercial use. guay Round) addresses situations (c) Section 6 of Executive Order 12889 where the law of a member country al- of December 27, 1993, waives the re- lows for use of a patent without au- quirement to obtain advance author- thorization from the patent holder, in- ization for— cluding use by the Government.

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(b) The contracting officer should tions, available to the public on rea- consult with legal counsel regarding sonable terms. questions under this section. Small business firm, as used in this subpart, means a small business con- [61 FR 39212, July 26, 1996] cern as defined at 15 U.S.C. 632 and implementing regulations of the Adminis- Subpart 27.3—Patent Rights Under trator of the Small Business Adminis- Government Contracts tration. (For the purpose of this definition, the size standard contained in 13 27.300 Scope of subpart. CFR 121.3–8 for small business contrac- This subpart prescribes policies, pro- tors and in 13 CFR 121.3–12 for small cedures, and contract clauses with re- business subcontractors will be used. spect to inventions made in the per- See FAR part 19). Subject invention, as used in this sub- formance of work under a Government part, means any invention of the con- contract or subcontract thereunder if a tractor conceived or first actually re- purpose of the contract or subcontract duced to practice in the performance of is the conduct of experimental, devel- work under a Government contract; opmental, or research work, except to provided, that in the case of a variety the extent statutory requirements ne- of plant, the date of determination de- cessitate different agency policies, pro- fined in section 41(d) of the Plant Vari- cedures, and clauses as specified in ety Protection Act, 7 U.S.C. 2401(d), agency supplemental regulations. must also occur during the period of contract performance. 27.301 Definitions. [49 FR 12974, Mar. 30, 1984, as amended at 54 Invention, as used in this subpart, FR 25063, June 12, 1989 and 55 FR 25525, June means any invention or discovery that 21, 1990] is or may be patentable or otherwise protectable under title 35 of the U.S. 27.302 Policy. Code or any novel variety of plant that (a) Introduction. (1) The policy of this is or may be protectable under the section is based on Chapter 18 of title Plant Variety Protection Act (7 U.S.C. 35, U.S.C. (Pub. L. 95–517, Pub. L. 98– 2321, et seq.). 620, 37 CFR part 401), the Presidential Made, as used in this subpart, when Memorandum on Government Patent used in relation to any invention, Policy to the Heads of Executive De- means the conception or first actual partments and Agencies dated Feb- reduction to practice of such invention. ruary 18, 1983, and Executive Order Nonprofit organization, as used in this 12591, which provides that, to the ex- subpart, means a domestic university tent permitted by law, the head of each or other institution of higher edu- Executive Department and agency cation or an organization of the type shall promote the commercialization, described in section 501(c)(3) of the In- in accord with the Presidential Memo- ternal Revenue Code of 1954 (26 U.S.C. randum, of patentable results of feder- 501(c)) and exempt from taxation under ally funded research by granting to all section 501(a) of the Internal Revenue contractors, regardless of size, the title Code (26 U.S.C. 501(a)), or any nonprofit to patents made in whole or in part scientific or educational organization with Federal funds, in exchange for qualified under a State nonprofit orga- royalty-free use by or on behalf of the nization statute. Government. The objectives of this pol- Practical application, as used in this icy are to use the patent system to pro- subpart, means to manufacture, in the mote the utilization of inventions aris- case of a composition or product; to ing from federally supported research practice, in the case of a process or or development; to encourage maxi- method; or to operate, in the case of a mum participation of industry in feder- machine or system; and, in each case, ally supported research and develop- under such conditions as to establish ment efforts; to ensure that these in- that the invention is being utilized and ventions are used in a manner to pro- that its benefits are, to the extent per- mote free competition and enterprise; mitted by law or Government regula- to promote the commercialization and

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public availability of the inventions inventions occurring under the above made in the United States by United two programs. States industry and labor; to ensure In the case of small business firms that the Government obtains sufficient and nonprofit organizations, when an rights in federally supported inven- agency justifies and exercises the ex- tions to meet the needs of the Govern- ception at subparagraph (b)(2) of this ment and protect the public against section on the basis of national secu- nonuse or unreasonable use of inven- rity, the contract shall provide the tions; and, to minimize the costs of ad- contractor with the right to elect own- ministering policies in this area. ership to any invention made under (b) Contractor right to elect title. Under such contract as provided by the clause the policy set forth in paragraph (a) of at 52.227–11, Patent Rights—Retention this section, each contractor may, by the Contractor (Short Form), if the after disclosure to the Government as invention is not classified by the agen- required by the patent rights clause in- cy within 6 months of the date it is re- cluded in the contract, elect to retain ported to the agency, or within the title to any invention made in the per- same time period the Department of formance of work under the contract. Energy (DOE) does not, as authorized by regulation, law or Executive order To the extent an agency’s statutory re- or implementing regulations thereto, quirements necessitate a different pol- prohibit unauthorized dissemination of icy, or different procedures and/or con- the invention. Contracts in support of tract clauses to effectuate the policy DOE’s naval nuclear propulsion pro- set forth in paragraph (a) of this sec- gram are exempted from this para- tion, such policy, procedures, and graph. When a contract involves a se- clauses shall be contained in or ex- ries of separate task orders, an agency pressly referred to in that agency’s may apply the exceptions at subpara- supplement to this subpart. In addi- graph (b) (2) or (3) of this section to in- tion, a contract may provide otherwise dividual task orders, and it may struc- (1) when the contractor is not located ture the contract so that modified pat- in the United States or does not have a ent rights clauses will apply to the place of business located in the United task order even though the clause at States or is subject to the control of a 52.227–11 is applicable to the remainder foreign-government (see 27.303(c)), (2) of the work. In those instances when in exceptional circumstances when it is the Government has the right to ac- determined by the agency that restric- quire title at the time of contracting, tion or elimination of the right to re- the contractor may, nevertheless, retain title in any subject invention will quest greater rights to an identified better promote the policy and objec- investion (see 27.304–1(a)). The right of tives of Chapter 18 of title 35, U.S.C. the contractor to retain title shall, in and the Presidential Memorandum, (3) any event, be subject to the provisions when it is determined by a Government of paragraphs (c) through (g) of this authority which is authorized by stat- section. ute or Executive order to conduct for- (c) Government license. The Govern- eign intelligence or counterintelligence ment shall have at least a nonexclu- activities that the restriction or elimi- sive, nontransferable, irrevocable, nation of the right to retain title to paid-up license to practice, or have any subject invention is necessary to practiced for or on behalf of the United protect the security of such activities, States, any subject invention through- or (4) when the contract includes the out the world; and may, if provided in operation of a Government-owned, con- the contract (see Alernative I of the tractor-operated facility of the Depart- applicable patent rights clause), have ment of Energy primarily dedicated to additional rights to sublicense any for- the Department’s naval nuclear propul- eign government or international orga- sion or weapons related programs and nization pursuant to existing treaties all funding agreement limitations or agreements identified in the con- under 35 U.S.C. 202(a)(iv) for agree- tract, or to otherwise effectuate such ments with small business firms and treaties or agreements. In the case of nonprofit organizations are limited to long term contracts, the contract may

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also provide (see Alternate II) such plicable laws and 37 CFR part 401. rights with respect to treaties or agree- Agencies shall not disclose such utili- ments to be entered into by the Gov- zation reports to persons outside the ernment after the award of the con- Government without permission of the tract. contractor. Contractors will continue (d) Government right to receive title. (1) to provide confidential markings to The Government has the right to re- help prevent inadvertent release out- ceive title to any invention if the con- side the agency. tract so provides pursuant to a deter- (f) March-in rights. (1) With respect to mination made in accordance with sub- any subject invention in which a con- paragraph (b) (1), (2), (3), or (4) of this tractor has acquired title, contracts section. In addition, to the extent pro- provide that the agency shall have the vided in the patent rights clause, the right (unless provided otherwise in ac- Government has the right to receive cordance with 27.304–1(f)) to require the title to an invention— contractor, an assignee, or exclusive li- (i) If the contractor has not disclosed censee of a subject invention to grant a the invention within the time specified nonexclusive, partially exclusive, or in the clause; exclusive license in any field of use to (ii) In any country where the con- a responsible applicant or applicants, tractor does not elect to retain rights upon terms that are reasonable under or fails to elect to retain rights to the the circumstances, and if the contrac- invention within the time specified in tor, assignee, or exclusive licensee re- the clause; fuses such request, to grant such a li- (iii) In any country where the con- cense itself, if the agency determines tractor has not filed a patent applica- that such action is necessary— tion within the time specified in the (i) Because the contractor or assignee clause; has not taken, or is not expected to (iv) In any country where the con- take within a reasonable time, effec- tractor decides not to continue pros- tive steps to achieve practical applica- ecution of a patent application, pay tion of the subject invention in such maintenance fees, or defend in a reex- field of use; amination or opposition proceeding on the patent; and/or (ii) To alleviate health or safety (v) In any country where the contrac- needs which are not reasonably satis- tor no longer desires to retain title. fied by the contractor, assignee, or (2) For the purposes of this para- their licensees; graph, election or filing in a European (iii) To meet requirements for public Patent Office Region or under the Pat- use specified by Federal regulations ent Cooperation Treaty constitutes and such requirements are not reason- election or filing in any country cov- ably satisfied by the contractor, as- ered therein to meet the times speci- signee, or licensees; or fied in the clause, provided that the (iv) Because the agreement required Government has the right to receive by paragraph (g) below has neither title in those countries not subse- been obtained nor waived, or because a quently designated by the contractor. licensee of the exclusive right to use or (e) Utilization reports. The Govern- sell any subject invention in the Unit- ment shall have the right to require ed States is in breach of its agreement periodic reporting on the utilization or obtained pursuant to paragraph (g) efforts at obtaining utilization that are below. being made by the contractor or its li- (2) This right of the agency shall be censees or assignees. Such reporting by exercised only after the contractor has small business firms and nonprofit or- been provided a reasonable time to ganizations may be required in accord- present facts and show cause why the ance with instructions as may be is- proposed agency action should not be sued by the Department of Commerce. taken, and afforded an opportunity to Agencies should protect the confiden- take appropriate action if the contrac- tiality or utilization reports which are tor wishes to dispute or appeal the pro- marked with restrictions to the extent posed action, in accordance with 27.304– permitted by 35 U.S.C. 205 or other ap- 1(g).

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(g) Preference for United States indus- vestigation of the concern, and, if ap- try. Unless provided otherwise in ac- propriate, enter into discussions or ne- cordance with 27.304–1(f), contracts pro- gotiations with the nonprofit organiza- vide that no contractor which receives tion to the end of improving its efforts title to any subject invention and no in meeting its obligations under the assignee of any such contractor shall clause. However, in no event will the grant to any person the exclusive right Secretary of Commerce intervene in to use or sell any subject invention in ongoing negotiations or contractor de- the United States unless such person cisions concerning the licensing of a agrees that any products embodying specific subject invention. All the the subject invention or produced above investigations, discussions, and through the use of the subject inven- negotiations of the Secretary of Com- tion will be manufactured substan- merce will be in coordinations with tially in the United States. However, in other interested agencies, including individual cases, the requirement for the Small Business Administration; such an agreement may be waived by and in the case of a contract for the op- the agency upon a showing by the con- eration of a Government-owned, contractor or assignee that reasonable but tractor-operated research or produc- unsuccessful efforts have been made to tion facility, the Secretary of Com- grant licenses on similar terms to po- merce will coordinate with the agency tential licensees that would be likely responsible for the facility prior to any to manufacture substantially in the discussions or negotiations with the United States or that under the cir- contractor. cumstances domestic manufacture is (i) Minimum rights to contractor. (1) not commercially feasible. When the Government acquires title to (h) Small business preference. (1) Non- profit organization contractors are ex- a subject invention, the contractor is pected to use efforts that are reason- normally granted a revocable, non- able under the circumstances to at- exclusive, royalty-free license to that tract small business licensees. They invention throughout the world. The are also expected to give small busi- contractor’s license extends to its do- ness firms that meet the standard out- mestic subsidiaries and affiliates, if lined in the clause at 52.227–11, Patent any, within the corporate structure of Rights—Retention by the Contractor which the contractor is a part and in- (Short Form), a preference over other cludes the right to grant sublicenses of applicants for licenses. What con- the same scope to the extent the constitutes reasonable efforts to attract tractor was legally obligated to do so small business licensees will vary with at the time the contract was awarded. the circumstances and the nature, du- The license is transferable only with ration, and expense of efforts needed to the approval of the contracting officer bring the invention to the market. except when transferred to the succes- Subparagraph (k)(4) of the clause is not sor of that part of the contractor’s intended, for example, to prevent non- business to which the invention per- profit organizations from providing tains. larger firms with a right of first refusal (2) The contractor’s domestic license or other options in inventions that re- may be revoked or modified to the ex- late to research being supported under tent necessary to achieve expeditious long-term or other arrangements with practical application of the subject in- larger companies. Under such cir- vention pursuant to an application for cumstances, it would not be reasonable an exclusive license submitted in ac- to seek and to give a preference to cordance with the applicable provisions small business licensees. in the Federal Property Management (2) Small business firms that believe Regulations and agency licensing regu- a nonprofit organzations is not meet- lations. This license will not be re- ing its obligations under the clause voked in that field of use or the geo- may report their concerns to the Sec- graphical areas in which the contractor retary of Commerce. To the extent has achieved practical application and deemed appropriate, the Secretary of continues to make the benefits of the Commerce will undertake informal in- invention reasonably accessible to the

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public. The license in any foreign coun- Space Administration (NASA), any try may be revoked or modified to the other type of contractor. extent the contractor, its licensees, or (ii) No alternative patent rights its domestic subsidiaries or affiliates clause is used in accordance with para- have failed to achieve practical appli- graph (c) or (d) of this section or 27.304– cation in that country. See the proce- 2. dures at 27.304–1(e). (2) To the extent the information is (j) Confidentiality of inventions. The not required elsewhere in the contract, publication of information disclosing and unless otherwise specified by agen- an invention by any party before the cy supplemental regulations, the con- filing of a patent application may cre- tracting officer may modify 52.227–11(f) ate a bar to a valid patent. Accord- to require the contractor to do one or ingly, 35 U.S.C. 205 and 37 CFR part 40 more of the following: provide that Federal agencies are au- (i) Provide periodic (but not more thorized to withhold from disclosure to frequently than annually) listings of the public information disclosing any all subject inventions required to be invention in which the Federal Govern- disclosed during the period covered by ment owns or may own a right, title, or the report. interest (including a nonexclusive li- (ii) Provide a report prior to the cense) for a reasonable time in order closeout of the contract listing all sub- for a patent application to be filed. ject inventions or stating that there Furthermore, Federal agencies shall were none. not be required to release copies of any (iii) Provide, upon request, the filing document which is part of an applica- date, serial number and title, a copy of tion for patent filed with the United the patent application, and patent States Patent and Trademark Office or number and issue date for any subject with any foreign patent office. The invention in any country in which the Presidential Memorandum on Govern- contractor has applied for patents. ment Patent Policy specifies that (iv) Furnish the Government an ir- agencies should protect the confiden- revocable power to inspect and make tiality of invention disclosures and copies of the patent application file patent applications required in per- when a Federal Government employee formance or in consequence of awards is a coinventor. to the extent permitted by 35 U.S.C. 205 (3) If the acquisition of patent rights or other applicable laws. for the benefit of a foreign government [49 FR 12974, Mar. 30, 1984, as amended at 50 is required under a treaty or executive FR 1743, Jan. 11, 1985; 50 FR 52429, Dec. 23, agreement, or if the agency head or a 1985; 51 FR 2665, Jan. 17, 1986; 54 FR 25063, designee determines at the time of con- June 12, 1989 and 55 FR 25525, June 21, 1990] tracting that it would be in the national interest to acquire the right to 27.303 Contract clauses. sublicense foreign governments or In contracts (and solicitations there- international organizations pursuant for) for experimental, developmental, to any existing or future treaty or or research work (but see 27.304–3 re- agreement, the contracting officer garding contracts for construction shall use the clause at 52.227–11, with work or architect-engineer services), a its Alternate I. If other rights are nec- patent rights clause shall be inserted essary to effectuate the treaty or as follows: agreement, Alternate I may be appro- (a) (1) The contracting officer shall priately modified. In long term con- insert the clause at 52.227–11, Patent tracts, Alternate II shall be added if Rights—Retention by the Contractor necessary to effectuate treaties or (Short Form), if all the following con- agreements to be entered into. ditions apply: (4) If the contracting officer includes (i) The contractor is a small business the clause at 52.227–11, Patent Rights— concern or nonprofit organization as Retention by the Contractor (Short defined in 27.301 or, except for con- Form), in a contract with a nonprofit tracts of the Department of Defense organization for the operation of a (DOD), the Department of Energy Government-owned facility, the con- (DOE), or the National Aeronautics and tracting officer will include Alternate

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III in lieu of subparagraph (k)(3) of the regarding subcontracts with U.S. clause. firms.) (5) If the contract is for the operation (2) Pursuant to their statutory re- of a Government-owned facility, the quirements, DOE and NASA may speci- contracting officer may include Alter- fy in their supplemental regulations nate IV with the clause at 52.227–11. use of a modified version of the clause (b) (1) The contracting officer shall at 52.227–13 in contracts with other insert the clause at 52.227–12, Patent than small business concerns or non- Rights—Retention by the Contractor profit organizations. (Long Form), if all the following condi- (3) If the acquisition of patent rights tions apply: for the benefit of a foreign government (i) The contractor is other than a is required under a treaty or executive small business firm or nonprofit orga- agreement or if the agency head or a nization. designee determines at the time of con- (ii) No alternative clause is used in tracting that it would be in the na- accordance with paragraph (c) or (d) of tional interest to acquire the right to this section or 237.304–2. sublicense foreign governments or (iii) The contracting agency is one of international organizations pursuant those excepted under subdivision to any existing or future treaty or (a)(1)(i) of this section. agreement, the contracting officer (2) If the acquisition of patent rights shall use the clause with its Alternate for the benefit of a foreign government I. If other rights are necessary to effec- is required under a treaty or executive tuate the treaty or agreement, Alter- agreement or if the agency head or a nate I may be appropriately modified. designee determines at the time of con- In long term contracts, Alternate II tracting that it would be in the na- shall be added if necessary to effec- tional interest to acquire the right to tuate treaties or agreements to be en- sublicense foreign governments or tered into. international organizations pursuant (4) Section 401 of title 37 of the Code to any existing or future treaty or agreement, the contracting officer of Federal Regulations provides that in shall use the clause at 52.227–12, with contracts with small business firms its Alternate I. If other rights are nec- and nonprofit organizations, when an essary to effectuate the treaty or agency exercises the exceptions at agreement, Alternate I may be appro- 27.302(b) (2) or (3) it shall use the clause priately modified. In long term con- at 52.227–11, with such modifications as tracts, Alternate II shall be added if are necessary to address the excep- necessary to effectuate treaties or tional circumstances or concerns which agreements to be entered into. led to the use of the exception. The (c) (1) The contracting officer shall greater rights determinations provi- insert the clause at 52.227–13, Patent sion of 52.227–13(b)(2) shall be included Rights—Acquisition by the Govern- in the modified clause. ment, if any of the following conditions (d) (1) If one of the following applies, apply: the contracting officer may insert the (i) No alternative clause is used in clause prescribed in paragraph (a) or accordance with subparagraphs (c) (2) (b) of this section as otherwise applica- and (4) or paragraph (d) of this section ble, agency supplemental regulations or 27.304–2. may provide another clause and specify (ii) The work is to be performed out- its use, or the contracting officer shall side the United States, its possessions, insert the clause prescribed in para- and Puerto Rico by contractors that graph (c) of this section: are not small business firms, nonprofit (i) The contractor is not located in organizations as defined in 27.301, or the United States or does not have a domestic firms. For purposes of this place of business located in the United subparagraph, the contracting officer States or is subject to the control of a may presume that a contractor is not a foreign government. domestic firm unless it is known that (ii) There are exceptional cir- the firm is not foreign owned, con- cumstances and the agency head deter- trolled, or influenced. (See 27.304–4(a) mines that restriction or elimination

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of the right to retain title to any sub- sent within 30 days after the award of ject invention will better promote the the contract to which they pertain. In policy and objectives of chapter 18 of the case of contracts with small busi- title 35 of the United States Code. ness concerns, copies will also be sent (iii) It is determined by a Govern- to the Chief Counsel for Advocacy of ment authority which is authorized by the Small Business Administration. statute or executive order to conduct (e) To qualify for the clause at 52.227– foreign intelligence or counterintel- 11, a prospective contractor may be re- ligence activities that restriction or quired by the agencies excepted under elimination of the right to retain any subdivision (a)(1)(i) of this section to subject invention is necessary to pro- certify that it is either a small busi- tect the security of such activities. ness firm or a nonprofit organization. (iv) The contract includes the oper- If one of these agencies has reason to ation of a Government-owned, contrac- question the status of the prospective tor-operated facility of the Department contractor, the agency may file a proof Energy primarily dedicated to that test in accordance with 13 CFR 121.3–5 Department’s naval nuclear propulsion if small business firm status is ques- or weapons related programs. tioned, or require the prospective con- (2) Before using any of the exceptions tractor to furnish evidence of its status under subparagraph (d)(1) of this sec- as a nonprofit organization. tion in a contract with a small busi- (f) Alternates I and II to the clauses ness firm or a nonprofit organization at 52.227–11, 52.227–12, and 52–227–13, as and before using the exception of sub- applicable, may be modified to make division (d)(1)(ii) of this section for any clear that the rights granted to the for- contractor, the agency shall prepare a eign government or international orga- written determination, including a nization may be for additional rights statement of facts supporting the de- beyond a license or sublicense if so re- termination, that the conditions iden- quired by the applicable treaty or tified in the exception exist. A separate international agreement. For example, statement of facts shall be prepared for in some cases exclusive licenses or each exceptional circumstances deter- even assignment of title in the foreign mination, except that in appropriate country involved might be required. In cases a single determination may apply addition, an Alternate may be modified to both a contract and any subcontract to provide for direct licensing by the issued under it, or to any contract to contractor of the foreign government which an exception is applicable. In or international organization. cases when subdivision (d)(1)(ii) of this section is used, the determination shall [54 FR 25065, June 12, 1989 and 55 FR 25525, also include an analysis justifying the June 21, 1990] determination. This analysis should address, with specificity, how the alter- 27.304 Procedures. nate provisions will better achieve the objectives set forth in 35 U.S.C. 200. For 27.304–1 General. contracts with small business firms (a) Contractor appeals of exceptions. (1) and nonprofit organizations, a copy of In accordance with 35 U.S.C. 202(b)(4), a each determination, statement of facts, small business firm or nonprofit orga- and, if applicable, analysis shall be nization contractor has the right to an promptly provided to the contractor or administrative review of a determina- offeror along with a notification of its tion to use one of the exceptions at appeal rights under 35 U.S.C. 202(b)(4) 27.303(d)(1)(i)–(iv) if the contractor be- in accordance with 27.304–1(a). In the lieves that a determination is either (i) case of small business and nonprofit contrary to the policies and objectives contractors, except for determination of this subsection or (ii) constitutes an under subdivision (d)(1)(iii) of this sec- abuse of discretion by the agency. Sub- tion, the agency shall, within 30 days paragraphs (a) (2) thru (7) of this sub- after award of a contract, also provide section specify the procedures to be copies of each determination, state- followed by contractors and agencies in ment of fact, and analysis to the Sec- such cases. The assertion of such a retary of Commerce. These shall be claim by the contractor shall not be

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used as a basis for withholding or de- (7) When fact-finding has been con- laying the award of a contract or for ducted, the head of the agency or des- suspending performance under an ignee shall base his or her decision on award. However, pending final resolu- the facts found, together with any ar- tion of the claim, the contract may be gument submitted by the contractor, issued with the patent rights provision agency officials, or any other informa- proposed by the agency; but should the tion in the administrative record. In final decision be in favor of the con- cases referred for fact-finding, the tractor, the contract will be amended agency head or designee may reject accordingly and the amendment made only those facts that have been found retroactive to the effective date of the to be clearly erroneous, but must ex- contract. plicitly state the rejection and indicate (2) A contractor may appeal a deter- the basis for the contrary finding. The mination by providing written notice agency head or designee may hear oral to the agency within 30 working days arguments after fact-finding provided from the time it receives a copy of the agency’s determination, or within such that the contractor or contractor’s at- longer time as an agency may specify torney or representative is present and in its regulations. The contractor’s no- given an opportunity to make argu- tice should specifically identify the ments and rebuttal. The decision of the basis for the appeal. agency head or designee shall be in (3) The appeal shall be decided by the writing and if it is unfavorable to the head of the agency or designee who is contractor, include an explanation of at a level above the person who made the basis of the decision. The decision the determination. If the notice raises of the agency or designee shall be made a genuine dispute over the material within 30 working days after fact-find- facts, the head of the agency or des- ing or, if there was no fact-finding, ignee shall undertake or refer the mat- within 45 working days from the date ter for fact-finding. the agency received the contractor’s (4) Fact-finding shall be conducted in written notice. In accordance with 35 accordance with procedures established U.S.C. 203, a small business firm or a by the agency. Such procedures shall nonprofit organization contractor ad- be as informal as practicable and be versely affected by a determination consistent with principles of fundamen- under this section may, at any time tal fairness. The procedures should af- within 60 days after the determination ford the contractor the opportunity to is issued, file a petition in the United appear with counsel, submit documen- States Claims Court, which shall have tary evidence, present witnesses, and jurisdiction to determine the appeal on confront such persons as the agency the record and to affirm, reverse, re- may rely upon. A transcribed record mand, or modify, as appropriate, the shall be made and shall be available at determination of the Federal agency. cost to the contractor upon request. (b) Greater rights determination. When- The requirement for a transcribed ever the contract contains the clause record may be waived by mutual agree- at 52.227–13, Patent Rights—Acquisi- ment of the contractor and the agency. (5) The official conducting the fact- tion by the Government, the contrac- finding shall prepare or adopt written tor (or an employee-inventor of the findings of fact and transmit them to contractor after consultation with the the head of the agency or designee contractor) may request greater rights promptly after the conclusion of the to an identified invention within the fact-finding proceeding along with a period specified in such clause. Re- recommended decision. A copy of the quests for greater rights may be grant- findings of fact and recommended deci- ed if the agency head or designee deter- sion shall be sent to the contractor by mines that the interests of the United registered or certified mail. States and the general public will be (6) Fact-finding should be completed better served thereby. In making such within 45 working days from the date determinations, the agency head or the agency receives the contractor’s designee shall consider at least the fol- written notice. lowing objectives:

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(1) Promoting the utilization of in- number and issue date for any subject ventions arising from federally-sup- invention in any country in which the ported research and development. contractor has applied for patents. (2) Ensuring that inventions are used (iv) Furnish the Government an ir- in a manner to promote full and open revocable power to inspect and make competition and free enterprise. copies of the patent application file (3) Promoting public availability of when a Federal Government employee inventions made in the United States is a coinventor. by United States industry and labor. (2) To the extent provided by such (4) Ensuring that the Government ob- modification (and automatically under tains sufficient rights in federally sup- the terms of the clauses at 52.227–12, ported inventions to meet the needs of Patent Rights—Retention by the Con- the Government and protect the public tractor (Long Form), and 52.227–13, Pat- against nonuse or unreasonable use of ent Rights—Acquisition by the Govern- inventions. ment), the contracting officer may re- (c) Retention of rights by inventor. If quire the contractor to— the contractor does not elect to retain (i) Furnish a copy of each subtitle to a subject invention, the agency contract containing a patent rights may consider and, after consultation clause (but if a copy of a subcontract is with the contractor, grant requests for furnished under another clause, a du- retention or rights by the inventor. Re- plicate shall not be requested under the tention of rights by the inventor will patent rights clause); be subject to the conditions in paragraph (d) (except subparagraphs (d)(1)), (ii) Submit interim and final inven- (f)(4), and paragraphs (h), (i), and (j) of tion reports listing subject inventions the applicable Patent Rights—Reten- and notifying the contracting officer of tion by the Contractor clause. all subcontracts awarded for experi- (d) Government assignment to contrac- mental, developmental, or research tor of rights in Government employees’ in- work; ventions. When a Government employee (iii) Submit information regarding is a coinventor of an invention made the filing date, serial number and title, under a contract with a small business and, upon request, a copy of the patent firm or nonprofit organization, the application, and patent number and agency employing the coinventor may issue date for any subject invention in transfer or reassign whatever right it any country for which the contractor may acquire in the subject invention has retained title; and from its employee to the contractor, (iv) Submit periodic reports on the subject at least to the conditions of 35 utilization of a subject invention or on U.S.C. 202–204. efforts at obtaining utilization that are (e) Additional requirements. (1) If it is being made by the contractor or its li- desired to have the right to require any censees or assignees. of the following, when using the clause (3) The contractor is required to de- at 52.227–11, Patent Rights—Retention liver to the contracting officer an in- by the Contractor (Short Form), the strument confirmatory of all rights to contract shall be modified to require which the Government is entitled and the contractor to do one or more of the to furnish the Government an irrev- following: ocable power to inspect and make cop- (i) Provide periodic (but not more ies of the patent application file. Such frequently than annually) listings of delivery should normally be made all subject inventions required to be within 6 months after filing each pat- disclosed during the period covered by ent application, or within 6 months the report. after submitting the invention disclo- (ii) Provide a report prior to the sure if the application has been pre- closeout of the contract listing all sub- viously filed. ject inventions or stating that there (f) Revocation or modification of con- were none. tractor’s minimum rights. Before revoca- (iii) Provide, upon request, the filing tion or modification of the contractor’s date, serial number, and title; a copy of license in accordance with 27.302(i)(2), the patent application; and patent the contracting officer will furnish the

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contractor a written notice of inten- censee of its rights as set forth in this tion to revoke or modify the license, section and in any supplemental agen- and the contractor will be allowed 30 cy regulations or procedures. The de- days (or such other time as may be au- termination to exercise march-in thorized by the contracting officer for rights shall be made by the head of the good cause shown by the contractor) agency or designee. after the notice to show cause why the (3) Within 30 days after the receipt of license should not be revoked or modi- the written notice of march-in, the fied. The contractor has the right to contractor, its assignee or exclusive li- appeal, in accordance with applicable censee, may submit in person, in writ- regulations in 37 CFR part 404 and ing, or through a representative infor- agency licensing regulations, any deci- mation or argument in opposition to sions concerning the revocation or the proposed march-in, including any modification. additional specific information which (g) Exercise of march-in rights. The fol- raises a genuine dispute over the mate- lowing procedures shall govern the ex- rial facts upon which the march-in is ercise of the march-in rights set forth based. If the information presented in 35 U.S.C. 203, paragraph (j) of the raises a genuine dispute over the mate- Patent Rights—Retention by the Con- rial facts, the head of the agency or tractor clauses, and subdivision designee shall undertake or refer the (c)(1)(ii) of the Patent Rights—Acquisi- matter to another official for fact-find- tion by the Government clause: ing. (1) When the agency receives infor- (4) Fact-finding shall be conducted in mation that it believes might warrant accordance with the procedures estab- the exercise of march-in rights, before lished by the agency. Such procedures initiating any march-in proceeding in shall be as informal as practicable and accordance with the procedures of sub- be consistent with principles of fun- paragraph (g)(2) of this section, it shall damental fairness. The procedures notify the contractor in writing of the should afford the contractor the oppor- information and request informal writ- tunity to appear with counsel, submit ten or oral comments from the con- documentary evidence, present wit- tractor. In the absence of any com- nesses, and confront such persons as ments from the contractor within 30 the agency may present. A transcribed days the agency may, at its discretion, record shall be made and shall be avail- initiate the procedures below. If a com- able at cost to the contractor upon re- ment is received, whether or not within quest. The requirement for a tran- 30 days, then the agency shall, within scribed record may be waived by mu- 60 days after it receives the comment, tual agreement of the contractor and either initiate the procedures below or the agency. Any portion of the march- notify the contractor, in writing, that in proceeding, including a fact-finding it will not pursue march-in rights hearing that involves testimony or evi- based on the information about which dence relating to the utilization or ef- the contractor was notified. forts at obtaining utilization that are (2) A march-in proceeding shall be being made by the contractor, its as- initiated by the issuance of a written signee, or licensees shall be closed to notice by the agency head or a designee the public, including potential licens- to the contractor and its assignee or ees. In accordance with 35 U.S.C. exclusive licensee, as applicable and if 202(c)(5), agencies shall not disclose known to the agency, stating that the any such information obtained during Government has determined to exercise a march-in proceeding to persons out- march-in rights. The notice shall state side the Government except when such the reasons for the proposed march-in, release is authorized by the contractor, in terms sufficient to put the contrac- its assignee, or licensee. tor on notice of the facts upon which (5) The official conducting the fact- the action is based, and shall specify finding shall prepare or adopt written the field or fields of use in which the findings of fact and transmit them to Government is considering requiring li- the head of the agency or designee censing. The notice shall advise the promptly after the conclusion of the contractor, assignee, or exclusive li- factfinding proceeding along with a

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recommended determination. A copy of (9) An agency determination unfavor- the findings of fact shall be sent to the able to the contractor, its assignee, or contractor, its assignee, or exclusive li- exclusive licensee shall be held in abey- censee by registered or certified mail. ance pending the exhaustion of appeals The contractor, its assignee or exclu- or petitions filed under 35 U.S.C. 203(2). sive licensee, and agency representa- (h) Licenses and assignments under tives will be given 30 days to submit contracts with nonprofit organizations. If written arguments to the head of the the contractor is a nonprofit organiza- agency or designee; and, upon request tion, the clause at 52.227–11 provides by the contractor, oral arguments will that certain contractor actions require be held before the agency head or des- agency approval, as specified below. ignee that will make the final deter- Agencies shall provide procedures for mination. obtaining such approval. (6) In case in which fact-finding has Rights to a subject invention in the been conducted, the head of the agency United States may not be assigned or designee shall base his or her deter- without the approval of the contract- mination on the facts found, together ing agency, except where such assign- with any other information and writ- ment is made to an organization which ten or oral arguments submitted by the has as one of its primary functions the contractor, its assignee or exclusive li- management of inventions (provided censee and agency representatives, and that such assignee will be subject to any other information in the adminis- the same provisions as the contractor). trative record. The consistency of the [54 FR 25066, June 12, 1989 and 55 FR 25525, exercise of march-in rights with the June 21, 1990] policy and objectives of 35 U.S.C. 200 shall also be considered. In cases re- 27.304–2 Contracts placed by or for ferred for fact-finding, the head of the other Government agencies. agency or designee may reject only The following procedures apply un- those facts that have been found to be less agency agreements provide other- clearly erroneous, but must explicitly wise: state the rejection and indicate the (a) When a Government agency re- basis for the contrary finding. Written quests another Government agency to notice of the determination whether award a contract on its behalf, the re- march-in rights will be exercised shall quest should explain any special cir- be made by the head of the agency or cumstances surrounding the contract designee and sent to the contractor, its and specify and furnish the patent assignee, or exclusive licensee, by cer- rights clause to be used. Normally, the tified or registered mail within 90 days clause will be in accordance with the after the completion of fact-finding or policies and procedures of this subpart. 90 days after oral arguments, which- If, however, the request states that a ever is later, or the proceedings will be clause of the requesting agency is re- deemed to have been terminated and quired (e.g., because of statutory re- thereafter no march-in based on the quirements, a deviation, or exceptional facts and reasons upon which the pro- circumstances) that clause shall be ceeding was initiated may be exercised. used rather than those of this subpart. (7) An agency may, at any time, ter- (1) If the request states that an agen- minate a march-in proceeding if it is cy clause is required and the work to satisfied that it does not wish to exer- be performed under the contract is not cise march-in rights. severable and is funded wholly or in (8) These procedures shall also apply part by the agency, then that agency to the exercise of march-in rights clause and no other patent rights against inventors receiving title to clause shall be included in the con- subject inventions under 35 U.S.C. tract. 202(d) and, for that purpose, the term (2) If the request states that an agen- contractor, as used herein, shall be cy clause is required, and the work to deemed to include the inventory and be performed under the contract is sev- the term exclusive licensee shall be erable and is only in part for the re- deemed to include partially exclusive questing agency, then the work which licensee. is on behalf of the requesting agency

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shall be identified in the contract, and the design of a Government facility or the agency clause shall be made appli- of novel structures, machines, prod- cable to that portion. In such situa- ucts, materials, processes, or equip- tions, the remaining portion of the ment (including construction equip- work (for the agency awarding the con- ment), it shall include a patent rights tract) shall likewise be identified and clause selected in accordance with the the appropriate patent rights clause (if policies and procedures of this subpart required) shall be made applicable to 27.3. that remaining portion. (b) A solicitation or contract for con- (3) If the request states that an agen- struction work or architect-engineer cy clause is not required in any result- services that calls for or can be ex- ing contract, then the appropriate pat- pected to involve only standard types of ent rights clause shall be used, if a patent rights clause is required. construction to be built by previously (b) Where use of the specified clause, developed equipment, methods, and or any modification, waiver, or omis- processes shall not include a patent sion of the Government’s rights under rights clause. The term standard types any provisions therein, requires a writ- of construction means construction in ten determination, the reporting of which the distinctive features, if any, such determination, or a deviation, if in all likelihood will amount to no any such acts are required in accord- more than— ance with 27.303(d)(2), it shall be the re- (1) Variations in size, shape, or ca- sponsibility of the requesting agency pacity of otherwise structurally ortho- to make such determination, submit dox and conventionally acting struc- the required reports, and obtain such tures or structural groupings; or deviations, in consultation with the (2) Purely artistic or esthetic (as dis- contracting agency, unless otherwise tinguished from functionally signifi- agreed between the contracting and re- cant) architectural configurations and questing agencies. However, a devi- designs of both structural and non- ation to a specified clause of the re- structural members or groupings, questing agency shall not be made which may or may not be sufficiently without prior approval of that agency. novel or meritorious to qualify for de- (c) The requesting agency may resign protection under the design patent quire, and provide instructions regard- or copyright laws. ing, the forwarding or handling of any invention disclosures or other report- 27.304–4 Subcontracts. ing requirements of the specified clauses. Normally the requesting agen- (a) The policies and procedures cov- cy shall be responsible for the handling ered by this subpart apply to all con- of any disclosed inventions, including tracts at any tier. Hence, a contractor the filing of patent applications where awarding a subcontract and a sub- the Government receives title, and the contractor awarding a lower-tier sub- custody, control, and licensing thereof, contract that has as a purpose the con- unless provided otherwise in the in- duct of experimental, developmental, structions or other agreements with or research work is required to deter- the contracting agency. mine the appropriate patent rights clause to be included that is consistent [49 FR 12974, Mar. 30, 1984, as amended at 54 FR 25068, June 12, 1989 and 55 FR 25525, June with these policies and procedures. 21, 1990] Generally, the clause at either 52.227– 11, 52.227–12, or 52.227–13 is to be used 27.304–3 Contracts for construction and will be so specified in the patent work or architect-engineer services. rights clause contained in the higher- (a) If a solicitation or contract for tier contract, but the contracting offi- construction work or architect-engi- cer may direct the use of a particular neer services has as a purpose the per- patent rights clause in any lower-tier formance of experimental, developmen- contract in accordance with the poli- tal, or research work or test and eval- cies and procedures of this subpart. For uation studies involving such work and instance, when the clause at 52.227–13 is calls for, or can be expected to involve, in the prime contract because the work

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is to be performed overseas, any sub- a conveyance of title under 27.302(d)(1) contract with a nonprofit organization (i) through (v) including any dispute as would contain the clause at 52.227–11. to whether or not an invention is a sub- (b) Whenever a prime contractor or a ject invention. subcontractor considers the inclusion (d) To the extent that any of the ac- of a particular clause in a subcontract tions described in paragraph (a) above to be inappropriate or a subcontractor are subject to appeal under the Con- refuses to accept the proffered clause, tract Disputes Act, the procedures the matter shall be resolved by the under that Act will satisfy the require- agency contracting officer in consulta- ments of paragraphs (b) and (c) above. tion with counsel. (c) It is Government policy that con- [49 FR 12974, Mar. 30, 1984, as amended at 54 tractors shall not use their ability to FR 25068, June 12, 1989 and 55 FR 25525, June award subcontracts as economic lever- 21, 1990] age to acquire rights for themselves in inventions resulting from sub- 27.305 Administration of patent rights contracts. clauses.

27.304–5 Appeals. 27.305–1 Patent rights follow-up. (a) The agency official initially au- (a) It is important that the Govern- thorized to take any of the following ment and the contractor know and ex- actions shall provide the contractor ercise their rights in inventions con- with a written statement of the basis ceived or first actually reduced to for the action at the time the action is practice in the course of or under Gov- taken, including any relevant facts ernment contracts in order to ensure that were relied upon in taking the ac- their expeditious availability to the tion: public and to enable the Government, (1) A refusal to grant an extension to the contractor, and the public to avoid the invention disclosure period under unnecessary payment of royalties and subparagraph (c)(4) of the clauses at to defend themselves against claims 52.227–11 and 52.227–12. and suits for patent infringement. To (2) A request for a conveyance of title attain these ends, contracts having a to the Government under 27.302(d)(1)(i) through (v). patent rights clause should be so ad- (3) A refusal to grant a waiver under ministered that— 27.302(g), Preference for U.S. Industry. (1) Inventions are identified, dis- (4) A refusal to approve an assign- closed, and reported as required by the ment under 27.304–1(h)(1). contract, and elections are made; (5) A refusal to approve an extension (2) The rights of the Government in of the exclusive license period under such inventions are established; 27.304–1(h)(2). (3) Where patent protection is appro- (b) Each agency shall establish and priate, patent applications are timely publish procedures under which any of filed and prosecuted by contractors or the agency actions listed in paragraph by the Government; (a) above may be appealed to the head (4) The rights of the Government in of the agency or designee. Review at filed patent applications are docu- this level shall consider both the fac- mented by formal instruments such as tual and legal basis for the action and licenses or assignments; and its consistency with the policy and ob- (5) Expeditious commercial utiliza- jectives of 35 U.S.C. 200–206 and this tion of such inventions is achieved. subpart. (c) Appeals procedures established (b) If a subject invention is made under paragraph (b) of this subsection under funding agreements of more than shall include administrative due proc- one agency, at the request of the con- ess procedures and standards for fact- tractor or on their own initiative, the finding at least comparable to those agencies shall designate one agency as set forth in 37 CFR part 401.6(e)–(g) responsible for administration of the whenever there is a dispute as to the rights of the Government in the inven- factual basis for an agency request for tion.

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27.305–2 Follow-up by contractor. curement was made for appropriate action. (a) Contractor procedures. If required by the applicable clause, the contrac- (c) Contracting activities shall estab- tor shall establish and maintain effec- lish appropriate procedures to detect tive procedures to ensure its patent and correct failures by the contractor rights obligations are met and that to comply with its obligations under subject inventions are timely identi- the patent rights clauses, such as fail- fied and disclosed, and when appro- ures to disclose and report subject in- priate, patent applications are filed. ventions, both during and after contract performance. Ordinarily a con- (b) Contractor reports. Contractors shall submit all reports required by the tractor should have written instruc- patent rights clause to the contracting tions for its employees covering com- officer or other representative des- pliance with these contract obliga- ignated for such purpose in the con- tions. Government effort to review and tract. Agencies may, in their imple- correct contractor compliance with its menting instructions, provide specific patent rights obligations should be di- forms for use on an optional basis for rected primarily towards contracts such reporting. that, because of the nature of the research, development, or experimental 27.305–3 Follow-up by Government. work or the large dollar amount spent on such work, are more likely to result (a) Agencies shall maintain appro- in subject inventions significant in priate follow-up procedures to protect number or quality, and towards con- the Government’s interest and to tracts when there is reason to believe check that subject inventions are iden- the contractors may not be complying tified and disclosed, and when appro- with their contractual obligations. priate, patent applications are filed, Other contracts may be reviewed using and that the Government’s rights a spot-check method, as feasible. Ap- therein are established and protected. propriate follow-up procedures and ac- Follow-up activities for contracts that tivities may include the investigation include a clause referenced in 27.304–2 or review of selected contracts or con- shall be coordinated with the appro- tractors by those qualified in patent priate agency. and technical matters to detect fail- (b) The contracting officer admin- ures to comply with contract obliga- istering the contract (or other rep- tions. resentative specifically designated in (d) Follow-up activities should in- the contract for such purpose) is responsible for receiving invention dis- clude, where appropriate, use of Gov- closures, reports, confirmatory instru- ernment patent personnel— ments, notices, requests, and other (1) To interview agency technical documents and information submitted personnel to identify novel develop- by the contractor pursuant to a patent ments made in contracts; rights clause. If the contractor fails to (2) To review technical reports sub- furnish documents or information as mitted by contractors with cognizant called for by the clause within the time agency technical personnel; required, the contracting officer shall (3) To check the Official Gazette of promptly request the contractor to the United States Patent and Trade- supply the required documents or in- mark Office and other sources for pat- formation and, if the failure persists, ents issued to the contractor in fields shall take appropriate action to secure related to its Government contracts; compliance. Invention disclosures, re- and ports, confirmatory instruments, no- (4) If additional information is re- tices, requests, and other documents quired, to have cognizant Government and information relating to patent personnel interview contractor person- rights clauses shall be promptly fur- nel regarding work under the contract nished by the contracting officer ad- involved, observe the work on site, and ministering the contract (or other des- inspect laboratory notebooks and other ignee) to the procuring agency or con- records of the contractor related to tracting activity for which the pro- work under the contract.

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(e) If it is determined that a contrac- the rights the contractor is required to tor or subcontractor does not have a convey to the Government. Agencies clear understanding of the rights and may, by supplemental instructions, de- obligations of the parties under a pat- velop suitable assignments, licenses, ent rights clause, or that its proce- and other papers evidencing any rights dures for complying with the clause are of the Government in patents or patent deficient, a post-award orientation con- applications, including such instru- ference or letter should ordinarily be ments as may be required to be re- used to explain these rights and obliga- corded in the Statutory Register or tions (see subpart 42.5). When a con- documented in the Government Reg- tractor fails to establish, maintain, or ister maintained by the U.S. Patent follow effective procedures for identify- and Trademark Office pursuant to Ex- ing, disclosing, and, when appropriate, ecutive Order 9424, February 18, 1944. filing patent applications on inventions (if such procedures are required 27.305–5 Publication or release of in- by the patent rights clause), or after vention disclosures. appropriate notice fails to correct any (a) In accordance with the policy at deficiency, the contracting officer may 27.302(i), to protect their mutual inter- require the contractor to make avail- ests, contractors and the Government able for examination books, records, should cooperate in deferring the publi- and documents relating to the contrac- cation or release of invention disclo- tor’s inventions in the same field of sures until the filing of the first patent technology as the contract effort to en- application, and use their best efforts able a determination of whether there to achieve prompt filing when publica- are such inventions and may invoke tion or release may be imminent. The the withholding of payments provision Government will, on its part and to the (if any) of the clause. The withholding extent authorized by 35 U.S.C. 205, of payments provision (if any) of the withhold from disclosure to the public patent rights clause or of any other any invention disclosures reported contract clause may also be invoked if under the patent rights clauses of the contractor fails to disclose a sub- 52.227–11, 52.227–12, or 52.227–13 for a rea- ject invention. Significant or repeated failures by a contractor to comply with sonable time in order for patent appli- the patent rights obligation in its con- cations to be filed. The policy in tracts shall be documented and made a 27.302(i) regarding protection of con- part of the general file (see 4.801(c)(3)). fidentiality shall be followed. (b) The Government will also use rea- 27.305–4 Conveyance of invention sonable efforts to withhold from disclo- rights acquired by the Government. sure to the public for a reasonable time (a) Agencies are responsible for those other information disclosing a reported procedures necessary to protect the invention included in any data deliv- Government’s interest in subject in- ered pursuant to contract require- ventions. When the Government ac- ments; provided, that the contractor quires the entire right, title, and inter- notifies the agency as to the identity est in an invention by contract, this is of the data and the invention to which normally accomplished by an assign- it relates at the time of delivery of the ment either from each inventor to the data. Such notification must be to both contractor and from the contractor to the contracting officer and any patent the Government, or from the inventor representative to which the invention to the Government with the consent of is reported, if other than the contract- the contractor, so that the chain of ing officer. title from the inventor to the Govern- (c) As an additional protection for ment is clearly established. When the small business firms and nonprofit or- Government’s rights are limited to a li- ganizations 37 CFR part 401 prescribes cense, there should be a confirmatory that agencies shall not disclose or re- instrument to that effect. lease, in accordance with 35 U.S.C. 205, (b) The form of conveyance of title for a period of 18 months from the fil- from the inventor to the contractor ing date of the application to third par- must be legally sufficient to convey ties pursuant to request under the

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Freedom of Information Act or other- Subpart 27.4—Rights in Data and wise copies of any document which the Copyrights agency obtained under contract which is part of an application for patent SOURCE: 52 FR 18140, May 13, 1987, unless with the U.S. Patent and Trademark otherwise noted. Office or any foreign patent office filed by the contractor (or its assignees, li- 27.400 Scope of subpart. censees, or employees) on a subject in- (a) The policy statement in 27.402 ap- vention to which the contractor has plies to all executive agencies. The re- elected to retain title. This prohibition does not extend to disclosure to other mainder of the subpart sets forth civil- Government agencies or contractors of ian agency and National Aeronautics Government agencies under an obliga- and Space Administration (NASA) poli- tion to maintain such information in cies, procedures, and instructions with confidence. respect to (1) rights in data and copyrights and (2) acquisition of data. How- [49 FR 12974, Mar. 30, 1984, as amended at 54 ever, these policies, procedures, and in- FR 25069, June 12, 1989 and 55 FR 25525, June structions are not required to be appli- 21, 1990] cable to NASA solicitations until De- 27.306 Licensing background patent cember 31, 1987 (or until such other rights to third parties. date as the NASA FAR Supplement is (a) A contract with a small business revised to accommodate the policies, firm or nonprofit organization will not procedures, and instructions contained contain a provision allowing the Gov- in this subpart). Due to the special ernment to require the licensing to mission needs of the Department of De- third parties of inventions owned by fense (DOD) and as required by 10 the contractor that are not subject in- U.S.C. 2320, the remainder of the DOD ventions unless such provision has been policies, procedures, and instructions approved by the agency head and writ- with respect to rights in data and copy- ten justification has been signed by the rights and acquisition of data are con- agency head. Any such provision will tained in the DOD FAR Supplement clearly state whether the licensing (DFARS). may be required in connection with the (b) Civilian agencies other than practice of a subject invention, a spe- NASA shall implement section 203 of cifically identified work object, or Public Law 98–577 pertaining to valida- both. The agency head may not dele- tion of proprietary data restrictions. gate the authority to approve such pro- [52 FR 18140, May 13, 1987, as amended at 54 visions or to sign justifications re- FR 34755, Aug. 21, 1989] quired for such provisions. (b) The Government will not require 27.401 Definitions. the licensing of third parties under any such provision unless the agency head Computer software, as used in this determines that the use of the inven- subpart, means computer programs, tion by others is necessary for the computer data bases, and documenta- practice of a subject invention or for tion thereof. the use of a work object of the contract Data, as used in this subpart, means and that such action is necessary to recorded information, regardless of achieve the practical application of the form or the media on which it may be subject invention or work object. Any recorded. The term includes technical such determination will be on the data and computer software. The term record after an opportunity for a hear- does not include information inciden- ing, and the contractor shall be given tal to contract administration, such as notification of the determination by financial, administrative, cost or pric- certified or registered mail. The notifi- ing or management information. cation shall include a statement that Form, fit, and function data, as used in any action commenced for judicial re- this subpart, means data relating to view of such determination must be items, components, processes that are brought by the contractor within 60 sufficient to enable physical and func- days after the notification. tional interchangeability, as well as

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data identifying source, size, configu- any purpose, and to have or permit ration, mating and attachment charac- others to do so. teristics, functional characteristics, and performance requirements; except 27.402 Policy. that for computer software it means (a) It is necessary for the depart- data identifying source, functional ments and agencies, in order to carry characteristics, and performance re- out their missions and programs, to ac- quirements, but specifically excludes quire or obtain access to many kinds of the source code, algorithm, process, data produced during or used in the formulae, and flow charts of the soft- performance of their contracts. Agen- ware. cies require such data to: obtain com- Limited rights, as used in this subpart, petition among suppliers; fulfill cer- means the rights of the Government in tain responsibilities for disseminating limited rights data, as set forth in a and publishing the results of their ac- Limited Rights Notice if included in a tivities; ensure appropriate utilization data rights clause of the contract. of the results of research, development, Limited rights data, as used in this and demonstration activities including subpart, means data, other than com- the dissemination of technical infor- puter software, that embody trade se- mation to foster subsequent techno- crets or are commercial or financial logical developments; and meet other and confidential or privileged, to the programmatic and statutory require- extent that such data pertain to items, ments. Further, for defense purposes, components, or processes developed at such data are also required by agencies to meet specialized acquisition needs private expense, including minor modi- and ensure logistics support. fications thereof. (Agencies may, how- (b) At the same time, the Govern- ever, adopt the following alternate def- ment recognizes that its contractors inition: may have a legitimate proprietary in- Limited rights data, as used in this terest (e.g., a property right or other subpart, means data developed at pri- valid economic interest) in data result- vate expense that embody trade secrets ing from private investment. Protec- or are commercial or financial and con- tion of such data from unauthorized fidential or privileged (see 27.404(c).) use and disclosure is necessary in order Restricted computer software, as used to prevent the compromise of such in this subpart, means computer soft- property right or economic interest, ware developed at private expense and avoid jeopardizing the contractor’s that is a trade secret; is commercial or commercial position, and preclude im- financial and confidential or privi- pairment of the Government’s ability leged; or is published copyrighted com- to obtain access to or use of such data. puter software; including minor modi- The protection of such data by the fications of such computer software. Government is also necessary to en- Restricted rights, as used in this sub- courage qualified contractors to par- part, means the rights of the Govern- ticipate in Government programs and ment in restricted computer software apply innovative concepts to such pro- as set forth in a Restricted Rights No- grams. In light of the above consider- tice, if included in a data rights clause ations, in applying these policies, agen- of the contract, or as otherwise may be cies shall strike a balance between the included or incorporated in the con- Government’s need and the contrac- tract. tor’s legitimate proprietary interest. Technical data, as used in this subpart, means data other than computer 27.403 Data rights—general. software, which are of a scientific or All contracts that require data to be technical nature. produced, furnished, acquired or spe- Unlimited rights, as used in this sub- cifically used in meeting contract per- part, means the rights of the Govern- formance requirements, must contain ment to use, disclose, reproduce, pre- terms that delineate the respective pare derivative works, distribute copies rights and obligations of the Govern- to the public, and perform publicly and ment and the contractor regarding the display publicly, in any manner and for use, duplication, and disclosure of such

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data, except certain contracts result- as set forth in paragraph (f) of this sec- ing from sealed bidding or similar situ- tion, rather than with unlimited ations which require only existing data rights. (other than limited rights data and re- (b) Limited rights data and restricted stricted computer software) to be de- computer software. The clause at 52.227– livered and reproduction rights are not 14, Rights in Data—General, enables needed for such data. As a general rule the contractor to protect qualifying the data rights clause at 52.227–14, limited rights data and restricted com- Rights in Data—General, including Al- puter software by withholding such ternates I, II, III, IV, and V, where de- data from delivery to the Government termined to be appropriate as discussed and delivering form, fit, and function in 27.404, is to be used for that purpose. data in lieu thereof. However, when an However, in certain contracts either agency has a need to obtain delivery of the particular subject matter of the limited rights data or restricted com- contract or the intended use of the puter software, the clause may be used data may require the use of other pre- with its Alternates II or III, as set forth scribed clauses, or may not require the in paragraphs (d) and (e) of this sec- use of any prescribed clause, as dis- tion. These alternatives enable a con- cussed in 27.405 and 27.408. Also, in se- tracting officer to selectively request lecting a data rights clause, it is im- the delivery of such data with limited portant to note that any such clause rights or restricted rights, either by does not specify the data (in terms of specifying such delivery in the con- type, quantity or quality) that is to be tract or by specific request. delivered, but only the respective (c) Alternate definition of limited rights rights of the Government and the con- data. In the clause at 52.227–14, Rights tractor to use, disclose, or reproduce in Data—General, in order for data to such data. Accordingly, the contract qualify as limited rights data, in addi- should also include appropriate terms tion to being data that either embody to specify the data to be delivered. a trade secret or are data that are commercial or financial and confidential or 27.404 Basic rights in data clause. privileged, such data must also pertain (a) Unlimited rights data. Under the to items, components, or processes de- clause at 52.227–14, Rights in Data— veloped at private expense, including General, the Government acquires un- minor modifications thereof. However, limited rights in the following data for contracts that do not require the (except as provided in paragraph (f) of development, use or delivery of items, this section for copyrighted data): (1) components or processes that are in- Data first produced in the performance tended to be acquired by or for the of a contract (except to the extent such Government, an agency may adopt for data constitute minor modifications to general use or for use in specific cir- data that are limited rights data or re- cumstances the alternate definition of stricted computer software); (2) form, limited rights data set forth in Alter- fit, and function data delivered under nate I. The alternate definition does contract; (3) data (except as may be in- not require that such data pertain to cluded with restricted computer soft- items, components, or processes devel- ware) that constitute manuals or in- oped at private expense; but rather structional and training material for that such data were developed at pri- installation, operation, or routine vate expense and embody a trade secret maintenance and repair of items, com- or are commercial or financial and con- ponents, or processes delivered or fur- fidential or privileged. nished for use under a contract; and (4) (d) Protection of limited rights data all other data delivered under the con- specified for delivery. (1) Contracting of- tract other than limited rights data or ficers are authorized to modify the restricted computer software (see para- clause at 52.227–14, Rights in Data— graph (b) of this section). If any of the General, by use of Alternate II, which foregoing data are published copy- Alternate adds subparagraph (g)(2) to righted data with the notice of 17 the clause to enable the Government to U.S.C. 401 or 402, the Government ac- require delivery of limited rights data quires them under a copyright license, rather than allowing the contractor to

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withhold such data. To obtain such de- resentation requests that an offeror livery, the contract may identify and state in response to a solicitation, to specify data to be delivered, or the con- the extent feasible, whether limited tracting officer may require, by writ- rights data are likely to be used in ten request during contract perform- meeting the data delivery require- ance, the delivery of data that has been ments set forth in the solicitation. In withheld or identified as withholdable addition, the need for Alternate II under subparagraph (g)(1) of the clause should be considered during negotia- at 52.227–14 Rights in Data—General. In tions or discussion with an offeror, par- addition, if agreed to during negotia- ticularly where negotiations are based tions, the contract may specifically on an unsolicited proposal. However, identify data that are not to be deliv- use of the clause at 52.227–14, Rights in ered under Alternate II or which, if de- Data—General, without Alternate II livered, will be delivered with limited does not preclude this Alternate from rights. The limited rights obtained by being used subsequently by modifica- the Government are set forth in the tion during contract performance, Limited Rights Notice contained in should the need arise for delivery of subparagraph (g)(2) (Alternate II). Such limited rights data that have been limited rights data will not, without withheld or identified as withholdable. permission of the contractor, be used (3) Whenever data that would qualify by the Government for purposes of as limited rights data, if it were to be manufacture, and will not be disclosed delivered in human readable form, is outside the Government except for cer- formatted as a computer data base for tain specific purposes as may be set the purpose of delivery under a con- forth in the Notice, and then only if tract containing the clause at 52.227–14, the Government makes the disclosure Rights in Data—General, such data is subject to prohibition against further to be treated as limited rights data, use and disclosure by the recipient. rather than restricted computer soft- The following are examples of specific ware, for the purposes of paragraph (g) purposes which may be adopted by an of that clause. agency in its supplement and added to (e) Protection of restricted computer the Limited Rights Notice of subpara- software specified for delivery. (1) Con- graph (g)(2) of the clause (Alternate II): tracting officers are authorized to mod- (i) Use (except for manufacture) by ify the clause at 52.227–14, Rights in support service contractors. Data—General, by use of Alternate III, (ii) Evaluation by nongovernment which Alternate adds subparagraph evaluators. (g)(3) to the clause to enable the Gov- (iii) Use (except for manufacture) by ernment to require delivery of re- other contractors participating in the stricted computer software rather than Government’s program of which the allowing the contractor to withhold specific contract is a part, for informa- such restricted computer software. To tion and use in connection with the obtain such delivery, the contract may work performed under each contract. identify and specify the computer soft- (iv) Emergency repair or overhaul ware to be delivered, or the contracting work. officer may require by written request (v) Release to a foreign government, during contract performance, the deliv- or instrumentality thereof, as the in- ery of computer software that has been terests of the United States Govern- withheld or identified as withholdable ment may require, for information or under subparagraph (g)(1) of the clause. evaluation, or for emergency repair or In addition, if agreed to during nego- overhaul work by such government. tiations, the contract may specifically (2) As an aid in determining whether identify computer software that are the clause at 52.227–14 should be used not to be delivered under Alternate III with its Alternate II, the provision at or which, if delivered, will be with re- 52.227–15, Representation of Limited stricted rights. In considering whether Rights Data and Restricted Computer to use the clause at 52.227–14 with its Software, may be included in any solic- Alternate III, it should be particularly itation containing the clause at 52.227– noted that unlike other data, computer 14, Rights in Data—General. This rep- software is also an end item in itself,

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such that if withheld and form, fit, and clause. However, either greater or less- function data provided in lieu thereof, er rights, consistent with the purposes an operational program will not be ac- and needs for which the software is to quired. Thus, if delivery of restricted be acquired, may be specified by the computer software is anticipated to be contracting officer in a particular con- needed to meet contract performance tract or prescribed in agency regula- requirements, the contracting officer tions. For example, consideration should assure that the clause is used should be given to any networking with its Alternate III. Unless otherwise needs or any requirements for use of agreed to (see paragraph (e)(2) of this the computer software from remote section) the restricted rights obtained terminals. Also, in addressing such by the Government are set forth in the needs, the scope of the restricted rights Restricted Rights Notice contained in may be different for the documentation subparagraph (g)(3) (Alternate III). Such accompanying the computer software restricted computer software will not than for the programs and data bases. be used or reproduced by the Govern- Any additions to, or limitations on, the ment, or disclosed outside the Govern- restricted rights set forth in the Re- ment, except that the computer soft- stricted Rights Notice of subparagraph ware may be— (g)(3) of the clause are to be expressly (i) Used or copied for use in or with stated in the contract or in a collateral the computer or computers for which it agreement incorporated in and made was acquired, including use at any part of the contract, and the notice Government installation to which such modified accordingly. computer or computers may be trans- (3) As an aid in determining whether ferred; (ii) Used or copied for use in or with the clause should be used with its Alter- a backup computer if any computer for nate III, the provision at 52.227–15, Rep- which it was acquired becomes inoper- resentation of Limited Rights Data and ative; Restricted Computer Software, may be (iii) Reproduced for safekeeping (ar- included in any solicitation containing chives) or backup purposes; the clause at 52.227–14, Rights in Data— (iv) Modified, adapted, or combined General. This representation requests with other computer software, provided that an offeror state, in response to a that the modified, combined, or adapt- solicitation, to the extent feasible, ed portions of any derivative software whether restricted computer software incorporating restricted computer soft- is likely to be used in meeting the data ware are made subject to the same re- delivery requirements set forth in the stricted rights; solicitation. In addition, the need for (v) Disclosed to and reproduced for Alternate III should be considered dur- use by support service contractors, ing negotiations or discussions with an subject to the same restriction under offeror, particularly where negotia- which the Government acquired the tions are based on an unsolicited pro- software; posal. However, use of the clause at (vi) Used or copied for use in or 52.227–14, Rights in Data—General, transferred to a replacement computer; without Alternate III does not preclude and this Alternate from being used subse- (vii) Used in accordance with subdivi- quently by modification during con- sions (e)(1) (i) through (v) of this sec- tract performance, should the need tion, without disclosure prohibitions, if arise for the delivery of restricted com- the computer software is published puter software that has been withheld copyrighted computer software. or identified as withholdable. (2) The restricted rights set forth in (f) Copyrighted data.—(1) Data first subparagraph (e)(1) of this section are produced in the performance of a con- the minimum rights the Government tract. (i) In order to enhance the trans- normally obtains with restricted com- fer or dissemination of information puter software and will automatically produced at Government expense, con- apply when such software is acquired tractors are normally authorized, with- under the Restricted Rights Notice of out prior approval of the contracting subparagraph (g)(3) (Alternate III) of the officer, to establish claim to copyright

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subsisting in technical or scientific ar- sion for contractors to establish claim ticles based on or containing data first to copyright subsisting in all data first produced in the performance of work produced in the performance of the under a contract containing the clause contract without further request being at 52.227–14, Rights in Data—General made by the contractor. Alternate IV and published in academic, technical or shall be used in all contracts for basic professional journals, symposia pro- or applied research (other than those ceedings and similar works. Otherwise, for management or operation of Gov- the permission of the contracting offi- ernment facilities and in contracts and cer is required in accordance with sub- subcontracts in support of programs division (f)(1)(ii) of this section or any being conducted at such facilities or applicable agency regulations, to es- where international agreements re- tablish claim to copyright subsisting in quire otherwise) to be performed solely data first produced in the performance by colleges and universities. Alternate of a contract unless the clause is used IV will not be used in contracts with with its Alternate IV in accordance with colleges and universities if a purpose of subdivision (f)(1)(iii) of this section. the contract is for development of com- Agencies may, however, restrict copy- puter software for distribution to the right under certain circumstances in public (including use in solicitations) accordance with subparagraph (g)(3) of by or on behalf of the Government. In this section. addition, Alternate IV may be used in (ii) Usually, permission for a contrac- other contracts if an agency deter- tor to establish claim to copyright sub- mines to grant blanket permission for sisting in data first produced under the contractors to establish claim to copy- contract will be granted when copyright subsisting in all data first pro- right protection will enhance the appropriate transfer or dissemination of duced in the performance of contract such data and the commercialization of without further request being made by products or processes to which it per- the contractor. In any contract where tains. The request for permission must Alternate IV is used, the contract may be made in writing, and may be made exclude any data, items or categories either prior to contract award or subse- of data from the blanket permission quently during contract performance. granted, either by express provisions in It should identify the data involved or the contract or by the addition of a furnish copies of the data for which subparagraph (d)(3) to the clause, con- permission is requested, as well as a sistent with subparagraph (g)(3) of this statement as to the intended publica- section. tion or dissemination media or other (iv) Whenever a contractor estab- purpose for which copyright is desired. lishes claim to copyright subsisting in The request normally will be granted data (other than computer software) unless—(A) the data consist of a report first produced in the performance of a that represents the official views of the contract, the Government is granted a agency or that the agency is required paid-up nonexclusive, irrevocable, by statute to prepare; (B) the data are worldwide license to reproduce, prepare intended primarily for internal use by derivative works, distribute to the pub- the Government; (C) the data are of the lic, perform publicly and display pub- type that the agency itself distributes licly by or on behalf of the Govern- to the public under an agency program; ment, for all such data, as set forth in (D) the Government determines that subparagraph (c)(1) of the clause at limitation on distribution of the data 52.227–14, Rights in Data—General. For is in the national interest; (E) the Gov- computer software the scope of the ernment determines that the data Government’s license does not include should be disseminated without restric- the right to distribute to the public. tion. Agencies may also, either on a case-by- (iii) An Alternate IV is provided for case basis, or on a class basis if pro- use with the clause at 52.227–14, Rights vided in implementing regulations, ob- in Data—General, which Alternate pro- tain a license of different scope than vides a substitute subparagraph (c)(1) set forth in subparagraph (c)(1) of the in the clause granting blanket permis- clause if the agency determines that

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such different license will substan- sistent with the purpose of acquiring tially enhance the transfer or dissemi- the data. If a license of a different nation of any data first produced under scope is acquired, it must be so stated the contract, and will not interfere in the contract and clearly set forth in with the Government’s use of the data a conspicuous place on the data when as contemplated by the contract or if delivered to the Government. In addi- required for international agreements. tion, if computer software not first If an agency obtains such a different li- produced under a contract is delivered cense, the scope of that license shall be with the copyright notice of 17 U.S.C. clearly stated in a conspicuous place 401, the Government’s license will be as on the medium on which the data is re- set forth in subparagraph (g)(3) (Alter- corded. That is, if a report, the scope of nate III) if included in the clause at the different license shall be put on the 52.227–14, Rights in Data—General, or cover, or first page, of the report. If as otherwise may be provided in a col- computer software, the scope of the dif- lateral agreement incorporated in or ferent license shall be placed on the made part of the contract. most conspicuous place available. (ii) Contractors delivering data with (v) Whenever a contractor establishes both an authorized limited rights or re- claim to copyright in data first pro- stricted rights notice and the copy- duced in the performance of a contract, right notice of 17 U.S.C. 401 or 402 irrespective of which Alternate is used should modify the copyright notice to with the clause or the scope of the Gov- include the following (or similar) state- ernment’s license, the contractor is re- ment: Unpublished—all rights reserved quired to affix the applicable copyright under the copyright laws of the United notices of 17 U.S.C. 401 or 402, and ac- States. If this statement is omitted, the knowledgment of Government sponsor- contractor may be afforded an oppor- ship (including the contract number) to tunity to correct it in accordance with the data whenever such data are deliv- paragraph (h) of this section. Other- ered to the Government, published, or wise, data delivered with a copyright deposited for registration as a pub- notice of 17 U.S.C. 401 or 402 may be lished work in the U.S. Copyright Of- presumed to be published copyrighted fice. Failure to do so could result in such data being treated as unlimited data subject to the applicable license rights data (see paragraph (i) of this rights set forth in subdivision (f)(2)(i) section). of this section, without disclosure limi- (2) Data not first produced in the per- tations or restrictions. formance of a contract. (i) Contractors (iii) If contractor action causes lim- are not to incorporate in data delivered ited rights or restricted rights data to under a contract any data that is not be published with the copyright notice first produced under the contract and of 17 U.S.C. 401 or 402 after its delivery that is marked with the copyright no- to the Government, the Government is tice of 17 U.S.C. 401 or 402, without ei- relieved of disclosure and use limita- ther (A) acquiring for or granting to tions and restrictions regarding such the Government certain copyright li- data, and the contractor should advise cense rights for the data, or (B) obtain- the Government, request that a copying permission from the contracting of- right notice be placed on the copies of ficer to do otherwise. The copyright li- the data delivered to the Government cense the Government acquires for and acknowledge that the applicable such data will normally be of the same copyright license set forth in subdivi- scope as discussed in subdivision sion (f)(2)(i) of this section applies. (f)(1)(iv) of this section, and is set forth (g) Release, publication, and use of in subparagraph (c)(2) of the clause at data. (1) In paragraph (d) of the clause 52.227–14, Rights in Data—General. at 52.227–14, Rights in Data—General, However, agencies may, on a case-by- subparagraph (d)(1) recognizes the fact case basis, or on a class basis if pro- that normally the contractor has the vided in implementing agency regula- right to use, release to others, repro- tions, obtain a license of different duce, distribute, or publish data first scope if the agency determines that produced in the performance of a con- such different license will not be incon- tract, except to the extent such data

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may be subject to Federal export con- tives, needed to support specific agency trol or to national security laws or reg- programs, or necessary to meet statu- ulations. In addition, to the extent the tory requirements. Notwithstanding contractor receives or is given access the provisions of this subparagraph, to data that is necessary for the per- agencies may obtain, if provided in formance of the contract from or by their FAR supplement, for information the Government or others acting on be- purposes only, advance copies of arti- half of the Government, and the data cles intended for publication in aca- contains restrictive markings, subpara- demic, scientific or technical journals graph (d)(2) provides an agreement or symposia proceedings or similar with the contractor to treat the data works. in accordance with the markings, un- (h) Unauthorized marking of data. Ex- less otherwise specifically authorized cept for validation of restrictive mark- by the contracting officer. ings on technical data under contracts (2) In contracts for basic or applied for major systems, or for support of research with universities or colleges, major systems, by agencies subject to no restrictions may be placed upon the the provisions of Title III of the Fed- conduct of or reporting on the results eral Property and Administrative Serv- of unclassified basic or applied re- ices Act of 1949, the Government has, search, except as provided in applicable in accordance with paragraph (e) of the U.S. Statutes. For the purposes of this clause at 52.227–14, Rights in Data— subparagraph, agency restrictions on General, the right to either return to the release or disclosure of computer software that has been, readily can be, the contractor data containing mark- or is intended to be, developed to the ings not authorized by that clause, or point of practical application (includ- to cancel or ignore such markings. ing for agency distribution under es- However, markings will not be can- tablished programs) are not considered celed or ignored without making writ- restrictions on the reporting of the reten inquiry of the contractor and af- sults of basic or applied research. fording the contractor at least 30 days Agencies may also restrict claim to to provide a written justification to copyright in any computer software for substantiate the propriety of the mark- purposes of established agency dis- ings. Failure of the contractor to re- tribution programs, or where required spond, or failure to provide a written to accomplish the purpose for which justification to substantiate the pro- the software is produced. priety of the markings within the time (3) Except for the results of basic or afforded, may result in the Govern- applied research under contracts with ment’s action to cancel or ignore the universities or colleges, agencies may, markings. If the contractor provides a to the extent provided in their FAR written justification to substantiate supplements, place limitations or re- the propriety of the markings, it will strictions on the contractor’s right to be considered by the contracting offi- use, release to others, reproduce, dis- cer and the contractor notified of any tribute, or publish any data first pro- determination based thereon. If the duced in the performance of the con- contracting officer determines that the tract, including a requirement to as- markings are authorized, the contrac- sign copyright to the Government or tor will be so notified in writing. Fur- another party, either by adding a sub- ther, if the contracting officer deter- paragraph (d)(3) to the Rights in mines, with concurrence of the head of Data—General clause at 52.227–14, or by the contracting activity, that the express limitations or restrictions in markings are not authorized, the con- the contract. In the latter case, the tractor will be furnished a written de- limitations or restrictions should be termination which shall become the referenced in the Rights in Data—Gen- final agency decision regarding the ap- eral clause. However, such regulatory propriateness of the markings and the restrictions or limitations are not to markings will be cancelled or ignored be imposed unless they are determined and the data will no longer be made by the agency to be necessary in the subject to disclosure prohibitions, un- furtherance of agency mission objec- less the contractor files suit within 90

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days in a court of competent jurisdic- (2) The contracting officer may also tion. In any event, the markings will (i) permit correction, at the contrac- not be cancelled or ignored unless the tor’s expense, of incorrect notices if contractor fails to respond within the the contractor identifies the data on period provided, or, if the contractor which correction of the notice is to be does respond, until final resolution of made, and demonstrates that the cor- the matter, either by the contracting rect notice is authorized, or (ii) correct officer’s determination becoming the any incorrect notices. final agency decision or by final dis- (j) Inspection of data at the contractor’s position of the matter by court deci- facility. Contracting officers may ob- sion if suit is filed. The foregoing pro- tain the right to inspect data at the cedures may be modified in accordance contractor’s facility by use of Alternate with agency regulations implementing V, which adds paragraph (j) to provide the Freedom of Information Act (5 that right in the clause at 52.227–14, U.S.C. 552) if necessary to respond to a Rights in Data—General. Agencies may request thereunder. In addition, the also adopt Alternate V for general use. contractor is not precluded from bring- The data subject to inspection may be ing a claim under the Contract Dis- data withheld or withholdable under putes Act, including pursuant to the subparagraph (g)(1) of the clause. Such Disputes clause of this contract if ap- inspection may be made by the con- plicable, that may arise as the result of tracting officer or designee (including the Government’s action to remove or nongovernmental personnel under the ignore any markings on data, unless same conditions as the contracting of- such action occurs as the result of a ficer) for the purpose of verifying a final disposition of the matter by a contractor’s assertion regarding the court of competent jurisdiction. limited rights or restricted rights sta- (i) Omitted or incorrect notices. (1) tus of the data, or for evaluating work Data delivered under a contract con- performance under the contract. This taining the clause at 52.227–14, Rights right may be exercised up to 3 years in Data—General, without a limited after acceptance of all items to be de- rights notice or restricted rights no- livered under the contract. The con- tice, and without a copyright notice, tract may specify data items that are will be presumed to have been deliv- not subject to inspection under para- ered with unlimited rights, and the graph (j) (Alternate V). If the contractor Government assumes no liability for demonstrates to the contracting officer the disclosure, use, or reproduction of that there would be a possible conflict such data. However, to the extent the of interest if inspection were made by a data has not been disclosed without re- particular representative, the contract- striction outside the Government, the ing officer shall designate an alternate contractor may within 6 months (or a representative. longer period approved by the contracting officer for good cause shown) re- 27.405 Other data rights provisions. quest permission of the contracting of- (a) Production of special works . (1) ficer to have omitted limited rights or The clause at 52.227–17, Rights in restricted rights notices, as applicable, Data—Special Works, is to be used in placed on qualifying data at the con- contracts (or may be made applicable tractor’s expense, and the contracting to portions thereof) that are primarily officer may agree to so permit if the for the production or compilation of contractor (i) identifies the data for data (other than limited rights data or which a notice is to be added or cor- restricted computer software) for the rected, (ii) demonstrates that the omis- Government’s own use, or when there sion of the proposed notice was inad- is a specific need to limit distribution vertent, (iii) establishes that use of the and use of the data and/or to obtain in- proposed notice is authorized, and (iv) demnity for liabilities that may arise acknowledges that the Government has out of the content, performance, or dis- no liability with respect to any disclo- closure of the data. Examples are con- sure or use of any such data made prior tracts for— to the addition of the notice or result- (i) The production of audiovisual ing from the omission of the notice. works, including motion pictures or

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television recordings with or without other unlawful matter arising out of or accompanying sound, or for the prepa- contained in any production or com- ration of motion picture scripts, musi- pilation of data that are subject to the cal compositions, sound tracks, trans- clause, may be deleted or limited in lation, adaptation, and the like; scope where the contracting officer de- (ii) Histories of the respective agen- termines that, because of the nature of cies, departments, services, or units the particular data involved, such li- thereof; ability will not arise. (iii) Surveys of Government estab- (5) When the audiovisual or other lishments; special works are produced to accom- (iv) Works pertaining to the instruc- plish a public purpose other than action or guidance of Government offi- quisition for the Government’s own use cers and employees in the discharge of (such as for production and distribu- their official duties; tion to the public of such works by (v) The compilation of reports, books, other than a Federal agency) agencies studies, surveys, or similar documents are authorized to modify the Rights in that do not involve research, develop- Data—Special Works clause for use in ment, or experimental work; such contracts, with rights in data pro- (vi) The collection of data containing visions which meet agency mission personally identifiable information needs yet protect free speech and free- such that the disclosure thereof would dom of expression, as well as the artis- violate the right of privacy or publicity tic license of the creator of the work. of the individual to whom the informa- (b) Rights relating to existing data other tion relates; than limited rights data—(1) Acquisition (vii) Investigatory reports; or of existing audiovisual and similar works. (viii) The development, accumula- The clause at 52.227–18, Rights in tion, or compilation of data (other Data—Existing Works, is for use in than that resulting from research, de- contracts exclusively for the acquisi- velopment, or experimental work per- tion (without modification) of existing formed by the contractor), the early re- motion pictures, television recordings, lease of which could prejudice follow- and other audiovisual works; sound re- on acquisition activities or agency reg- cordings; musical, dramatic, and lit- ulatory or enforcement activities. erary works; pantomimes and choreo- (2) The contract may specify the pur- graphic works; pictorial, graphic, and poses and conditions (including time sculptural works; and works of a simi- limitations) under which the data may lar nature. The contract may set forth be used, released, or reproduced other limitations consistent with the pur- than for contract performance. Con- poses for which the works covered by tracts for the production of audiovisual the contract are being acquired. Exam- works, sound recordings, etc., may in- ples of these limitations are (i) means clude limitations in connection with of exhibition or transmission, (ii) time, talent releases, music licenses, and the (iii) type of audience, and (iv) geo- like that are consistent with the pur- graphical location. If the contract re- poses for which the works are acquired. quires that works of the type indicated (3) Subdivision (c)(1)(ii) of the clause in subparagraph (b)(1) of this section at 52.227–17, Rights in Data—Special are to be modified through editing, Works, which enables the Government translation, or addition of subject mat- to obtain assignment of copyright in ter, etc. (rather than purchased in ex- any data first produced in the perform- isting form) the clause at 52.227–17, ance of the contract, may be deleted if Rights in Data—Special Works, is to be the contracting officer determines that used. (See paragraph (a) of this sec- such assignment is not needed to fur- tion.) ther the objectives of the contract. (2) Acquisition of existing computer soft- (4) Paragraph (e) of the clause, which ware. (i) When contracting other than requires the contractor to indemnify from GSA’s Multiple Award Schedule the Government against any liability contracts for the acquisition of exist- incurred as the result of any violation ing computer software (i.e., privately of trade secrets, copyrights, right of developed software normally vended privacy or publicity, or any libelous or commercially under a license or lease

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agreement restricting its use, disclo- to commercial sales and may not be ap- sure, or reproduction), no specific con- propriate for Government contracts. tract clause prescribed in this subpart Any inconsistencies in a vendor’s need be used, but the contract (or pur- standard commercial agreement shall chase order) must specifically address be addressed in the contract and the the Government’s rights to use, dis- contract terms shall take precedence close and reproduce the software, over the vendor’s standard commercial which rights must be sufficient for the agreement. If the clause at 52.227–19, Government to fulfill the need for Commercial Computer Software—Re- which the software is being acquired. stricted Rights, is used, inconsistencies Such rights may be negotiated and set in the vendor’s standard commercial forth in the contract using the guid- agreement regarding the Government’s ance concerning restricted rights as set right to use, duplicate or disclose the forth in 27.404(e), or the clause at computer software are reconciled by 52.227–19, Commercial Computer Soft- that clause. ware—Restricted Rights, may be used. (iii) If a prime contractor under a Restricted computer software acquired contract containing the clause at under GSA Multiple Award Schedule 52.227–14, Rights in Data—General, with contracts and orders are excluded from subparagraph (g)(3) (Alternate III) in this requirement. The guidance con- the clause, acquires restricted com- cerning rights set forth in 27.404(e), as puter software from a subcontractor well as those in the clause at 52.227–19, (at any tier) as a separate acquisition are the minimum rights the Govern- for delivery to or for use on behalf of ment usually should accept. Thus if the Government, the contracting offi- greater rights than these minimum rights are needed, or lesser rights are cer may approve any additions to, or to be acquired, they must be nego- limitations on the restricted rights in tiated and set forth in the contract (or the Restricted Rights Notice of sub- purchase order). This includes any ad- paragraph (g)(3) in a collateral agree- ditions to, or limitations on, the rights ment incorporated in and made part of set forth in paragraph (b) of the clause the contract. at 52.227–19 when used. Examples of (3) Other existing data and works. Ex- greater rights may be those necessary cept for existing audiovisual and simi- for networking purposes or use of the lar works pursuant to subparagraph software from remote terminals com- (b)(1) of this section, and existing communicating with a host computer puter software pursuant to subpara- where the software is located. If the graph (b)(2) of this section, no clause computer software is to be acquired contained in this subpart is required to with unlimited rights, the contract be included in (i) contracts solely for must also so state. In addition, the the acquisition of books, periodicals, contract must adequately describe the and other printed items in the exact computer programs and/or data bases, form in which such items are to be ob- the form (tapes, punch cards, disk tained unless reproduction rights are pack, and the like), and all the nec- to be acquired; or (ii) other contracts essary documentation pertaining (e.g., contracts resulting from sealed thereto. If the acquisition is by lease or bidding) that require only existing data license, the disposition of the computer (other than limited rights data) to be software (by returning to the vendor or delivered and such data are available destroying) at the end of the term of without disclosure prohibitions, unless the lease or license must be addressed. reproduction rights to the data are to (ii) If the contract incorporates, be obtained. If the reproduction rights makes reference to, or uses a vendor’s to the data are to be obtained in any standard commercial lease, license, or contract of the type described in sub- purchase agreement, such agreement division (b)(3) (i) or (ii) of this section, shall be reviewed to assure that it is such rights must be specifically set consistent with subdivision (b)(2)(i) of forth in the contract. No clause con- this section. Caution should be exer- tained in this subpart is required to be cised in accepting a vendor’s terms and included in contracts substantially for conditions, since they may be directed on-line data base services in the same

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form as they are normally available to or restricted computer software. Rath- the general public. er, form, fit, and function data may be (c) Contracts awarded under Small furnished with unlimited rights in lieu Business Innovative Research (SBIR) Pro- of the qualifying data, or the qualify- gram. The clause at 52.227–20, Rights in ing data may be furnished with limited Data—SBIR Program, is for use in all rights or restricted rights if needed Phase I and Phase II contracts awarded (see 27.404 (d) and (e)). If greater rights under the Small Business Innovative are needed such need should be clearly Research Program (SBIR) established set forth in the solicitation and the pursuant to Pub. L. 97–219 (the Small contractor fairly compensated for such Business Innovation Development Act greater rights. of 1982). The clause is limited to use (b) Additional data requirements. (1) solely in contracts awarded under the Recognizing that in some contracting SBIR Program, and is the only data situations, such as experimental, devel- rights clause to be used in such con- opmental, research, or demonstration tracts. contracts, it may not be feasible to ascertain all the data requirements at 27.406 Acquisition of data. the time of contracting, the clause at (a) General. (1) It is the Government’s 52.227–16, Additional Data Require- practice to determine, to the extent ments, may be used to enable the sub- feasible, its data requirements in time sequent ordering by the contracting of- for inclusion in solicitations. The data ficer of additional data first produced requirements may be subject to revi- or specifically used in the performance sion during contract negotiations. of such contracts as the actual require- Since the preparation, reformatting, ments become known. The clause shall maintenance and updating, cataloging, normally be used in solicitations and and storage of data represents an ex- contracts involving experimental, de- pense to both the Government and the velopmental, research or demonstra- contractor, efforts should be made to tion work (other than basic or applied keep the contract data requirements to research to be performed under a con- a minimum, consistent with the pur- tract solely by a university or college poses of the contract. when the contract amount will be (2) To the extent feasible, all known $500,000 or less) unless all the require- data requirements, including the time ments for data are believed to be and place for delivery and any limita- known at the time of contracting and tions and restrictions to be imposed on specified in the contract. If the con- the contractor in the handling of the tract is for basic or applied research to data, shall be specified in the contract. be performed by a university or col- Further, and to the extent feasible, in lege, and the contracting officer be- major system acquisitions, data relieves the contract effort will in the fu- quirements shall be set out as separate ture exceed $500,000, even though the contract line items. In establishing the initial award does not, the contracting contract data requirements and in officer may include the clause in the specifying data items to be delivered initial award. by a contractor, agencies may, consist- (2) Data may be ordered under the ent with subparagraph (a)(1) of this clause at 52.227–16, Additional Data Re- section, develop their own contract quirements, at any time during con- schedule provisions in agency proce- tract performance or within a period of dures (including data requirements 3 years after acceptance of all items to lists) for listing, specifying, identifying be delivered under the contract. The source, assuring delivery, and handling contractor is to be compensated for any data required to be delivered, first converting the data into the prescribed produced, or specifically used in the form, for reproduction, and for deliv- performance of the contract. ery. In order to minimize storage costs (3) Data delivery requirements should for the retention of data, the contrac- normally not require that a contractor tor may be relieved of retention re- provide the Government, as a condition quirements for specified data items by of the procurement, unlimited rights in the contracting officer at any time data that qualify as limited rights data during the retention period required by

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the clause. The contracting officer may by subpart 46.3, and the clause at permit the contractor to identify and 52.227–21, Technical Data Certification, specify in the contract data not to be Revision, and Withholding of Pay- ordered for delivery under the Addi- ment—Major Systems, when it is in- tional Data Requirements clause if cluded in the contract. (See paragraph such data is not necessary to meet the (d) of this section.) Government’s requirements for data. (d) Major system acquisition. (1) In Also, the contracting officer may alter order to assure that technical data the Additional Data Requirements needed to support a major system ac- clause by deleting the term or specifi- quisition are timely delivered and are cally used in paragraph (a) thereof if de- complete, accurate, and satisfy the re- livery of such data is not necessary to quirements of the contract concerning meet the Government’s requirements the data, the clause at 52.227–21, Tech- for data. Any data ordered under this nical Data Certification, Revision, and clause will be subject to the Rights in Withholding of Payment—Major Sys- Data—General clause (or other equiva- tems, is to be included in contracts for lent clause setting forth the respective rights of the Government and the con- or in support of a major system (as the tractor) in the contract, and data au- term major system is defined in section thorized to be withheld under such 4 of the Office of Federal Procurement clause will not be required to be deliv- Policy Act, as amended by Pub. L. 98– ered under the Additional Data Re- 577), including every detailed design, quirements clause, except as provided development, or production contract in Alternate II or Alternate III, if infor a major system acquisition and cluded in the clause (see 27.404 (d) and contracts for any individual part, com- (e)). ponent, subassembly, assembly, or sub- (3) Agencies not having an estab- system integral to the major system, lished program for dissemination of and other property which may be re- computer software shall give consider- placed during the service life of the ation to not ordering additional com- system, and including spare parts and puter software under the clause at replenishment spare parts. 52.227–16, Additional Data Require- (2) The clause at 52.227–21, Technical ments, for the sole purpose of dissemi- Data, Certification, Revision, and nating or marketing of the software to Withholding of Payment—Major Sys- the public especially if this will pro- tems, requires the contractor, upon de- vide the contractor additional incen- livery of any technical data made sub- tive to make improvements to the soft- ject to the clause in the contract, to ware at its own expense and dissemi- certify that to the best of its knowl- nate or market it. This should not pre- edge and belief, such data are com- clude an agency from including a sum- plete, accurate, and comply with con- mary description of computer software tract requirements. It also provides for available from a contractor in any data corrections of any deficiencies in the dissemination programs which it oper- data, as well as for the ability of the ates, with a statement as to how the contracting officer to request revisions potential user can obtain it through of the data to reflect engineering de- the contractor, licensee, or assignee. In cases where the contracting officer or- sign changes made during performance ders software for internal purposes, of the contract and affecting form, fit, consideration shall be given, consistent and function of the items the data de- with the Government’s needs, to not pict. Further included is the authority ordering particular source codes, algo- for the contracting officer to withhold rithms, processes, formulae or flow payment under the contract to assure charts of the software if the contractor timely delivery of the technical data shows that this aids its efforts to dis- and/or assure correction if the tech- seminate or market the software. nical data are not complete, accurate, (c) Acceptance of data. Acceptability and in compliance with contract re- of technical data delivered under a con- quirements. tract shall be in accordance with the (3) When the clause at 52.227–21, Tech- appropriate contract clause as required nical Data, Certification, Revision and

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Withholding of Payment—Major Sys- for the Government to operate or tems, is used, the section of the con- maintain the product, or use the proc- tract specifying data delivery require- ess if obtained by the United States as ments (see subparagraph (a)(2) of this an element of performance under the section) shall expressly identify those contract), shall not be required to be line items of technical data to which provided to the Government from per- the clause applies. Upon delivery of sons who have developed such products such technical data, the contracting of- or processes as a condition for the pro- ficer or designee shall review the tech- curement of such products or processes nical data and the contractor’s certifi- by the Government. cation relating thereto to assure that the data are complete, accurate, and 27.407 Rights to technical data in suc- comply with contract requirements. If cessful proposals. not, the contractor is to be requested to correct the deficiencies, and pay- (a) Contracting officers may, in con- ment may be withheld until such is sideration of contract award, desire to done. Final payment should not be acquire unlimited rights in technical made under the contract until it has data (but not commercial or financial been determined that the delivery re- information) contained in a successful quirements of those line items of data proposal upon which a contract award to which the clause applies have been is based. However, before such unlim- satisfactorily met. ited rights are acquired, the prospec- (4) In a contract for or in support of tive contractor must be afforded the a major system awarded by a civilian opportunity either (1) to advise the agency other than NASA or the U.S. contracting officer that the technical Coast Guard the contracting officer data, or portions thereof (to be identi- shall include contractual provisions re- fied by the prospective contractor), are quiring, as an element of performance covered by any restrictive notice re- under the contract, the delivery of any garding the disclosure and use of pro- technical data, other than computer posal information authorized by sub- software, relating to the major system part 15.4 or 15.5 (or any agency supple- or supplies for the major system pro- ment thereto), and request that such cured or to be procured by the Govern- protection be maintained by excluding ment, which are to be developed exclu- the data from the Government’s rights; sively with Federal funds in the per- or (2) to establish to the contracting formance of the contract if the deliv- officer’s satisfaction that identified ery of such technical data is needed to ensure the competitive acquisition of portions of the technical data do not supplies or services that will be re- relate directly to or will not be utilized quired in substantial quantities in the in the work to be performed under the future. The clause at 52.227–22, Major contract, and request that such por- System—Minimum Rights, is to be in- tions be excluded from the Govern- cluded in such contracts in addition to ment’s rights. the clause at 52.227–14, Rights in Data— (b) If unlimited rights to technical General, and other required clauses, to data in successful proposals, as set ensure that the Government acquires forth in paragraph (a) of this section, at least those rights required by Pub. are to be acquired, it shall be by use of L. 98–577 in technical data developed the clause at 52.227–23, Rights to Pro- exclusively with Federal funds. In any posal Data (Technical). Any excluded contract to which this subparagraph technical data will be identified by in- (d)(4) applies, technical data, other serting appropriate proposal page num- than computer software, relating to a bers in the clause, which clause enables major system or supplies for a major the identification of data to be ex- system, procured or to be procured by cluded from the Government’s rights, the Government and also relating to as discussed in paragraph (a) of this the design, development, or manufac- section. Such exclusion is not disposi- ture of products or processes offered or tive of the protective status of the to be offered for sale to the public (ex- data, but any excluded technical data, cept for such data as may be necessary

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as well as any commercial and finan- tract (such as license rights) may be cial information contained in the pro- tailored to the circumstances consist- posal, will remain subject to the poli- ent with the foregoing and the policy cies in subpart 15.4 or 15.5 (or agency set forth in 27.402. As a guide, such supplements thereto) relating to pro- clause may be appropriate when the posal information (i.e., will be used for contractor contributes money or re- evaluation purposes only). If the clause sources, or agrees to make repayment at 52.227–23, Rights to Proposal Data of nonrecurring costs, of a value of ap- (Technical), is included in a contract, proximately 50 percent of the total cost the prospective contractor must be spe- of the contract (i.e., Government, con- cifically afforded the opportunity to tractor, and/or third party paid costs), exclude technical data as set forth in and the respective contributions are paragraph (a) of this section, and the not readily segregable for any work contract file must reflect that fact. If element to be performed under the con- there is a need to have access to any of tract. Such clause may be used for all the excluded technical data during con- or for only specifically identified tasks tract performance, consideration or work elements under the contract. should be given to their acquisition as In the latter instance, its use will be in limited rights data, if they so qualify, addition to whatever other data rights in accordance with 27.404(d). clause is prescribed under this subpart, with the contract specifically identify- 27.408 Cosponsored research and development activities. ing which clause is to apply to which tasks or work elements. Further, such (a) In contracts involving cospon- clause may not be appropriate where sored research and development where- the purpose of the contract is to in the contractor is required to make produce data for dissemination to the substantial contributions of funds or public, or to develop or demonstrate resources (i.e., by cost-sharing or by re- technologies which will be available, in payment of nonrecurring costs), and any event, to the public for their direct the contractor’s and the Government’s use. respective contributions to any item, component, process, or computer soft- (b) Where the contractor’s contribu- ware, developed or produced under the tions are readily segregable (by per- contract are not readily segregable, the formance requirements and the funding contracting officer may limit the ac- therefor) and so identified in the con- quisition of or acquire less than unlim- tract, any data resulting therefrom ited rights to any data developed and may be treated under such clause as delivered under such contract. Agen- limited rights data or restricted com- cies may regulate the use of this au- puter software in accordance with thority in their supplements. Basically 27.404 (d) or (e), as applicable; or if such such rights should, at a minimum, as- treatment is inconsistent with the pur- sure use of the data for agreed-to Gov- pose of the contract, rights to such ernmental purposes (including re- data may, if so negotiated and stated procurement rights as appropriate), in the contract, be treated in a manner and will address any disclosure limita- consistent with paragraph (a) of this tions or restrictions to be imposed on section. the data. Also, consideration may be given to directed licensing provisions if 27.409 Solicitation provisions and contract clauses. needed to carry out the objectives of the contract. Since the purpose of the (a)(1) The contracting officer shall cosponsored research and development, insert the clause at 52.227–14, Rights in the legitimate proprietary interests of Data—General, including its use with the contractor, the needs of the Gov- Alternate I through Alternate V as may ernment, and the respective contribu- be required or authorized in accordance tions of both parties may vary, no spe- with paragraphs (b) through (f) of this cific clauses are prescribed, but a section, in solicitations and contracts clause providing less than unlimited if it is contemplated that data will be rights in the Government for data de- produced, furnished, or acquired under veloped and delivered under the con- the contract, unless the contract is—

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(i) For the production of special necessary to obtain the delivery of re- works of the type set forth in 27.405(a), stricted computer software, the clause but the clause at 52.227–14, Rights in shall be used with its Alternate III. Any Data— General, shall be included in greater or lesser rights regarding the the contract and made applicable to use, duplication, or disclosure of re- data other than special works, as ap- stricted computer software than those propriate; set forth in the Restricted Rights No- (ii) For the acquisition of existing tice of subparagraph (g)(3) of the clause data works, as described in 27.405(b); must be specified in the contract and (iii) To be performed outside the the notice modified accordingly. United States, its possessions, and (e) The clause shall be used with its Puerto Rico, in which case agencies Alternate IV in contracts for basic or may prescribe different clauses (see paragraph (n) of this section); applied research (other than those for (iv) For architect-engineer services the management or operation of Gov- or construction work, in which case ernment facilities or where inter- agencies may utilize the clause at national agreements require other- 52.227–17, Rights in Data—Special wise), to be performed solely by univer- Works, or may prescribe different sities and colleges. The clause may be clauses; used with its Alternate IV in other con- (v) A Small Business Innovation Re- tracts if in accordance with 27.404(f)(1) search contract (see paragraph (l) of an agency determines to grant blanket this section); permission for the contractor to estab- (vi) For the management, operation, lish claim to copyright subsisting in all design, or construction of a Govern- data first produced without further re- ment-owned facility to perform request being made by the contractor. search, development, or production When Alternate IV is used, the contract work, in which case agencies may pre- may exclude items or categories of scribe different clauses (see paragraph data from the blanket permission (p) of this section); or granted, either by express provisions in (vii) A contract involving cospon- the contract or by the addition of a sored research and development in subparagraph (d)(3) to the clause (see which a clause providing for less than 27.404(g)(2)). unlimited right has been authorized. (f) In accordance with 27.404(i), if a (See 27.408). contracting officer needs to have the (2) Subparagraph (e)(3) of the clause at 52.227–14, Rights in Data—General, right to inspect certain data at a con- may be deleted or reserved by an agen- tractor’s facility or if by an agency, cy not subject to Title III of the Fed- generally the clause shall be used with eral Property and Administrative Serv- its Alternate V. ices Act. (g) In accordance with 27.404(d)(2), if (b) If an agency determines, in ac- the contracting officer desires to have cordance with 27.404(c), to adopt the al- an offeror state in response to a solici- ternate definition of Limited Rights tation, to the extent feasible, whether Data in paragraph (a) of the clause, the limited rights data or restricted com- clause shall be used with its Alternate I. puter software are likely to be used in (c) In accordance with 27.404(d), if a meeting the data delivery require- contracting officer determines it is ments set forth in the solicitation, the necessary to obtain the delivery of lim- contracting officer shall insert in the ited rights data, the clause shall be solicitation the provision at 52.227–15, used with its Alternate II. The contract- Representation of Limited Rights Data ing officer shall, when Alternate II is and Restricted Computer Software in used, assure that the purposes, if any, any solicitation containing the clause for which limited rights data are to be at 52.227–14, Rights in Data—General. disclosed outside the Government are The contractor’s response will provide included in the Limited Rights Notice of an aid in determining whether the subparagraph (g)(2) of the clause. clause should be used with Alternate II (d) In accordance with 27.404(e), if a contracting officer determines it is and/or Alternate III.

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(h) The contracting officer shall nor- computer software, the clause at mally insert the clause at 52.227–16, Ad- 52.227–19, Commercial Computer Soft- ditional Data Requirements, in solici- ware-Restricted Rights, may be used in tations and contracts involving experi- the solicitation and contract. In any mental, developmental, research, or event, the contracting officer shall as- demonstration work (other than basic sure that the contract contains terms or applied research to be performed to obtain sufficient rights for the Gov- solely by a university or college where ernment to fulfill the need for which the contract amount will be $500,000 or the software is being acquired and is less) unless all the requirements for otherwise consistent with 27.405(b)(2). data are believed to be known at the (l) If the contract is a Small Business time of contracting and specified in the Innovation Research (SBIR) contract, contract. (See 27.406(b).) This clause the clause at 52.227–20, Rights in Data— may also be used in other contracts SBIR Program shall be used in all when considered appropriate. Phase I and Phase II contracts awarded (i) In accordance with 27.405(a), the under the Small Business Innovation contracting officer shall insert the Research Program established pursu- clause at 52.227–17, Rights in Data— ant to Pub. L. 97–219 (The Small Busi- Special Works, in solicitations and ness Innovation Development Act of contracts primarily for the production 1982). or compilation of data (other than lim- (m) While no specific clause of this ited rights data or restricted computer subpart is required to be included in software) for the Government’s inter- contracts solely for the acquisition, nal use, or when there is a specific need without disclosure prohibitions, of to limit distribution and use of the books, publications and similar items data and/or to obtain indemnity for li- in the exact form in which such items abilities that may arise out of the con- exist prior to the request for purchase tent, performance, or disclosure of the (i.e., the off-the-shelf purchase of such data. Examples of such contracts are items), or in other contracts (e.g., con- set forth in 27.405(a). The contract may tracts resulting from sealed bidding) specify the purposes and conditions (in- where only existing data available cluding time limitations) under which without disclosure prohibitions is to be the data may be used, released or re- furnished, if reproduction rights are to produced by the contractor for other be acquired the contract shall include than contract performance. Contracts terms addressing such rights. (See for the production of audiovisual 27.405(b)(3).) works, sound recordings, etc. may include limitations in connection with (n) Agencies may prescribe in their talent releases, music licenses, and the procedures, as appropriate, a clause like that are consistent with the pur- consistent with the policy of 27.402 in poses for which the data is acquired. contracts to be performed outside the (j) The contracting officer shall in- United States, its possessions, and sert the clause at 52.227–18, Rights in Puerto Rico. Data—Existing Works, in solicitations (o) Agencies may prescribe in their and contracts exclusively for the acqui- procedures the clause at 52.227–17, sition, without modification, of exist- Rights in Data—Special Works, or pre- ing audiovisual and similar works of scribe, as appropriate, clauses consist- the type set forth in 27.405(b)(1). The ent with the policy in 27.402 in con- contract may set forth limitations contracts for architect-engineer services sistent with the purposes for which the and construction work. work is being acquired. The clause at (p) Agencies may prescribe in their 52.227–17, Rights in Data—Special procedures, as appropriate, a clause Works, shall be used if existing works consistent with the policy of 27.402 in are to be modified, as by editing, trans- contracts for management, operation, lation, addition of subject matter, etc. design, or construction of Government- (k) In accordance with 27.405(b)(2), owned research, development, or pro- when contracting (other than from duction facilities, and in contracts and GSA’s Multiple Award Schedule con- subcontracts in support of programs tracts) for the acquisition of existing being conducted at such facilities.

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(q) In accordance with 27.406(d), the ment with the unrestricted right to contracting officer shall insert the use, duplicate, or disclose and to have clause at 52.227–21, Technical Data Cer- or permit others to do so; tification, Revision, and Withholding (b) Foreign license and technical as- of Payment—Major Systems, in con- sistance agreements between the U.S. tracts for major systems acquisitions Government and United States domes- or for support of major systems acqui- tic concerns; sitions. When used, this clause requires (c) Guidance on negotiating contract that the technical data to which it ap- prices and terms concerning patents plies be specified in the contract. (See and data, including royalties, in con- 27.406(d).) tracts between the U.S. Government (r) In the case of civilian agencies ex- and a foreign government or foreign cept NASA and the U.S. Coast Guard, concern; and the contracting officer shall insert the (d) Regulations and guidance on con- clause at 52.227–22, Major System—Min- trols on the exportation of data relat- imum Rights, in contracts for major ing to certain designated items, such systems or contracts in support of as arms or munitions of war, and guid- major systems. ance on reviews of agreements involv- (s) In accordance with 27.407, if a con- ing such data (see 22 CFR part l24). tracting officer desires to acquire unlimited rights in technical data con- PART 28—BONDS AND INSURANCE tained in a successful proposal upon which a contract award is based, the Sec. contracting officer shall insert the 28.000 Scope of part. clause at 52.227–23, Rights to Proposed 28.001 Definitions. Data (Technical). Rights to technical data in a proposal are not acquired by Subpart 28.1—Bonds mere incorporation by reference of the proposal in the contract, and if a pro- 28.100 Scope of subpart. 28.101 Bid guarantees. posal is incorporated by reference, 28.101–1 Policy on use. 27.404 must be followed to assure that 28.101–2 Solicitation provision or contract such rights are appropriately ad- clause. dressed. 28.101–3 [Reserved] 28.101–4 Noncompliance with bid guarantee [52 FR 18140, May 13, 1987, as amended at 55 requirements. FR 38517, Sept. 18, 1990] 28.102 Performance and payment bonds and alternative payment protections for con- Subpart 27.5—[Reserved] struction contracts. 28.102–1 General. 28.102–2 Amount required. Subpart 27.6—Foreign License 28.102–3 Solicitation requirements and con- and Technical Assistance tract clause. Agreements 28.103 Performance and payment bonds for other than construction contracts. 27.601 General. 28.103–1 General. Agencies shall provide all necessary 28.103–2 Performance bonds. 28.103–3 Payment bonds. rules and regulations as are required 28.103–4 Contract clause. for the proper application of the laws 28.104 Annual performance bonds. and policies of the U.S. Government re- 28.105 Other types of bonds. garding— 28.105–1 Advance payment bonds. (a) Elimination in agreements be- 28.105–2 Patent infringement bonds. tween domestic concerns and foreign 28.106 Administration. governments or foreign concerns of 28.106–1 Bonds and bond related forms. charges for the use of patents in which 28.106–2 Substitution of surety bonds. the U.S. Government has a royalty-free 28.106–3 Additional bond or security. 28.106–4 Contract clause. license or of charges in agreements for 28.106–5 Consent of surety. the use of data that the U.S. Govern- 28.106–6 Furnishing information. ment has a right to use and disclose to 28.106–7 Withholding contract payments. others, that is in the public domain, or 28.106–8 Payment to subcontractors or sup- that was acquired by the U.S. Govern- pliers.

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Subpart 28.2—Sureties The terms bid and bidders include proposal and offerors. 28.200 Scope of subpart. 28.201 Requirements for sureties. [48 FR 42286, Sept. 19, 1983, as amended at 50 28.202 Acceptability of corporate sureties. FR 1743, Jan. 11, 1985; 50 FR 52429, Dec. 23, 28.203 Acceptability of individual sureties. 1985] 28.203–1 Security interests by an individual surety. 28.001 Definitions. 28.203–2 Acceptability of assets. Attorney-in-fact, as used in this part, 28.203–3 Acceptance of real property. means an agent, independent agent, 28.203–4 Substitution of assets. underwriter, or any other company or 28.203–5 Release of lien. individual holding a power of attorney 28.203–6 Contract clause. 28.203–7 Exclusion of individual sureties. granted by a surety (see also power of 28.204 Alternatives in lieu of corporate or attorney). individual sureties. Bid guarantee means a form of secu- 28.204–1 United States bonds or notes. rity assuring that the bidder (a) will 28.204–2 Certified or cashiers checks, bank not withdraw a bid within the period drafts, money orders, or currency. specified for acceptance and (b) will 28.204–3 Irrevocable letter of credit (ILC). execute a written contract and furnish 28.204–4 Contract clause. required bonds, including any necessary coinsurance or reinsurance Subpart 28.3—Insurance agreements, within the time specified 28.301 Policy. in the bid, unless a longer time is al- 28.302 Notice of cancellation or change. lowed, after receipt of the specified 28.303 Insurance against loss of or damage forms. to Government property. Bond means a written instrument ex- 28.304 Risk-pooling arrangements. ecuted by a bidder or contractor (the 28.305 Overseas workers’ compensation and ‘‘principal’’), and a second party (‘‘the war-hazard insurance. surety’’ or ‘‘sureties’’) (except as pro- 28.306 Insurance under fixed-price contracts. vided in 28.204), to assure fulfillment of 28.307 Insurance under cost-reimbursement contracts. the principal’s obligations to a third 28.307–1 Group insurance plans. party (the ‘‘obligee’’ or ‘‘Govern- 28.307–2 Liability. ment’’), identified in the bond. If the 28.308 Self-insurance. principal’s obligations are not met, the 28.309 Contract clauses for workers’ com- bond assures payment, to the extent pensation insurance. stipulated, of any loss sustained by the 28.310 Contract clause for work on a Gov- obligee. The types of bonds and related ernment installation. documents are as follows: 28.311 Solicitation provision and contract (a) An advance payment bond secures clause on liability insurance under cost- reimbursement contracts. fulfillment of the contractor’s obliga- 28.311–1 Contract clause. tions under an advance payment provi- 28.311–2 Agency solicitation provisions and sion. contract clauses. (b) An annual bid bond is a single 28.312 Contract clause for insurance of bond furnished by a bidder, in lieu of leased motor vehicles. separate bid bonds, which secures all 28.313 Contract clauses for insurance of bids (on other than construction con- transportation or transportation-related tracts) requiring bonds submitted dur- services. ing a specific Government fiscal year. AUTHORITY: 40 U.S.C. 486(c); 10 U.S.C. Chap- (c) An annual performance bond is a ter 137; and 42 U.S.C. 2473(c). single bond furnished by a contractor, SOURCE: 48 FR 42286, Sept. 19, 1983, unless in lieu of separate performance bonds, otherwise noted. to secure fulfillment of the contractor’s obligations under contracts (other 28.000 Scope of part. than construction contracts) requiring This part prescribes requirements for bonds entered into during a specific obtaining financial protection against Government fiscal year. damages under sealed bid and nego- (d) A patent infringement bond se- tiated contracts. It covers bid guaran- cures fulfillment of the contractor’s tees, bonds, sureties, and insurance. obligations under a patent provision.

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(e) A payment bond assures payments under its charter, has legal power to as required by law to all persons sup- act as surety for others. plying labor or material in the prosecu- (c) A cosurety is one of two or more tion of the work provided for in the sureties that are jointly liable for the contract. penal sum of the bond. A limit of li- (f) A performance bond secures per- ability for each surety may be stated. formance and fulfillment of the con- [48 FR 42286, Sept. 19, 1983, as amended at 61 tractor’s obligations under the con- FR 31652, June 20, 1996] tract. Consent of surety means an acknowl- Subpart 28.1—Bonds edgment by a surety that its bond given in connection with a contract 28.100 Scope of subpart. continues to apply to the contract as This subpart prescribes requirements modified. and procedures for the use of bonds and Insurance, as used in this part, means all types of bid guarantees. a contract which provides that for a stipulated consideration, one party un- 28.101 Bid guarantees. dertakes to indemnify another against loss, damage, or liability arising from 28.101–1 Policy on use. an unknown or contingent event. (a) A contracting officer shall not re- Irrevocable letter of credit (ILC) means quire a bid guarantee unless a perform- a written commitment by a federally ance bond or a performance and pay- insured financial institution to pay all ment bond is also required (see 28.102 or part of a stated amount of money on and 28.103). Except as provided in para- demand to the Government (the bene- graph (c) of this subsection, bid guar- ficiary) until the expiration date of the antees shall be required whenever a letter. The letter of credit cannot be performance bond or a performance and revoked or conditioned. payment bond is required. Penal sum or penal amount means the (b) All types of bid guarantees are ac- amount of money specified in a bond ceptable for supply or service contracts (or a percentage of the bid price in a (see annual bid bonds and annual per- bid bond) as the maximum payment for formance bonds coverage in 28.001). which the surety is obligated. Only separate bid guarantees are ac- Power of attorney, as used in this ceptable in connection with construc- part, means the authority given one tion contracts. Agencies may specify person or corporation to act for and ob- that only separate bid bonds are ac- ligate another, as specified in the in- ceptable in connection with construc- strument creating the power; in cor- tion contracts. porate suretyship, an instrument under (c) The chief of the contracting office seal which appoints an attorney-in-fact may waive the requirement to obtain a to act in behalf of a surety company in bid guarantee when a performance signing bonds (see also attorney-in-fact). bond or a performance and payment Reinsurance means a transaction bond is required if it is determined that which provides that a surety, for a con- a bid guarantee is not in the best inter- sideration, agrees to indemnify another est of the Government for a specific ac- surety against loss which the latter quisition (e.g., overseas construction, may sustain under a bond which it has emergency acquisitions, sole-source issued. contracts). Class waivers may be au- Surety means an individual or cor- thorized by the agency head or des- poration legally liable for the debt, de- ignee. fault, or failure of a principal to satisfy [48 FR 42286, Sept. 19, 1983, as amended at 51 a contractual obligation. The types of FR 2665, Jan. 17, 1986; 52 FR 19803, May 27, sureties referred to are as follows: 1987; 52 FR 30076, Aug. 12, 1987; 54 FR 34755, (a) An individual surety is one per- Aug. 21, 1989; 61 FR 39213, July 26, 1996] son, as distinguished from a business entity, who is liable for the entire 28.101–2 Solicitation provision or con- penal amount of the bond. tract clause. (b) A corporate surety is licensed (a) The contracting officer shall in- under various insurance laws and, sert a provision or clause substantially

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the same as the provision at 52.228–1, not met, deficiencies in bid guarantees Bid Guarantee, in solicitations or con- submitted by offerors determined to be tracts that require a bid guarantee or in the competitive range shall be ad- similar guarantee. For example, the dressed during discussions and the contracting officer may modify this offeror shall be given an opportunity to provision— correct the deficiency. (1) To set a period of time that is (c) Noncompliance with a solicitation other than 10 days for the return of ex- requirement for a bid guarantee shall ecuted bonds; be waived in the following cir- (2) For use in connection with con- cumstances unless the contracting offi- struction solicitations when the agen- cer determines in writing that accept- cy has specified that only separate bid ance of the bid would be detrimental to bonds are acceptable in accordance the Government’s interest when— with 28.101–1(b); (1) Only one offer is received. In this (3) For use in solicitations for nego- case, the contracting officer may re- tiated contracts; or quire the furnishing of the bid guaran- (4) For use in service contracts con- tee before award; taining options for extended perform- (2) The amount of the bid guarantee ance. submitted is less than required, but is (b) The contracting officer shall de- equal to or greater than the difference termine the amount of the bid guaran- between the offer price and the next tee for insertion in the provision at higher acceptable offer; 52.228–1 (see 28.102–2(c)). The amount (3) The amount of the bid guarantee shall be adequate to protect the Gov- submitted, although less than that re- ernment from loss should the success- quired by the solicitation for the maxi- ful bidder fail to execute further con- mum quantity offered, is sufficient for tractual documents and bonds as re- a quantity for which the offeror is oth- quired. The bid guarantee amount shall erwise eligible for award. Any award to be at least 20 percent of the bid price the offeror shall not exceed the quan- but shall not exceed $3 million. When tity covered by the bid guarantee; the penal sum is expressed as a per- (4) The bid guarantee is received late, centage, a maximum dollar limitation and late receipt is waived under 14.304; may be stated. (5) A bid guarantee becomes inadequate as a result of the correction of [61 FR 39213, July 26, 1996] a mistake under 14.407 (but only if the 28.101–3 [Reserved] bidder will increase the bid guarantee to the level required for the corrected 28.101–4 Noncompliance with bid bid); guarantee requirements. (6) A telegraphic offer modification is (a) In sealed bidding, noncompliance received without corresponding modi- with a solicitation requirement for a fication of the bid guarantee, if the bid guarantee requires rejection of the modification expressly refers to the bid, except in the situations described previous offer and the offeror corrects in paragraph (c) of this subsection any deficiency in bid guarantee; when the noncompliance shall be (7) An otherwise acceptable bid bond waived. was submitted with a signed offer, but (b) In negotiation, noncompliance the bid bond was not signed by the with a solicitation requirement for a offeror; bid guarantee requires rejection of an (8) An otherwise acceptable bid bond initial proposal as unacceptable, if a is errroneously dated or bears no date determination is made to award the at all; or contract based on initial proposals (9) A bid bond does not list the Unit- without discussion, except in the situa- ed States as obligee, but correctly tions described in paragraph (c) of this identifies the offeror, the solicitation subsection when noncompliance shall number, and the name and location of be waived. (See 15.610(a) for conditions the project involved, so long as it is ac- regarding making awards based on ini- ceptable in all other respects. tial proposals.) If the conditions for [54 FR 48985, Nov. 28, 1989, as amended at 60 awarding based on initial proposals are FR 34739, July 3, 1995]

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28.102 Performance and payment (c) The contractor shall furnish all bonds and alternative payment pro- bonds or alternative payment protec- tections for construction contracts. tion, including any necessary reinsurance agreements, before receiving a no- 28.102–1 General. tice to proceed with the work or being (a) The Miller Act (40 U.S.C. 270a– allowed to start work. 270f) requires performance and pay- [48 FR 42286, Sept. 19, 1983, as amended at 61 ment bonds for any construction con- FR 31652, June 20, 1996] tract exceeding $100,000, except that this requirement may be waived (1) by 28.102–2 Amount required. the contracting officer for as much of (a) Performance bonds. (1) The penal the work as is to be performed in a for- amount of performance bonds shall be eign country upon finding that it is im- 100 percent of the original contract practicable for the contractor to fur- price, unless the contracting officer de- nish such bond, or (2) as otherwise au- termines that a lesser amount would be thorized by the Miller Act or other law. adequate for the protection of the Gov- (b)(1) Pursuant to Section 4104(b)(2) ernment. of the Federal Acquisition Streamlin- (2) The Government may require ad- ing Act of 1994 (Public Law 103–355), for ditional performance bond protection construction contracts greater than when a contract price is increased. The $25,000, but not greater than $100,000, increase in protection shall generally the contracting officer shall select two equal 100 percent of the increase in or more of the following payment pro- contract price. The Government may tections, giving particular consider- secure additional protection by direct- ation to inclusion of an irrevocable let- ing the contractor to increase the ter of credit as one of the selected al- penal amount of the existing bond or to ternatives: obtain an additional bond. (i) A payment bond. (b) Payment bonds or alternative payment protection. (1) The penal amount of (ii) An irrevocable letter of credit payment bonds or alternative payment (ILC). protection shall equal— (iii) A tripartite escrow agreement. The (i) Fifty percent of the contract price prime contractor establishes an escrow if the contract price is not more than account in a federally insured financial $1 million; institution and enters into a tripartite (ii) Forty percent of the contract escrow agreement with the financial price if the contract price is more than institution, as escrow agent, and all of $1 million but not more than $5 mil- the suppliers of labor and material. lion; or The escrow agreement shall establish (iii) Two and one half million if the the terms of payment under the con- contract price is more than $5 million. tract and of resolution of disputes (2) If the original contract price is $5 among the parties. The Government million or less, the Government may makes payments to the contractor’s es- require additional protection if the crow account, and the escrow agent contract price is increased. The penal distributes the payments in accordance amount of the total protection as re- with the agreement, or triggers the dis- vised shall meet the requirement of putes resolution procedures if required. paragraph (b)(1) of this subsection. (iv) Certificates of deposit. The con- (3) The Government shall secure ad- tractor deposits certificates of deposit ditional protection by directing the from a federally insured financial insti- contractor to increase the penal sum of tution with the contracting officer, in the existing bond or to obtain an addi- an acceptable form, executable by the tional bond, or to furnish additional al- contracting officer. ternative payment protection. (v) A deposit of the types of security (c) Requirements and indefinite-quan- listed in 28.204–1 and 28.204–2. tity contracts. (1) When determining the (2) The contractor shall submit to penal sum of bonds or alternative pay- the Government one of the payment ment protection for requirements con- protections selected by the contracting tracts, the contracting officer shall officer. consider the contract price to be the

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price payable for the estimated quan- However, performance and payment tity. bonds may be used as permitted in (2) When determining the penal sum 28.103–2 and 28.103–3. of bonds or alternative payment pro- (b) The contractor shall furnish all tection for indefinite-quantity con- bonds before receiving a notice to pro- tracts, the contracting officer shall ceed with the work. consider the contract price to be the (c) No bond shall be required after price payable for the specified mini- the contract has been awarded if it was mum quantity. When the minimum not specifically required in the con- quantity is exceeded, subparagraphs tract, except as may be determined (a)(2) and (b)(2) of this subsection necessary for a contract modification. apply. (d) Reducing amounts. The contract- 28.103–2 Performance bonds. ing officer has the discretion to reduce (a) Performance bonds may be re- the amount of security to support a quired for contracts exceeding the sim- bond, subject to the conditions of plified acquisition threshold when nec- 28.203–5(c) or 28.204(b). essary to protect the Government’s in- [48 FR 42286, Sept. 19, 1983, as amended at 61 terest. The following situations may FR 31652, June 20, 1996] warrant a performance bond: (1) Government property or funds are 28.102–3 Solicitation requirements and to be provided to the contractor for use contract clause. in performing the contract or as par- (a) The contracting officer shall in- tial compensation (as in retention of sert a clause substantially the same as salvaged material). the clause at 52.228–15, Performance (2) A contractor sells assets to or and Payment Bonds—Construction, in merges with another concern, and the solicitations and contracts for con- Government, after recognizing the lat- struction that contain a requirement ter concern as the successor in inter- for performance and payment bonds if est, desires assurance that it is finan- the resultant contract is expected to cially capable. exceed $100,000. The penal amount of (3) Substantial progress payments the performance bonds may be de- are made before delivery of end items creased in accordance with 28.102–2(a). starts. Where the provision at 52.228–1 is not (4) Contracts are for dismantling, included in the solicitation, the con- demolition, or removal of improve- tracting officer shall set a period of ments. time for return of executed bonds. (b) The Government may require ad- (b) Insert the clause at 52.228–13, Al- ditional performance bond protection ternative Payment Protections, in so- when a contract price is increased. licitations and contracts for construc- (c) The contracting officer must de- tion, when the estimated or actual termine the contractor’s responsibility value exceeds $25,000 but does not ex- (see subpart 9.1) even though a bond ceed $100,000. Complete the clause by has been or can be obtained. specifying the payment protection or [48 FR 42286, Sept. 19, 1983, as amended at 60 protections selected (see 28.102–1(b)(1)), FR 34759, July 3, 1995; 61 FR 39213, July 26, the penal amount required, and the 1996] deadline for submission. 28.103–3 Payment bonds. [48 FR 42286, Sept. 19, 1983, as amended at 61 (a) A payment bond is required only FR 31652, June 20, 1996; 61 FR 39213, July 26, 1996] when a performance bond is required, and if the use of payment bond is in the 28.103 Performance and payment Government’s interest. bonds for other than construction (b) When a contract price is in- contracts. creased, the Government may require additional bond protection in an 28.103–1 General. amount adequate to protect suppliers (a) Generally, agencies shall not re- of labor and material. quire performance and payment bonds [48 FR 42286, Sept. 19, 1983, as amended at 61 for other than construction contracts. FR 39213, July 26, 1996]

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28.103–4 Contract clause. (b) The contracting officer shall determine the penal sum. The contracting officer shall insert a clause substantially the same as the 28.106 Administration. clause at 52.228–16, Performance and Payment Bonds—Other than Construc- 28.106–1 Bonds and bond related tion, in solicitations and contracts forms. that contain a requirement for both The following Standard Forms (SF’s) payment and performance bonds. The and Optional Forms (OF’s) shown in contracting officer shall determine the 53.301 and 53.302 shall be used, except in amount of each bond for insertion in foreign countries, when a bid bond, per- the clause. The amount shall be ade- formance or payment bond, or an indi- quate to protect the interest of the vidual surety is required. The bond Government. The contracting officer forms shall be used as indicated in the shall also set a period of time (nor- instruction portion of each form. mally 10 days) for return of executed (a) SF 24, Bid Bond (see 28.101). bonds. Alternate I shall be used when (b) SF 25, Performance Bond (see only performance bonds are required. 28.102–1 and 28.106–3(b)). [61 FR 39213, July 26, 1996] (c) SF 25–A, Payment Bond (see 28.102–1 and 28.106–3(b)). 28.104 Annual performance bonds. (d) SF 25–B, Continuation Sheet (for SF’s 24, 25, and 25–A). (a) Annual performance bonds only (e) SF 28, Affidavit of Individual Sur- apply to non-construction contracts. ety (see 28.203). They shall provide a gross penal sum (f) SF 34, Annual Bid Bond (see applicable to the total amount of all 28.001). covered contracts. (g) SF 35, Annual Performance Bond (b) When the penal sums obligated by (see 28.104). contracts are approximately equal to (h) SF 273, Reinsurance Agreement or exceed the penal sum of the annual for a Miller Act Performance Bond (see performance bond, an additional bond 28.202(a)(4)). will be required to cover additional (i) SF 274, Reinsurance Agreement contracts. for a Miller Act Payment Bond (see 28.202(a)(4)). 28.105 Other types of bonds. (j) SF 275, Reinsurance Agreement in The head of the contracting activity Favor of the United States (see may approve using other types of bonds 28.202(a)(4)). in connection with acquiring particular (k) SF 1414, Consent of Surety (see supplies or services. These types in- 28.106–5). clude advance payment bonds and pat- (l) SF 1415, Consent of Surety and In- ent infringement bonds. crease of Penalty (see 28.106–3). (m) SF 1416, Payment Bond for Other 28.105–1 Advance payment bonds. Than Construction Contracts (see Advance payment bonds may be re- 28.103–3 and 28.106–3(b)). quired only when the contract contains (n) SF 1418, Performance Bond for an advance payment provision and a Other Than Construction Contracts performance bond is not furnished. The (see 28.103–2 and 28.106–3(b)). contracting officer shall determine the (o) OF 90, Release of Lien on Real amount of the advance payment bond Property (see 28.203–5). necessary to protect the Government. (p) OF 91, Release of Personal Prop- erty from Escrow (see 28.203–5). 28.105–2 Patent infringement bonds. [48 FR 42286, Sept. 19, 1983, as amended at 54 (a) Contracts providing for patent in- FR 48986, Nov. 28, 1989; 61 FR 39213, July 26, demnity may require these bonds only 1996] if— (1) A performance bond is not fur- 28.106–2 Substitution of surety bonds. nished; and (a) A new surety bond covering all or (2) The financial responsibility of the part of the obligations on a bond pre- contractor is unknown or doubtful. viously approved may be substituted

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for the original bond if approved by the furnished pursuant to the Miller Act head of the contracting activity, or as (see 28.102–1), except for contracts for otherwise specified in agency regula- the acquisition of commercial items as tion. defined in Subpart 2.1. (b) When a new surety bond is ap- [48 FR 42286, Sept. 19, 1983, as amended at 60 proved, the contracting officer shall FR 48273, Sept. 18, 1995] notify the principal and surety of the original bond of the effective date of 28.106–5 Consent of surety. the new bond. (a) When any contract is modified, [48 FR 42286, Sept. 19, 1983, as amended at 61 the contracting officer shall obtain the FR 39213, July 26, 1996] consent of surety if— (1) An additional bond is obtained 28.106–3 Additional bond or security. from other than the original surety; (a) When additional bond coverage is (2) No additional bond is required required and is furnished in whole or in and— part by the original surety or sureties, (i) The modification is for new work agencies shall use Standard Form 1415, beyond the scope of the original con- Consent of Surety and Increase of Pen- tract; or alty. Standard Form 1415 is authorized (ii) The modification does not change for local reproduction, and a copy of the contract scope but changes the the form is furnished for this purpose contract price (upward or downward) in part 53 of the looseleaf edition of the by more than 25 percent or $50,000; or FAR. (3) Consent of surety is required for a (b) When additional coverage is fur- novation agreement (See subpart 42.12). nished in whole or in part by a new sur- (b) When a contract for which per- ety, agencies shall use Standard Form formance or payment is secured by any 25, Performance Bond; Standard Form of the types of security listed in 28.204 1418, Performance Bond for Other Than is modified as described in paragraph Construction Contracts; Standard (a) of this subsection, no consent of Form 25–A, Payment Bond; or Stand- surety is required. ard Form 1416, Payment Bond for Other (c) Agencies shall use Standard Form Than Construction Contracts. 1414, Consent of Surety, for all types of (c) When an ILC is used as an alter- contracts. native to corporate or individual sure- [48 FR 42286, Sept. 19, 1983, as amended at 61 ties as security for a performance or FR 31652, June 20, 1996] payment bond and the contract performance period is extended, the con- 28.106–6 Furnishing information. tracting officer shall require the con- (a) The surety on the bond, upon its tractor to provide an ILC with an ap- written request, may be furnished in- propriately extended maturity that formation on the progress of the work, meets the requirements of 28.204–3(f). payments, and the estimated percent- [48 FR 42286, Sept. 19, 1983, as amended at 53 age of completion, concerning the con- FR 43391, Oct. 26, 1988; 61 FR 31652, June 20, tract for which the bond was furnished. 1996; 61 FR 39213, July 26, 1996] (b) When a payment bond has been provided, the contracting officer shall, 28.106–4 Contract clause. upon request, furnish the name and ad- (a) The contracting officer shall in- dress of the surety or sureties to any sert the clause at 52.228–2, Additional subcontractor or supplier who has fur- Bond Security, in solicitations and nished or been requested to furnish contracts when bonds are required. labor or material for the contract. In (b) In accordance with Section addition, general information concern- 806(a)(3) of Pub. L. 102–190, as amended ing the work progress, payments, and by Sections 2091 and 8105 of Pub. L. 103– the estimated percentage of comple- 355, the contracting officer shall insert tion may be furnished to persons who the clause at 52.228–12, Prospective have provided labor or materials and Subcontractor Requests for Bonds, in have not been paid. solicitations and contracts with re- (c) When a payment bond has been spect to which a payment bond will be provided for a contract, the head of the

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agency or designee shall furnish a cer- sulting from withholding the final pay- tified copy of the bond and the con- ment. The contracting officer will au- tract for which it was given to any per- thorize final payment upon agreement son who makes a request therefor and between the contractor and surety or who furnishes an affidavit that the re- upon a judicial determination of the questor has supplied labor or materials rights of the parties. for such work and payment therefor (c) For any withholding incident to has not been made or that the reques- the labor standards provisions of the tor is being sued on such bond. The per- contract, see part 22. son who makes the request shall be required to pay such costs of preparation 28.106–8 Payment to subcontractors or as determined by the head of the agen- suppliers. cy or designee to be reasonable and ap- The contracting officer will only au- propriate (see 40 U.S.C. 270(c)). thorize payment from an ILC (or any (d) Section 806(a)(2) of Pub. L. 102–190, other cash equivalent security) upon a as amended by Sections 2091 and 8105 of judicial determination of the rights of Pub. L. 103–355, requires that the Fed- the parties, a signed notarized state- eral Government provide information ment by the contractor that the pay- to subcontractors on payment bonds ment is due and owed, or a signed under contracts for other than com- agreement between the parties as to mercial items as defined in Subpart 2.1. amount due and owed. Upon the written or oral request of a subcontractor/supplier, or prospective [61 FR 31652, June 20, 1996] subcontractor/supplier, under a contract with respect to which a payment Subpart 28.2—Sureties bond has been furnished pursuant to the Miller Act, the contracting officer 28.200 Scope of subpart. shall promptly provide to the re- This subpart prescribes procedures quester, either orally or in writing, as for the use of sureties to protect the appropriate, any of the following: Government from financial losses. (1) Name and address of the surety or sureties on the payment bond. 28.201 Requirements for sureties. (2) Penal amount of the payment (a) Agencies shall obtain adequate se- bond. (3) Copy of the payment bond. The curity for bonds (including coinsurance contracting officer may impose reason- and reinsurance agreements) required able fees to cover the cost of copying or used with a contract for supplies or and providing a copy of the payment services (including construction). Ac- bond. ceptable forms of security include (1) corporate or individual sureties or (2) [48 FR 42286, Sept. 19, 1983, as amended at 50 any of the types of security authorized FR 26903, June 28, 1985; 60 FR 48273, Sept. 18, in lieu of sureties by 28.204. 1995] (b) Solicitations shall not preclude 28.106–7 Withholding contract pay- offerors from using the types of surety ments. or security permitted by this subpart, unless prohibited by law or regulation. (a) During contract performance, agencies shall not withhold payments [48 FR 42286, Sept. 19, 1983, as amended at 55 due contractors or assignees because FR 25530, June 21, 1990] subcontractors or suppliers have not been paid. 28.202 Acceptability of corporate sure- (b) If, after completion of the con- ties. tract work, the Government receives (a)(1) Corporate sureties offered for written notice from the surety regard- bonds furnished with contracts per- ing the contractor’s failure to meet its formed in the United States, its posses- obligation to its subcontractors or sup- sions, or Puerto Rico must appear on pliers, the contracting officer shall the list contained in the Department of withhold final payment. However, the the Treasury Circular 570, ‘‘Companies surety must agree to hold the Govern- Holding Certificates of Authority as ment harmless from any liability re- Acceptable Sureties on Federal Bonds

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and Acceptable Reinsuring Compa- and (2) the termination of the author- nies.’’ ity of any specific corporate surety to (2) The penal amount of the bond qualify as a surety on Federal bonds. should not exceed the surety’s under- Upon receipt of notification of termi- writing limit stated in the Department nation of a company’s authority to of the Treasury circular. If the penal qualify as a surety on Federal bonds, amount exceeds the underwriting the contracting officer shall review the limit, the bond will be acceptable only outstanding contracts and take action if (i) the amount which exceeds the necessary to protect the Government, specified limit is coinsured or rein- including, where appropriate, securing sured and (ii) the amount of coinsur- new bonds with acceptable sureties in ance or reinsurance does not exceed the lieu of outstanding bonds with the underwriting limit of each coinsurer or named company. reinsurer. (d) The Department of the Treasury (3) Coinsurance or reinsurance agree- Circular 570 may be obtained from the ments shall conform to the Depart- U.S. Department of the Treasury, Fi- ment of the Treasury regulations in 31 nancial Management Service, Surety CFR 223.10 and 223.11. When reinsurance Bond Branch, 401 14th St., SW., 2nd is contemplated, the contracting office Floor—West Wing, Washington, DC generally shall require reinsurance 20227. agreements to be executed and submit- [48 FR 42286, Sept. 19, 1983, as amended at 54 ted with the bonds before making a FR 48986, Nov. 28, 1989] final determination on the bonds. (4) When specified in the solicitation, 28.203 Acceptability of individual the contracting officer may accept a sureties. bond from the direct writing company (a) An individual surety is acceptable in satisfaction of the total bond re- for all types of bonds except position quirement of the contract. This is per- schedule bonds. The contracting officer missible until necessary reinsurance shall determine the acceptability of in- agreements are executed, even though dividuals proposed as sureties, and the total bond requirement may exceed shall ensure that the surety’s pledged the insurer’s underwriting limitation. assets are sufficient to cover the bond The contractor shall execute and sub- obligation. (See 28.203–7 for informa- mit necessary reinsurance agreements tion on excluded individual sureties.) to the contracting officer within the (b) An individual surety must exe- time specified on the bid form, which cute the bond, and the unencumbered may not exceed 45 calendar days after value of the assets (exclusive of all out- the execution of the bond. The contrac- standing pledges for other bond obliga- tor shall use Standard Form 273, Rein- tions) pledged by the individual surety, surance Agreement for a Miller Act must equal or exceed the penal amount Performance Bond, and Standard Form of each bond. The individual surety 274, Reinsurance Agreement for a Mil- shall execute the Standard Form 28 and ler Act Payment Bond, when reinsur- provide a security interest in accordance is furnished with Miller Act ance with 28.203–1. One individual sur- bonds. Standard Form 275, Reinsurance ety is adequate support for a bond, pro- Agreement in Favor of the United vided the unencumbered value of the States, is used when reinsurance is fur- assets pledged by that individual sur- nished with bonds for other purposes. ety equal or exceed the amount of the (b) For contracts performed in a for- bond. An offeror may submit up to eign country, sureties not appearing on three individual sureties for each bond, Treasury Department Circular 570 are in which case the pledged assets, when acceptable if the contracting officer de- combined, must equal or exceed the termines that it is impracticable for penal amount of the bond. Each indi- the contractor to use Treasury listed vidual surety must accept both joint sureties. and several liability to the extent of (c) The Department of the Treasury the penal amount of the bond. issues supplements to Circular 570, no- (c) If the contracting officer deter- tifying all Federal agencies of (1) new mines that no individual surety in sup- approved corporate surety companies port of a bid guarantee is acceptable,

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the offeror utilizing the individual sur- contracting officer. At a minimum, the ety shall be rejected as nonresponsible, escrow account shall provide for the except as provided in 28.101–4. A finding following: of nonresponsibility based on (i) The account must provide the con- unacceptability of an individual sur- tracting officer the sole and unre- ety, need not be referred to the Small stricted right to draw upon all or any Business Administration for a com- part of the funds deposited in the ac- petency review. (See 19.602–1(a)(2)(i) count. A written demand for with- and 61 Comp. Gen. 456 (1982).) drawal shall be sent to the financial in- (d) A contractor submitting an unac- stitution by the contracting officer, ceptable individual surety in satisfac- after obtaining the concurrence of tion of a performance or payment bond legal counsel, with a copy to the requirement may be permitted a rea- offeror/contractor and to the surety. sonable time, as determined by the Within the time period specified in the contracting officer, to substitute an ac- demand, the financial institution ceptable surety for a surety previously would pay the Government the amount determined to be unacceptable. demanded up to the amount on deposit. (e) When evaluating individual sure- If any dispute should arise between the ties, contracting officers may obtain Government and the offeror/contractor, assistance from the office identified in the surety, or the subcontractors or 28.202(d). suppliers with respect to the offer or (f) Contracting officers shall obtain contract, the financial institution the opinion of legal counsel as to the would be required, unless precluded by adequacy of the documents pledging order of a court of competent jurisdic- the assets prior to accepting the bid tion, to disburse monies to the Govern- guarantee and payment and perform- ment as directed by the contracting of- ance bonds. ficer. (g) Evidence of possible criminal or (ii) The financial institution would fraudulent activities by an individual be authorized to release to the individ- surety shall be referred to the appro- ual surety all or part of the balance of priate agency official in accordance the escrow account, including any ac- with agency procedures. crued interest, upon receipt of written authorization from the contracting of- [54 FR 48986, Nov. 28, 1989] ficer. 28.203–1 Security interests by an indi- (iii) The Government would not be vidual surety. responsible for any costs attributable (a) An individual surety may be ac- to the establishment, maintenance, ad- cepted only if a security interest in as- ministration, or any other aspect of sets acceptable under 28.203–2 is pro- the account. (iv) The financial institution would vided to the Government by the indi- not be liable or responsible for the in- vidual surety. The security interest terpretation of any provisions or terms shall be furnished with the bond. (b) The value at which the contract- and conditions of the solicitation or ing officer accepts the assets pledged contract. (v) The financial institution would must be equal to or greater than the provide periodic account statements to aggregate penal amounts of the bonds the contracting officer. required by the solicitation and may be (vi) The terms of the escrow account provided by one or a combination of could not be amended without the con- the following methods: sent of the contracting officer. (1) An escrow account with a feder- (2) A lien on real property, subject to ally insured financial institution in the the restrictions in 28.203–2 and 28.203–3. name of the contracting agency. (See 28.203–2(b)(2) with respect to Govern- [54 FR 48986, Nov. 28, 1989] ment securities in book entry form.) Acceptable securities for deposit in es- 28.203–2 Acceptability of assets. crow are discussed in 28.203–2. While (a) The Government will accept only the offeror is responsible for establish- cash, readily marketable assets, or ir- ing the escrow account, the terms and revocable letters of credit from a feder- conditions must be acceptable to the ally insured financial institution from

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individual sureties to satisfy the un- unencumbered market value provided a derlying bond obligations. current appraisal is furnished (see (b) Acceptable assets include— 28.203–3). (1) Cash, or certificates of deposit, or (5) Irrevocable letters of credit (ILC) other cash equivalents with a federally issued by a federally insured financial insured financial institution; institution in the name of the con- (2) United States Government securi- tracting agency and which identify the ties at market value. (An escrow ac- agency and solicitation or contract count is not required if an individual number for which the ILC is provided. surety offers Government securities (c) Unacceptable assets include but held in book entry form at a depository are not limited to— institution. In lieu thereof, the individ- (1) Notes or accounts receivable; ual shall provide evidence that the de- (2) Foreign securities; pository institution has (i) placed a no- (3) Real property as follows: tation against the individual’s book (i) Real property located outside the entry account indicating that the secu- United States, its territories, or pos- rity has been pledged in favor of the re- sessions. spective agency; (ii) agreed to notify (ii) Real property which is a principal the agency prior to maturity of the se- residence of the surety. curity; and (iii) agreed to hold the pro- (iii) Real property owned concur- ceeds of the security subject to the rently regardless of the form of co-ten- pledge in favor of the agency until a ancy (including joint tenancy, tenancy substitution of securities is made or by the entirety, and tenancy in com- the security interest is formally re- mon) except where all co-tenants agree leased by the agency); to act jointly. (3) Stocks and bonds actively traded (iv) Life estates, leasehold estates, or on a national U.S. security exchange future interests in real property. with certificates issued in the name of (4) Personal property other than that the individual surety. National secu- listed in paragraph (b) of this sub- rity exchanges are—(i) the New York section (e.g., jewelry, furs, antiques); Stock Exchange; (ii) the American (5) Stocks and bonds of the individual Stock Exchange; (iii) the Boston Stock surety in a controlled, affiliated, or Exchange; (iv) the Cincinnati Stock closely held concern of the offeror/con- Exchange; (v) the Midwest Stock Ex- tractor; change; (vi) the Philadelphia Stock Ex- (6) Corporate assets (e.g., plant and change; (vii) the Pacific Stock Ex- equipment); (7) Speculative assets (e.g., mineral change; and (viii) the Spokane Stock rights); Exchange. These assets will be accept- (8) Letters of credit, except as pro- ed at 90 percent of their 52-week low, as vided in 28.203–2(b)(5). reflected at the time of submission of the bond. Stock options and stocks on [54 FR 48987, Nov. 28, 1989] the over-the-counter (OTC) market or NASDQ Exchanges will not be accept- 28.203–3 Acceptance of real property. ed. Assistance in evaluating the ac- (a) Whenever a bond with a security ceptability of securities may be ob- interest in real property is submitted, tained from the Securities and Ex- the individual surety shall provide— change Commission, Division of En- (1) Evidence of title in the form of a forcement, 450 Fifth Street NW., Wash- certificate of title prepared by a title ington, DC 20549. insurance company approved by the (4) Real property owned in fee simple United States Department of Justice. by the surety without any form of con- This list entitled List of Approved At- current ownership, except as provided torneys, Abstracters, and Title Compa- in subdivision (c)(3)(iii) of this sub- nies is available from the Title Unit, section, and located within the 50 Unit- Land Acquisition Section, Land and ed States, its territories, or posses- Natural Resource Division, Depart- sions. These assets will be accepted at ment of Justice, Washington, DC 20530. 100 percent of the most current tax as- This title evidence must show fee sim- sessment value (exclusive of encum- ple title vested in the surety along brances) or 75 percent of the properties’ with any concurrent owners; whether

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any real estate taxes are due and pay- street address and other identifying de- able; and any recorded encumbrances scription) against the property, including the lien IN WITNESS HEREOF, I/we have filed in favor of the Government under hereunto affixed my/our hand(s) and paragraph (d) of this subsection; seal(s) this –––– DAY OF –––– 19––. (2) Evidence of the amount due under ———————————————————————— any encumbrance shown in the evi- WITNESS: dence of title; ———————————————————————— (3) A copy of the current real estate (SEAL) tax assessment of the property or a I, –––––, a Notary Public in and for current appraisal dated no earlier than the (CITY) –––––, (STATE) –––––, do 6 months prior to the date of the bond, hereby certify that –––––, a party or prepared by a professional appraiser parties to a certain Agreement bearing who certifies that the appraisal has the date ––––– day of ––––– 19––, and been conducted in accordance with the hereunto annexed, personally appeared generally accepted appraisal standards before me, the said ––––– being person- as reflected in the Uniform Standards ally well known to me as the person(s) of Professional Appraisal Practice as who executed said lien, and acknowl- promulgated by the Appraisal Founda- edged the same to be his/her/their act tion, 1029 Vermont Avenue NW., Wash- and deed. GIVEN under my hand and ington, DC 20005. seal this ––––– day of ––––– 19––. (b) Failure to provide evidence that ———————————————————————— the lien has been properly recorded will NOTARY PUBLIC, STATE render the offeror nonresponsible. My Commission expires: (c) The individual surety is liable for the payment of all administrative costs [54 FR 48987, Nov. 28, 1989] of the Government, including legal fees, associated with the liquidation of 28.203–4 Substitution of assets. pledged real estate. An individual surety may request the (d) The following format, or any doc- Government to accept a substitute ument substantially the same, shall be asset for that currently pledged by sub- used by the surety and recorded in the mitting a written request to the re- local recorder’s office when a surety sponsible contracting officer. The con- pledges real estate on Standard Form tracting officer may agree to the sub- 28, Affidavit of Individual Surety. stitution of assets upon determining, after consultation with legal counsel, LIEN ON REAL ESTATE that the substitute assets to be pledged are adequate to protect the outstand- I/we agree that this instrument con- ing bond or guarantee obiligations. If stitutes a lien in the amount of $––––– acceptable, the substitute assets shall on the property described in this lien. be pledged as provided for in subpart The rights of the United States Gov- 28.2. ernment shall take precedence over any subsequent lien or encumbrance [54 FR 48988, Nov. 28, 1989] until the lien is formally released by a duly authorized representative of the 28.203–5 Release of lien. United States. I/we hereby grant the (a) After consultation with legal United States the power of sale of sub- counsel, the contracting officer shall ject property, including the right to release the security interest on the in- satisfy its reasonable administrative dividual surety’s assets using the Op- costs, including legal fees associated tional Form 90, Release of Lien on Real with any sale of subject property, in Property, or Optional Form 91, Release the event of contractor default if I/we of Personal Property from Escrow, or a otherwise fail to satisfy the underlying similar release as soon as possible con- ( ) bid guarantee, ( ) performance sistent with the conditions in subpara- bond, ( ) or payment bond obligations graphs (a) (1) and (2) of this subsection. as an individual surety on solicitation/ A surety’s assets pledged in support of contract number –––––. The lien is upon a payment bond may be released to a the real estate now owned by me/us de- subcontractor or supplier upon Govern- scribed as follows: (legal description, ment receipt of a Federal district court

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judgment, or a sworn statement by the 28.203–6 Contract clause. subcontractor or supplier that the claim is correct along with a notarized Insert the clause at 52.228–11 in solici- authorization of the release by the sur- tations and contracts which require ety stating that it approves of such re- the submission of bid guarantees, per- lease. formance, or payment bonds. (1) Contracts subject to the Miller Act. [54 FR 48988, Nov. 28, 1989] The security interest shall be maintained for the later of (i) 1 year follow- 28.203–7 Exclusion of individual sure- ing final payment, (ii) until completion ties. of any warranty period (applicable only (a) An individual may be excluded to performance bonds), or (iii) pending resolution of all claims filed against from acting as a surety on bonds sub- the payment bond during the 1-year pe- mitted by offerors on procurement by riod following final payment. the executive branch of the Federal (2) Contracts subject to alternative pay- Government, by the acquiring agency’s ment protection (28.102–1(b)(1)). The secu- head or designee utilizing the proce- rity interest shall be maintained for dures in subpart 9.4. The exclusion the full contract performance period shall be for the purpose of protecting plus one year. the Government. (3) Other contracts not subject to the (b) An individual may be excluded for Miller Act. The security interest shall any of the following causes: be maintained for 90 days following (1) Failure to fulfill the obligations final payment or until completion of under any bond. any warranty period (applicable only (2) Failure to disclose all bond obli- to performance bonds), whichever is gations. later. (3) Misrepresentation of the value of (b) Upon written request, the contracting officer may release the secu- available assets or outstanding liabil- rity interest on the individual surety’s ities. assets in support of a bid guarantee (4) Any false or misleading state- based upon evidence that the offer sup- ment, signature or representation on a ported by the individual surety will not bond or affidavit of individual result in contract award. suretyship. (c) Upon written request by the indi- (5) Any other cause affecting respon- vidual surety, the contracting officer sibility as a surety of such serious and may release a portion of the security compelling nature as may be deter- interest on the individual surety’s as- mined to warrant exclusion. sets based upon substantial perform- (c) An individual surety excluded ance of the contractor’s obligations pursuant to this subsection shall be in- under its performance bond. Release of cluded on the List of Parties Excluded the security interest in support of a from Federal Procurement and Non- payment bond must comply with the procurement Programs. (See 9.404.) subparagraphs (a) (1) through (3) of this (d) Contracting officers shall not ac- subsection. In making this determina- cept the bonds of individual sureties tion, the contracting officer will give whose names appear on the List of Par- consideration as to whether the ties Excluded from Federal Procure- unreleased portion of the lien is suffi- ment and Nonprocurement Programs cient to cover the remaining contract obligations, including payments to sub- (see 9.404) unless the acquiring agency’s contractors and other potential liabil- head or a designee states in writing the ities. The individual surety shall, as a compelling reasons justifying accept- condition of the partial release, furnish ance. an affidavit agreeing that the release (e) An exclusion of an individual sur- of such assets does not relieve the indi- ety under this subsection will also pre- vidual surety of its obligations under clude such party from acting as a con- the bond(s). tractor in accordance with subpart 9.4. [54 FR 48988, Nov. 28, 1989, as amended at 61 [54 FR 48988, Nov. 28, 1989, as amended at 60 FR 31652, June 20, 1996] FR 33066, June 26, 1995]

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28.204 Alternatives in lieu of corporate and agreement authorizing the collec- or individual sureties. tion or sale of such United States (a) Any person required to furnish a bonds or notes in the event of default bond to the Government may furnish of the principal on the bond shall ac- any of the types of security listed in company the deposited bonds or notes. 28.204–1 through 28.204–3 instead of a The contracting officer may (a) turn corporate or individual surety for the securities over to the finance or other bond. When any of those types of secu- authorized agency official, or (b) de- rity are deposited, a statement shall be posit them with the Treasurer of the incorporated in the bond form pledging United States, a Federal Reserve Bank the security. The contractor shall exe- (or branch with requisite facilities), or cute the bond forms as the principal. other depository designated for that Agencies shall establish safeguards to purpose by the Secretary of the Treas- protect against loss of the security and ury, under procedures prescribed by the shall return the security or its equiva- agency concerned and Treasury De- lent to the contractor when the bond partment Circular No. 154 (exception: obligation has ceased. The contracting officer shall deposit (b) Upon written request by any con- all bonds and notes received in the Dis- tractor securing a performance or pay- trict of Columbia with the Treasurer of ment bond by any of the types of secu- the United States). rity listed in 28.204–1 through 28.204–3, [48 FR 42286, Sept. 19, 1983. Redesignated and the contracting officer may release a amended at 54 FR 48986, 48989, Nov. 28, 1989] portion of the security only when the conditions allowing the partial release 28.204–2 Certified or cashiers checks, of lien in 28.203–5(c) are met. The con- bank drafts, money orders, or cur- tractor shall, as a condition of the par- rency. tial release, furnish an affidavit agree- Any person required to furnish a ing that the release of such security bond has an option to furnish a cer- does not relieve the contractor of its tified or cashier’s check, bank draft, obligations under the bond(s). Post Office money order, or currency, (c) The contractor may satisfy a rein an amount equal to the penal sum of quirement for bond security by furnish- the bond, instead of furnishing surety ing a combination of the types of secu- or sureties on the bonds. Those furnish- rity listed in 28.204–1 through 28.204–3 ing checks, drafts, or money orders or a combination of bonds supported by shall draw them to the order of the ap- these types of security and additional propriate Federal agency. surety bonds under 28.202 or 28.203. Dur- ing the period for which a bond sup- [48 FR 42286, Sept. 19, 1983. Redesignated at 54 FR 48986, Nov. 28, 1989] ported by security is required, the contractor may substitute one type of se- 28.204–3 Irrevocable letter of credit curity listed in 28.204–1 through 28.204– (ILC). 3 for another, or may substitute, in (a) Any person required to furnish a whole or combination, additional sur- bond has the option to furnish a bond ety bonds under 28.202 or 28.203. secured by an ILC in an amount equal [61 FR 31653, June 20, 1996] to the penal sum required to be secured (see 28.204). A separate ILC is required 28.204–1 United States bonds or notes. for each bond. Any person required to furnish a (b) The ILC shall be irrevocable, un- bond to the Government has the op- conditional, expire only as provided in tion, instead of furnishing a surety or paragraph (f) of this subsection, and be sureties on the bond, of depositing cer- issued by an acceptable federally in- tain United States bonds or notes in an sured financial institution as provided amount equal at their par value to the in paragraph (g) of this subsection. penal sum of the bond (the Act of Feb- ILCs over $5 million must be confirmed ruary 24, 1919 (31 U.S.C. 9303) and Treas- by another acceptable financial insti- ury Department Circular No. 154 dated tution that had letter of credit busi- July 1, 1978 (31 CFR part 225)). In addi- ness of at least $25 million in the past tion, a duly executed power of attorney year.

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(c) To draw on the ILC, the contract- institution rated investment grade or ing officer shall use the sight draft set higher. forth in the clause at 52.228–14 and (1) The offeror/contractor shall pro- present it with the ILC to the issuing vide the contracting officer a credit financial institution or the confirming rating that indicates the financial in- financial institution (if any). stitution has the required rating(s) as (d) If the contractor does not furnish of the date of issuance of the ILC. an acceptable replacement ILC, or (2) If the contracting officer learns other acceptable substitute, at least 30 that a financial institution’s rating has days before an ILC’s scheduled expira- dropped below the required level, the tion, the contracting officer shall im- contracting officer shall give the con- mediately draw on the ILC. tractor 30 days to substitute an accept- (e) If, after the period of performance able ILC or shall draw on the ILC using of a contract where ILCs are used to the sight draft in paragraph (g) of the support payment bonds, there are out- clause at 52.228–14. standing claims against the payment (h) Additional information on credit bond, the contracting officer shall draw rating services and investment grade on the ILC prior to the expiration date ratings, and a copy of the Uniform Cus- of the ILC to cover these claims. toms and Practice (UCP) for Documen- (f) Expiration dates shall be estab- tary Credits, 1983 Revision, Inter- lished as follows: national Chamber of Commerce Publi- (1) If used as a bid guarantee, the ILC cation No. 400, is contained within the should expire no earlier than 60 days Office of Federal Procurement Policy after the close of the bid acceptance Pamphlet No. 7, Use of Irrevocable Let- period. ters of Credit. This pamphlet may be (2) If used as an alternative to cor- obtained by calling the Office of Man- porate or individual sureties as secu- agement and Budget’s publications of- rity for a performance or payment fice at (202) 395–7332. bond, the offeror/contractor may submit an ILC to cover the entire period of [61 FR 31653, June 20, 1996] performance or an ILC with an initial expiration date which is a minimum 28.204–4 Contract clause. period of one year from the date of is- Insert the clause at 52.228–14, Irrev- suance, with a provision which states ocable Letter of Credit, in solicitations that the ILC is automatically extended and contracts for services, supplies, or without amendment for one year from construction, when a bid guarantee, or the expiration date, or any future expi- performance bonds, or performance and ration date, until the period of per- payment bonds are required. formance is completed. The final expi- [61 FR 31653, June 20, 1996] ration date shall be: (i) For contracts subject to the Miller Act, the later of— Subpart 28.3—Insurance (A) One year following the expected date of final payment; 28.301 Policy. (B) For performance bonds only, Contractors shall be required to until completion of any warranty pe- carry insurance under the following riod; or circumstances: (C) For payment bonds only, until (a)(1) The Government requires any resolution of all claims filed against contractor subject to Cost Accounting the payment bond during the one-year Standard (CAS) 416 (48 CFR 9004.416 (ap- period following final payment. pendix B, FAR loose-leaf edition)) to (ii) For contracts not subject to the obtain insurance, by purchase or self- Miller Act, the later of— coverage, for the perils to which the (A) 90 days following final payment; contractor is exposed, except when (i) or the Government, by providing in the (B) Until completion of any warranty contract in accordance with law, period for performance bonds only. agrees to indemnify the contractor (g) The ILC shall be issued or con- under specified circumstances or (ii) firmed by a federally insured financial the contract specifically relieves the

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contractor of liability for loss of or 28.303 Insurance against loss of or damage to Government property. damage to Government property. (2) The Government reserves the When the Government requires or ap- right to disapprove the purchase of any proves insurance to cover loss of or insurance coverage not in the Govern- damage to Government property (see ment’s interest. 45.103, Responsibility and liability for (3) Allowability of the insurance pro- Government property), it may be program’s cost shall be determined in ac- vided by specific insurance policies or cordance with the criteria in 31.205–19. by inclusion of the risks in the con- (b) Contractors, whether or not their tractor’s existing policies. The policies contracts are subject to CAS 416, are shall disclose the Government’s inter- required by law and this regulation to est in the property. provide insurance for certain types of perils (e.g., workers’ compensation). In- 28.304 Risk-pooling arrangements. surance is mandatory also when com- Agencies may establish risk-pooling mingling of property, type of oper- arrangements. These arrangements are ation, circumstances of ownership, or designed to use the services of the in- condition of the contract make it nec- surance industry for safety engineering essary for the protection of the Gov- and the handling of claims at mini- ernment. The minimum amounts of in- mum cost to the Government. The surance required by this regulation agency responsible shall appoint a sin- (see 28.307–2) may be reduced when a gle manager or point of contact for contract is to be performed outside the each arrangement. United states, its possessions, and Puerto Rico. When more than one 28.305 Overseas workers’ compensa- agency is involved, the agency respon- tion and war-hazard insurance. sible for review and approval of a con- (a) Public-work contract, as used in tractor’s insurance program shall co- this subpart, means any contract for a ordinate with other interested agencies fixed improvement or for any other before acting on significant insurance project, fixed or not, for the public use matters. of the United States or its allies, in- (c) Contractors awarded nonpersonal volving construction, alteration, re- services contracts for health care serv- moval, or repair, including projects or ices are required to maintain medical operations under service contracts and liability insurance and indemnify the projects in connection with the na- Government for liability producing tional defense or with war activities, acts or omissions by the contractor, its dredging, harbor improvements, dams, employees and agents (see 37.400). roadways, and housing, as well as pre- [48 FR 42286, Sept. 19, 1983, as amended at 54 paratory and ancillary work in connec- FR 5056, Jan. 31, 1989; 59 FR 67043, Dec. 28, tion therewith at the site or on the 1994] project. (b) The Defense Base Act (42 U.S.C. 28.302 Notice of cancellation or 1651 et seq.) extends the Longshore- change. men’s and Harbor Workers’ Compensa- When the Government requires the tion Act (33 U.S.C. 901) to various class- contractor to provide insurance cov- es of employees working outside the erage, the policies shall contain an en- United States, including those engaged dorsement that any cancellation or in performing— material change in the coverage ad- (1) Public-work contracts; or versely affecting the Government’s in- (2) Contracts approved or financed terest shall not be effective unless the under the Foreign Assistance Act of insurer or the contractor gives written 1961 (Pub. L. 87–195) other than (i) con- notice of cancellation or change as re- tracts approved or financed by the De- quired by the contracting officer. When velopment Loan Fund (unless the Sec- the coverage is provided by self-insur- retary of Labor, acting upon the rec- ance, the contractor shall not change ommendation of a department or agen- or decrease the coverage without the cy, determines that such contracts administrative contracting officer’s should be covered) or (ii) contracts ex- prior approval (see 28.308(c)). clusively for materials or supplies.

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(c) When the Defense Base Act ap- (4) The Government elects to assume plies (see 42 U.S.C. 1651 et seq.) to these risks for which the contractor ordi- employees, the benefits of the Long- narily obtains commercial insurance. shoremen’s and Harbor Workers’ Com- (b) Work on a Government installation. pensation Act are extended through op- (1) When the clause at 52.228–5, Insur- eration of the War Hazards Compensa- ance—Work on a Government Installa- tion Act (42 U.S.C. 1701 et seq.) to pro- tion, is required to be included in a tect the employees against the risk of fixed-price contract by 28.310, the cov- war hazards (injury, death, capture, or erage specified in 28.307 is the mini- detention). When, by means of an in- mum insurance required and shall be surance policy or a self-insurance pro- included in the contract Schedule or gram, the contractor provides the elsewhere in the contract. The con- workers’ compensation coverage re- tracting officer may require additional coverage and higher limits. quired by the Defense Base Act, the (2) When the clause at 52.228–5, Insur- contractor’s employees automatically ance—Work on a Government Installa- receive war-hazard risk protection. tion, is not required by 28.310 but is in- (d) When the agency head rec- cluded because the contracting officer ommends a waiver to the Secretary of considers it to be in the Government’s Labor, the Secretary may waive the interest to do so, any of the types of in- applicability of the Defense Base Act surance specified in 28.307 may be omit- to any contract, subcontract, work lo- ted or the limits may be lowered, if ap- cation, or classification of employees. propriate. (e) If the Defense Base Act is waived for some or all of the contractor’s em- 28.307 Insurance under cost-reim- ployees, the benefits of the War Haz- bursement contracts. ards Compensation Act are automati- Cost-reimbursement contracts (and cally waived with respect to those em- subcontracts, if the terms of the prime ployees for whom the Defense Base Act contract are extended to the sub- is waived. For those employees, the contract) ordinarily require the types contractor shall provide workers’ com- of insurance listed in 28.307–2, with the pensation coverage against the risk of minimum amounts of liability indi- work injury or death and assume liabil- cated. (See 28.308 for self-insurance.) ity toward the employees and their 28.307–1 Group insurance plans. beneficiaries for war-hazard injury, death, capture, or detention. The con- (a) Prior approval requirement. Under tract shall provide either that the cost-reimbursement contracts, before costs of this liability or the reasonable buying insurance under a group insur- costs of insurance against this liability ance plan, the contractor must submit shall be allowed as a cost under the the plan for approval, in accordance contract. with agency regulations. Any change in benefits provided under an approved 28.306 Insurance under fixed-price plan that can reasonably be expected contracts. to increase significantly the cost to the Government requires similar approval. (a) General. Although the Govern- (b) Premium refunds or credits. The ment is not ordinarily concerned with plan shall provide for the Government the contractor’s insurance coverage if to share in any premium refunds or the contract is a fixed-price contract, credits paid or otherwise allowed to the in special circumstances agencies may contractor. In determining the extent specify insurance requirements under of the Government’s share in any pre- fixed-price contracts. Examples of such mium refunds or credits, any special circumstances include the following: reserves and other refunds to which the (1) The contractor is—or has a sepa- contractor may be entitled in the fu- rate operation—engaged principally in ture shall be taken into account. Government work. (2) Government property is involved. 28.307–2 Liability. (3) The work is to be performed on a (a) Workers’ compensation and employ- Government installation. er’s liability. Contractors are required

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to comply with applicable Federal and plied by the number of seats or pas- State workers’ compensation and occu- sengers, whichever is greater. pational disease statutes. If occupa- (e) Vessel liability. When contract per- tional diseases are not compensable formance involves use of vessels, the under those statutes, they shall be cov- contracting officer shall require, as de- ered under the employer’s liability sec- termined by the agency, vessel colli- tion of the insurance policy, except sion liability and protection and in- when contract operations are so com- demnity liability insurance. mingled with a contractor’s commercial operations that it would not be 28.308 Self-insurance. practical to require this coverage. Em- (a) When it is anticipated that 50 per- ployer’s liability coverage of at least cent or more of the self-insurance costs $100,000 shall be required, except in to be incurred at a segment (see 31.001) States with exclusive or monopolistic of a contractor’s business will be allo- funds that do not permit workers’ com- cable to negotiated Government con- pensation to be written by private car- tracts, and the self-insurance costs at riers. (See 28.305(c) for treatment of the segment for the contractor’s fiscal contracts subject to the Defense Base year are expected to be $200,000 or Act.) more, the contractor shall submit, in (b) General liability. (1) The contract- writing, information on its proposed ing officer shall require bodily injury self-insurance program to the adminis- liability insurance coverage written on trative contracting officer and obtain the comprehensive form of policy of at that official’s approval of the program. least $500,000 per occurrence. The submission shall be by segment or (2) Property damage liability insur- segments of the contractor’s business ance shall be required only in special to which the program applies and shall circumstances as determined by the include— agency. (1) A complete description of the pro- (c) Automobile liability. The contract- gram, including any resolution of the ing officer shall require automobile li- board of directors authorizing and ability insurance written on the com- adopting coverage, including types of prehensive form of policy. The policy risks, limits of coverage, assignments shall provide for bodily injury and of safety and loss control, and legal property damage liability covering the service responsibilities; operation of all automobiles used in (2) If available, the corporate insur- connection with performing the con- ance manual and organization chart tract. Policies covering automobiles detailing fiscal responsibilities for in- operated in the United States shall surance; provide coverage of at least $200,000 per (3) The terms regarding insurance person and $500,000 per occurrence for coverage for any Government property; bodily injury and $20,000 per occurrence for property damage. The amount of li- (4) The contractor’s latest financial ability coverage on other policies shall statements; be commensurate with any legal re- (5) Any self-insurance feasibility quirements of the locality and suffi- studies or insurance market surveys cient to meet normal and customary reporting comparative alternatives; claims. (6) Loss history, premiums history, (d) Aircraft public and passenger liabil- and industry ratios; ity. When aircraft are used in connec- (7) A formula for establishing re- tion with performing the contract, the serves, including percentage variations contracting officer shall require air- between losses paid and losses reserved; craft public and passenger liability in- (8) Claims administration policy, surance. Coverage shall be at least practices, and procedures; $200,000 per person and $500,000 per oc- (9) The method of calculating the currence for bodily injury, other than projected average loss; and passenger liability, and $200,000 per oc- (10) A disclosure of all captive insur- currence for property damage. Cov- ance company and re-insurance agree- erage for passenger liability bodily in- ments, including methods of computing jury shall be at least $200,000 multi- cost.

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(b) Programs of self-insurance cover- (5) The contractor’s compliance with ing a contractor’s insurable risks, in- Federal and State laws and regula- cluding the deductible portion of pur- tions. chased insurance, may be approved (e) Agencies shall not approve a pro- when examination of a program indi- gram of self-insurance for catastrophic cates that its application is in the Gov- risks (e.g., see 50.403, Special proce- ernment’s interest. Agencies shall not dures for unusually hazardous or nu- approve a program of self-insurance for clear risks). Should performance of workers’ compensation in a jurisdic- Government contracts create the risk tion where workers’ compensation does of catastrophic losses, the Government not completely cover the employer’s li- may, to the extent authorized by law, ability to employees, unless the con- agree to indemnify the contractor or tractor— recognize an appropriate share of pre- (1) Maintains an approved program of miums for purchased insurance, or self-insurance for any employer’s li- both. ability not so covered; or (f) Self-insurance programs to pro- (2) Shows that the combined cost to tect a contractor against the costs of the Government of self-insurance for correcting its own defects in materials workers’ compensation and commer- or workmanship shall not be approved. cial insurance for employer’s liability For these purposes, normal rework es- will not exceed the cost of covering timates and warranty costs will not be both kinds of risk by commercial in- considered self-insurance. surance. [48 FR 42286, Sept. 19, 1983, as amended at 55 (c) Once the administrative contract- FR 3883, Feb. 5, 1990] ing officer has approved a program, the contractor must submit to that official 28.309 Contract clauses for workers’ for approval any major proposed compensation insurance. changes to the program. Any program (a) The contracting officer shall in- approval may be withdrawn if a con- sert the clause at 52.228–3, Workers’ tracting officer finds that either (1) Compensation Insurance (Defense Base any part of a program does not comply Act), in solicitations and contracts with the requirements of this subpart when the Defense Base Act applies (see and/or the criteria at 31.205–19 or (2) 28.305) and— conditions or situations existing at the (1) The contract will be a public-work time of approval that were a basis for contract performed outside the United original approval of the program have States; or changed to the extent that a program (2) The contract will be approved or change is necessary. financed under the Foreign Assistance (d) To qualify for a self-insurance Act of 1961 (Pub. L. 87–195) and is not program, a contractor must dem- excluded by 28.305(b)(2). onstrate ability to sustain the poten- (b) The contracting officer shall in- tial losses involved. In making the de- sert the clause at 52.228–4, Workers’ termination, the contracting officer Compensation and War-Hazard Insur- shall consider the following factors: ance Overseas, in solicitations and con- (1) The soundness of the contractor’s tracts when the contract will be a pub- financial condition, including available lic-work contract performed outside lines of credit. the United States and the Secretary of (2) The geographic dispersion of as- Labor waives the applicability of the sets, so that the potential of a single Defense Base Act (see 28.305(d)). loss depleting all the assets is unlikely. (3) The history of previous losses, in- 28.310 Contract clause for work on a cluding frequency of occurrence and Government installation. the financial impact of each loss. (a) The contracting officer shall in- (4) The type and magnitude of risk, sert the clause at 52.228–5, Insurance- such as minor coverage for the deduct- Work on a Government Installation, in ible portion of purchased insurance or solicitations and contracts when a major coverage for hazardous risks. fixed-price contract is contemplated,

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the contract amount is expected to ex- 28.313 Contract clauses for insurance ceed the simplified acquisition thresh- of transportation or transportation- old, and the contract will require work related services. on a Government installation, unless— (a) The contracting officer shall in- (1) Only a small amount of work is sert the clause at 52.228–9, Cargo Insur- required on the Government installa- ance, in solicitations and contracts for tion (e.g., a few brief visits per month); transportation or for transportation- or related services, except when freight is (2) All work on the Government in- shipped under rates subject to released stallation is to be performed outside or declared value. the United States, its possessions, and (b) The contracting officer shall in- Puerto Rico. sert a clause substantially the same as that at 52.228–10, Vehicular and General (b) The contracting officer may in- Public Liability Insurance, in solicita- sert the clause at 52.228–5 in solicitations and contracts for transportation tions and contracts described in (a)(1) or for transportation-related services and (2) above if it is in the Govern- when the contracting officer deter- ment’s interest to do so. mines that vehicular liability or gen- [48 FR 42286, Sept. 19, 1983, as amended at 60 eral public liability insurance required FR 34759, July 3, 1995; 61 FR 39190, July 26, by law is not sufficient. 1996] PART 29—TAXES 28.311 Solicitation provision and contract clause on liability insurance Sec. under cost-reimbursement con- 29.000 Scope of part. tracts. Subpart 29.1—General 28.311–1 Contract clause. 29.101 Resolving tax problems. In accordance with agency acquisition regulations, the contracting offi- Subpart 29.2—Federal Excise Taxes cer shall insert the clause at 52.228–7, Insurance—Liability to Third Persons, 29.201 General. 29.202 General exemptions. in solicitations and contracts, other 29.203 Other Federal tax exemptions. than those for construction contracts and those for architect-engineer serv- Subpart 29.3—State and Local Taxes ices, when a cost-reimbursement con- 29.300 Scope of subpart. tract is contemplated. 29.301 Definition. [55 FR 52793, Dec. 21, 1990. Redesignated and 29.302 Application of State and local taxes amended at 61 FR 2639, Jan. 26, 1996] to the Government. 29.303 Application of State and local taxes to Government contractors and sub- 28.311–2 Agency solicitation provi- contractors. sions and contract clauses. 29.304 Matters requiring special consider- Agencies may prescribe their own so- ation. licitation provisions and contract 29.305 State and local tax exemptions. clauses to implement the basic policies Subpart 29.4—Contract Clauses contained in this subpart 28.3. 29.401 Domestic contracts. [55 FR 52793, Dec. 21, 1990. Redesignated at 61 29.401–1 Indefinite-delivery contracts for FR 2639, Jan. 26, 1996] leased equipment. 29.401–2 Construction contracts performed 28.312 Contract clause for insurance in North Carolina. of leased motor vehicles. 29.401–3 Competitive contracts. The contracting officer shall insert 29.401–4 Noncompetitive contracts. 29.401–5 Contracts performed in U.S. posses- the clause at 52.228–8, Liability and In- sions or Puerto Rico. surance—Leased Motor Vehicles, in so- 29.401–6 New Mexico gross receipts and com- licitations and contracts for the leas- pensating tax. ing of motor vehicles (see subpart 8.11). 29.402 Foreign contracts. 29.402–1 Foreign fixed-price contracts.

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29.402–2 Foreign cost-reimbursement con- mentation of any foreign-tax-relief tracts. programs and (2) to resolve any other AUTHORITY: 40 U.S.C. 486(c); 10 U.S.C. Chap- tax questions affecting the prospective ter 137; and 42 U.S.C. 2473(c). contract. SOURCE: 48 FR 42293, Sept. 19, 1983, unless otherwise noted. Subpart 29.2—Federal Excise 29.000 Scope of part. Taxes This part prescribes policies and pro- 29.201 General. cedures for (a) using tax clauses in con- (a) Federal excise taxes are levied on tracts (including foreign contracts), (b) the sale or use of particular supplies or asserting immunity or exemption from services. Subtitle D of the Internal taxes, and (c) obtaining tax refunds. It Revenue Code of 1954, Miscellaneous explains Federal, State, and local taxes Excise Taxes, 26 U.S.C. 4041 et seq., and on certain supplies and services acquired by executive agencies and the its implementing regulations, 26 CFR applicability of such taxes to the Fed- parts 40 through 299, cover miscellane- eral Government. It is for the general ous federal excise tax requirements. information of Government personnel Questions arising in this area should be and does not present the full scope of directed to the agency-designated the tax laws and regulations. counsel. The most common excise taxes are— (1) Manufacturers’ excise taxes im- Subpart 29.1—General posed on certain motor-vehicle arti- 29.101 Resolving tax problems. cles, tires and inner tubes, gasoline, lu- bricating oils, coal, fishing equipment, (a) Contract tax problems are essen- firearms, shells, and cartridges sold by tially legal in nature and vary widely. manufacturers, producers, or import- Specific tax questions must be resolved ers; and by reference to the applicable contract (2) Special-fuels excise taxes imposed terms and to the pertinent tax laws at the retail level on diesel fuel and and regulations. Therefore, when tax special motor fuels. questions arise, contracting officers (b) Sometimes the law exempts the should request assistance from the Federal Government from these taxes. agency-designated legal counsel. Contracting officers should solicit (b) To keep treatment within an prices on a tax-exclusive basis when it agency consistent, contracting officers is known that the Government is ex- or other authorized personnel shall empt from these taxes, and on a tax-in- consult the agency-designated counsel clusive basis when no exemption exists. before negotiating with any taxing au- (c) Executive agencies shall take thority for the purpose of (1) determin- maximum advantage of available Fed- ing whether or not a tax is valid or ap- eral excise tax exemptions. plicable or (2) obtaining exemption from, or refund of, a tax. [48 FR 42293, Sept. 19, 1983, as amended at 55 (c) When the constitutional immu- FR 52793, Dec. 21, 1990] nity of the Government from State or local taxation may reasonably be at 29.202 General exemptions. issue, contractors should be discour- No Federal manufacturers’ or spe- aged from negotiating independently cial-fuels excise taxes are imposed in with taxing authorities if the contract many contracting situations as, for ex- involved is either (1) a cost-reimburse- ample, when the supplies are for any of ment contract or (2) a fixed-price con- the following: tract containing a tax escalation (a) The exclusive use of any State or clause. political subdivision, including the Dis- (d) Before purchasing goods or serv- trict of Columbia (26 U.S.C. 4041 and ices from a foreign source, the con- 4221). tracting officer should consult the (b) Shipment to a United States pos- agency-designated counsel (1) for infor- session or Puerto Rico, or for export. mation on foreign tax treaties and Shipment or export must occur within agreements in force and on the imple- 6 months of the time title passes to the

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Government. When the exemption is Subpart 29.3—State and Local claimed, the words for export or ship- Taxes ment to a possession must appear on the contract or purchase document, and 29.300 Scope of subpart. the contracting officer must furnish This subpart prescribes the policies the seller proof of export (see 26 CFR and procedures regarding the exemp- 48.4221–3). tion or immunity of Federal Govern- (c) Further manufacture, or resale ment purchases and property from for further manufacture (this exemp- State and local taxation. tion does not include tires and inner tubes) (26 CFR 48.4221–2). 29.301 Definition. (d) Use as fuel supplies, ships or sea State and local taxes means taxes lev- stores, or legitimate equipment on ves- ied by the States, the District of Co- sels of war, including (1) aircraft owned lumbia, Puerto Rico, possessions of the by the United States and constituting United States, or their political sub- a part of the armed forces and (2) guid- divisions. ed missiles and pilotless aircraft owned 29.302 Application of State and local or chartered by the United States. taxes to the Government. When this exemption is to be claimed, the purchase should be made on a tax- (a) Generally, purchases and leases made by the Federal Government are exclusive basis. The contracting officer immune from State and local taxation. shall furnish the seller an exemption Whether any specific purchase or lease certificate for Supplies for Vessels of is immune, however, is a legal question War (an example is given in 26 CFR requiring advice and assistance of the 48.4221–4(d)(2); the IRS will accept one agency-designated counsel. certificate covering all orders under a (b) When it is economically feasible single contract for a specified period of to do so, executive agencies shall take up to 12 calendar quarters) (26 U.S.C. maximum advantage of all exemptions 4041 and 4221). from State and local taxation that may (e) A nonprofit educational organiza- be available. If appropriate, the con- tion (26 U.S.C. 4041 and 4221). tracting officer shall provide a Stand- (f) Emergency vehicles (26 U.S.C. 4053 ard Form 1094, U.S. Tax Exemption and 4064(b)(1)(c)). Certificate (see part 53), or other evidence listed in 29.305(a) to establish [48 FR 42293, Sept. 19, 1983, as amended at 53 that the purchase is being made by the FR 662, Jan. 11, 1988] Government.

29.203 Other Federal tax exemptions. 29.303 Application of State and local (a) Pursuant to 26 U.S.C. 4293, the taxes to Government contractors Secretary of the Treasury has exempt- and subcontractors. ed the United States from the commu- (a) Prime contractors and sub- nications excise tax imposed in 26 contractors shall not normally be des- U.S.C. 4251, when the supplies and serv- ignated as agents of the Government ices are for the exclusive use of the for the purpose of claiming immunity United States. (Secretarial Authoriza- from State or local sales or use taxes. tion, June 20, 1947, Internal Revenue Before any activity contends that a Cumulative Bulletin, 1947–1, 205.) contractor is an agent of the Govern- (b) Pursuant to 26 U.S.C. 4483(b), the ment, the matter shall be referred to Secretary of the Treasury has exempt- the agency head for review. The refer- ed the United States from the federal ral shall include all pertinent data on highway vehicle users tax imposed in which the contention is based, together 26 U.S.C. 4481. The exemption applies with a thorough analysis of all rel- whether the vehicle is owned or leased evant legal precedents. by the United States. (Secretarial Au- (b) When purchases are not made by thorization, Internal Revenue Cumu- the Government itself, but by a prime contractor or by a subcontractor under lative Bulletin, 1956–2, 1369.) a prime contract, the right to an ex- [53 FR 662, Jan. 11, 1988] emption of the transaction from a sales

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or use tax may not rest on the Govern- States and local governments impose a ment’s immunity from direct taxation wide variety of property, use, or other by States and localities. It may rest in- taxes on equipment leased to the Gov- stead on provisions of the particular ernment. The amount of these taxes State or local law involved, or, in some can vary considerably from jurisdiction cases, the transaction may not in fact to jurisdiction. See 29.401–1 for the pre- be expressly exempt from the tax. The scription of the contract clause to be Government’s interest shall be pro- included in contracts when delivery tected by using the procedures in points are not known at time of con- 29.101. tracting. (c) Frequently, property (including (d) The North Carolina State and property acquired under the progress local sales and use tax. payments clause of fixed-price con- (1) The North Carolina Sales and Use tracts or the Government property Tax Act authorizes counties and incor- clause of cost-reimbursement con- porated cities and towns to obtain each tracts) owned by the Government is in year from the Commissioner of Reve- the possession of a contractor or sub- nue of the State of North Carolina a re- contractor. Situations may arise in fund of sales and use taxes indirectly which States or localities assert the paid on building materials, supplies, right to tax Government property di- fixtures, and equipment that become a rectly or to tax the contractor’s or subpart of or are annexed to any building contractor’s possession of, interest in, or structure erected, altered, or re- or use of that property. In such cases, paired for such counties and incor- the contracting officer shall seek re- porated cities and towns in North Caro- view and advice from the agency-designated counsel on the appropriate lina. In United States v. Clayton, 250 F. course of action. Supp. 827 (1965), it was held that the United States is entitled to the benefit 29.304 Matters requiring special con- of the refund, but must follow the re- sideration. fund procedure of the Act and the regu- The imposition of State and local lations to recover what it is due. taxes may result in special contract (2) The Act provides that, to receive considerations including the following: the refund, claimants must file, within (a) With coordination of the agency- 6 months after the claimant’s fiscal designated counsel, a contract may (1) year closes, a written request substan- state that the contract price includes tiated by such records, receipts, and in- or excludes a specified tax or (2) reformation as the Commissioner of Rev- quire that the contractor take certain enue may require. No refund will be actions with regard to payment, non- made on an application not filed within payment, refund, protest, or other the time allowed and in such manner treatment of a specified tax. Such spe- as the Commissioner may require. The cial treatment may be appropriate requirements of the Commissioner are when there is doubt as to the applica- set forth in regulations that provide bility or allocability of the tax, or that, to substantiate a refund claim for when the applicability of the tax is sales or use taxes paid on purchases of being litigated. building materials, supplies, fixtures, (b) The applicability of State and or equipment by a contractor, the Gov- local taxes to purchases by the Federal ernment must secure from the contrac- Government may depend on the place tor certified statements setting forth and terms of delivery. When the con- the cost of the property purchased tract price will be substantial, alter- from each vendor and the amount of native places and terms of delivery sales or use taxes paid. In the event the should be considered in light of pos- contractor makes several purchases sible tax consequences. from the same vendor, the certified (c) Indefinite-delivery contracts for statement must indicate the invoice equipment rental may require the con- numbers, the inclusive dates of the in- tractor to furnish equipment in any of voices, the total amount of the in- the States. Since leased equipment re- voices, and the sales and use taxes mains the contractor’s property, paid. The statement must also include

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the cost of any tangible personal prop- (b) Furnishing proof of exemption. If a erty withdrawn from the contractor’s reasonable basis to sustain a claimed warehouse stock and the amount of exemption exists, the seller will be fur- sales or use tax paid by the contractor. nished evidence of exemption, as fol- Similar certified statements by sub- lows: contractors must be obtained by the (1) Under a contract containing the general contractor and furnished to the clause at 52.229–3, Federal, State, and claimant. Any local sales or use taxes Local Taxes, or at 52.229–4, Federal, included in the contractor’s statement State, and Local Taxes (Noncompeti- must be shown separately from the tive Contract), in accordance with the State sales or use taxes. terms of those clauses. (3) The clause prescribed at 29.401–2 requires contractors to submit to con- (2) Under a cost-reimbursement contracting officers by November 30 of tract, if requested by the contractor each year a certified statement disclos- and approved by the contracting officer ing North Carolina State and local or at the discretion of the contracting sales and use taxes paid during the 12- officer. month period that ended the preceding (3) Under a contract or purchase September 30. The contracting officer order that contains no tax provision, if shall ensure that contractors comply (i) requested by the contractor and ap- with this requirement and shall obtain proved by the contracting officer or at the annual refund to which the Govern- the discretion of the contracting offi- ment may be entitled. The application cer, and (ii) the contractor either cer- for refund must be filed each year be- tifies that the contract price does not fore March 31 and in the manner and include the tax or, if the transaction or form required by the Commissioner of property is tax exempt, consents to a Revenue. Copies of the form may be ob- reduction in the contract price. tained from the State of North Caro- lina Department of Revenue, Raleigh, NC 27602. Subpart 29.4—Contract Clauses

29.305 State and local tax exemptions. 29.401 Domestic contracts. (a) Evidence of exemption. Evidence 29.401–1 Indefinite-delivery contracts needed to establish exemption from for leased equipment. State or local taxes depends on the grounds for the exemption claimed, the The contracting officer shall insert parties to the transaction, and the re- the clause at 52.229–1, State and Local quirements of the taxing jurisdiction. Taxes, in solicitations and contracts Such evidence may include the follow- for leased equipment when a fixed-price ing: indefinite-delivery contract is con- (1) A copy of the contract or relevant templated, the contract will be per- portion. formed wholly or partly within the (2) Copies of purchase orders, ship- United States, its possessions, or Puer- ping documents, credit-card-imprinted to Rico, and the place or places of de- sales slips, paid or acknowledged in- livery are not known at the time of voices, or similar documents that iden- contracting. tify an agency or instrumentality of the United States as the buyer. 29.401–2 Construction contracts per- (3) A U.S. Tax Exemption Certificate formed in North Carolina. (SF 1094). The contracting officer shall insert (4) A State or local form indicating the clause at 52.229–2, North Carolina that the supplies or services are for the State and Local Sales and Use Tax, in exclusive use of the United States. solicitations and contracts for con- (5) Any other State or locally re- struction to be performed in North quired document for establishing gen- Carolina. If the requirement is for ves- eral or specific exemption. (6) Shipping documents indicating sel repair to be performed in North that shipments are in interstate or for- Carolina, the clause shall be used with eign commerce. its Alternate I.

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29.401–3 Competitive contracts. engaged in for other persons for a con- The contracting officer shall insert sideration, which activities involve the clause at 52.229–3, Federal, State, predominately the performance of a and Local Taxes, in solicitations and service as distinguished from selling or contracts if the contract is to be per- leasing property. Services includes ac- formed wholly or partly within the tivities performed by a person for its United States, its possessions, or Puer- members of shareholders. In determin- to Rico, when a fixed-price contract is ing what is a service, the intended use, contemplated and the contract is ex- principal objective or ultimate objec- pected to exceed the simplified acquisi- tive of the contracting parties shall tion threshold, unless the clause at not be controlling. Services also in- 52.229–4, Federal, State, and Local cludes construction activities and all Taxes (Noncompetitive Contract), is tangible personal property that will be- included in the contract. come an ingredient or component part of a construction project. Such tan- [60 FR 34759, July 3, 1995, as amended at 61 gible personal property retains its FR 39190, July 26, 1996] character as tangible personal property until it is installed as an ingredient or 29.401–4 Noncompetitive contracts. component part of a construction The contracting officer shall insert project in New Mexico. However, sales the clause at 52.229–4, Federal, State, of tangible personal property that will and Local Taxes (Noncompetitive Con- become an ingredient or component tract), in fixed-price noncompetitive part of a construction project to per- contracts when the contract exceeds sons engaged in the construction busi- the simplified acquisition threshold to ness are sales of tangible personal be performed wholly or partly within property. the United States, its possessions, or (b) Contract clause. The contracting Puerto Rico when satisfied that the officer shall insert the clause at 52.229– contract price does not include contin- 10, State of New Mexico Gross Receipts gencies for State and local taxes, and and Compensating Tax, in solicitations that, unless the clause is used, the con- and contracts issued by the executive tract price will include such contin- agencies identified in paragraph (c) of gencies. When the clause at 52.229–4 is this subsection when all three of the included in a contract, the contracting following conditions exist: officer shall ensure that the contract (1) The contractor will be performing does not include the clause at 52.229–3, a cost-reimbursement contract. Federal, State, and Local Taxes. (2) The contract directs or authorizes [48 FR 42293, Sept. 19, 1983, as amended at 55 the contractor to acquire tangible per- FR 52793, Dec. 21, 1990; 60 FR 34759, July 3, sonal property as a direct cost under a 1995; 61 FR 39190, July 26, 1996] contract and title to such property passes directly to and vests in the 29.401–5 Contracts performed in U.S. United States upon delivery of the possessions or Puerto Rico. property by the vendor. The contracting officer shall insert (3) The contract will be for services the clause at 52.229–5, Taxes—Contracts to be performed in whole or in part Performed in U.S. Possessions or Puer- within the State of New Mexico. to Rico, in solicitations and contracts (c) Participating agencies. (1) The ex- that include the clause at 52.229–3, Fed- ecutive agencies listed below have en- eral, State, and Local Taxes, or 52.229– tered into an agreement with the State 4, Federal, State, and Local Taxes of New Mexico to eliminate the double (Noncompetitive Contract). taxation of Government cost-reimbursement contracts when contractors 29.401–6 New Mexico gross receipts and their subcontractors purchase tan- and compensating tax. gible personal property to be used in (a) Definition. Services, as used in this performing services in whole or in part subsection, is as defined in the Gross in the State of New Mexico and for Receipts and Compensating Tax Act of which title to such property will pass the State of New Mexico, Sec. 7–9–3(k) to the United States upon delivery of NM SA 1978, and means all activities the property to the contractor and its

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subcontractors by the vendor. There- 29.402–2 Foreign cost-reimbursement fore, the clause applies only to solicita- contracts. tions and contracts issued by the— (a) The contracting officer shall in- United States Department of Agri- sert the clause at 52.229–8, Taxes—For- culture; eign Cost-Reimbursement Contracts, in United States Department of the Air solicitations and contracts when a Force; cost-reimbursement contract is con- United States Department of the templated and the contract is to be Army; United States Department of Energy; performed wholly or partly in a foreign United States Department of Health country, unless it is contemplated that and Human Services; the contract will be with a foreign gov- United States Department of Interior; ernment. United States Department of Labor; (b) The contracting officer shall in- United States Department of the Navy; sert the clause at 52.229–9, Taxes—Cost- United States Department of Transpor- Reimbursement Contracts with For- tation; eign Governments, in solicitations and United States General Services Admin- contracts when a cost-reimbursement istration; and contract with a foreign government is United States National Aeronautics contemplated. and Space Administration. (2) Any other Federal agency which PART 30—COST ACCOUNTING expects to award cost-reimbursement STANDARDS ADMINISTRATION contracts to be performed in New Mex- ico should contact the New Mexico 30.000 Scope of part. Taxation and Revenue Department to execute a similar agreement. Subpart 30.1—General [53 FR 34228, Sept. 2, 1988, as amended at 55 FR 3883, Feb. 5, 1990; 55 FR 38517, Sept. 18, 30.101 Cost Accounting Standards. 1990] 30.102 Cost Accounting Standards Board publication. 29.402 Foreign contracts. Subpart 30.2—CAS Program Requirements 29.402–1 Foreign fixed-price contracts. 30.201 Contract requirements. (a) The contracting officer shall in- 30.201–1 CAS applicability. sert the clause at 52.229–6, Taxes—For- 30.201–2 Types of CAS coverage. eign Fixed-Price Contracts, in solicita- 30.201–3 Solicitation provisions. tions and contracts expected to exceed 30.201–4 Contract clauses. the simplified acquisition threshold 30.201–5 Waiver. when a fixed-price contract is con- 30.201–6 Findings. templated and the contract is to be 30.201–7 Cognizant Federal agency respon- performed wholly or partly in a foreign sibilities. country, unless it is contemplated that 30.202 Disclosure requirements. the contract will be with a foreign gov- 30.202–1 General requirements. ernment. 30.202–2 Impracticality of submission. (b) The contracting officer shall in- 30.202–3 Amendments and revisions. sert the clause at 52.229–7, Taxes— 30.202–4 Privileged and confidential infor- Fixed-Price Contracts With Foreign mation. Governments, in solicitations and con- 30.202–5 Filing disclosure statements. tracts that exceed the simplified acqui- 30.202–6 Responsibilities. sition threshold when a fixed-price con- 30.202–7 Determinations. tract with a foreign government is con- 30.202–8 Subcontractor disclosure state- templated. ments. [48 FR 42293, Sept. 19, 1983, as amended at 55 FR 52793, Dec. 21, 1990; 61 FR 39198, July 26, 1996]

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Subpart 30.3—CAS Rules and Regulations Part III, preambles to CAS Rules and [Reserved] Regulations; Part IV, preambles published under the FAR system; and Part Subpart 30.4—Cost Accounting Standards V, CASB Rules and Procedures (admin- [Reserved] istrative). Subpart 30.5—Cost Accounting Standards (d) The preambles are not regulatory for Educational Institutions [Reserved] but are intended to explain why the Standards and related Rules and Regu- Subpart 30.6—CAS Administration lations were written, and to provide ra- tionale for positions taken relative to 30.601 Responsibility. 30.602 Changes to disclosed or established issues raised in the public comments. cost accounting practices. The preambles are printed in chrono- 30.602–1 Equitable adjustments for new or logical order to provide an administra- modified standards. tive history. 30.602–2 Noncompliance with CAS requirements. 30.102 Cost Accounting Standards 30.602–3 Voluntary changes. Board publication. 30.603 Subcontract administration. Copies of the CASB Standards and SOURCE: 57 FR 39587, Aug. 31, 1992, unless Regulations are printed in title 48 of otherwise noted. the Code of Federal Regulations, chap- 30.000 Scope of part. ter 99, and may be obtained by writing the Superintendent of Documents, U.S. This part describes policies and pro- Government Printing Office, Washing- cedures for applying the Cost Account- ton, DC 20402, or by calling the Wash- ing Standards Board (CASB) rules and ington, DC, ordering desk at area code regulations (48 CFR chapter 99 (FAR (202) 783–3238. appendix B)) to negotiated contracts and subcontracts. This part does not apply to sealed bid contracts or to any Subpart 30.2—CAS Program contract with a small business concern Requirements (see 48 CFR 9903.201–1(b) (FAR appendix B) for these and other exemptions). 30.201 Contract requirements. [57 FR 39587, Aug. 31, 1992, as amended at 61 Title 48 CFR 9903.201–1 (FAR appendix FR 18916, Apr. 29, 1996] B) describes the rules for determining whether a proposed contract or sub- Subpart 30.1—General contract is exempt from CAS. Nego- tiated contracts not exempt in accord- 30.101 Cost Accounting Standards. ance with 48 CFR 9903.201–1(b) shall be (a) Public Law 100–679 (41 U.S.C. 422) subject to CAS. A CAS-covered con- requires certain contractors and sub- tract may be subject to either full or contractors to comply with Cost Ac- modified coverage. The rules for deter- counting Standards (CAS) and to dis- mining whether full or modified cov- close in writing and follow consistently erage applies are in 48 CFR 9903.201–2 their cost accounting practices. (FAR appendix B). (b) Contracts that refer to this part [57 FR 39587, Aug. 31, 1992, as amended at 61 30 for the purpose of applying the poli- FR 18916, Apr. 29, 1996] cies, procedures, standards and regulations promulgated by the CASB pursu- 30.201–1 CAS applicability. ant to Public Law 100–679, shall be deemed to refer to the CAS, and any See 48 CFR 9903.201–1 (FAR appendix other regulations promulgated by the B). CASB (see 48 CFR chapter 99), all of [61 FR 18916, Apr. 29, 1996] which are hereby incorporated in this part 30. 30.201–2 Types of CAS coverage. (c) Appendix B to the FAR loose-leaf See 48 CFR 9903.201–2 (FAR appendix edition contains: Part I, CAS and B). CASB Rules and Regulations; Part II, nonregulatory preambles to the CAS; [61 FR 18916, Apr. 29, 1996]

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30.201–3 Solicitation provisions. low consistently its established cost (a) The contracting officer shall in- accounting practices. sert the provision at 52.230–1, Cost Ac- (c) Consistency in Cost Accounting counting Standards Notices and Cer- Practices. The contracting officer shall tification, in solicitations for proposed insert the clause at FAR 52.230–4, Con- contracts subject to CAS as specified in sistency in Cost Accounting Practices, 48 CFR 9903.201 (FAR appendix B). in negotiated contracts that are ex- (b) If an award to an educational in- empt from CAS requirements solely on stitution is contemplated prior to July the basis of the fact that the contract 1, 1997, the contracting officer shall in- is to be awarded to a United Kingdom sert the basic provision set forth at contractor and is to be performed sub- 52.230–1 with its Alternate I, unless the stantially in the United Kingdom (see contract is to be performed by a Feder- 48 CFR 9903.201–1(b)(12) (FAR appendix ally Funded Research and Development B)).– Center (FFRDC) (see 48 CFR 9903.201– (d) Administration of Cost Accounting 2(c)(5) (FAR appendix B)), or the provi- Standards. (1) The contracting officer sion at 48 CFR 9903.201–2(c)(6) (FAR ap- shall insert the clause at FAR 52.230–6, pendix B) applies. Administration of Cost Accounting [61 FR 18917, Apr. 29, 1996] Standards, in contracts containing any of the clauses prescribed in paragraphs 30.201–4 Contract clauses. (a), (b), or (e) of this subsection. (a) Cost Accounting Standards. (1) The (2) The clause at FAR 52.230–6 speci- contracting officer shall insert the fies rules for administering CAS re- clause at FAR 52.230–2, Cost Account- quirements and procedures to be fol- ing Standards, in negotiated contracts, lowed in cases of failure to comply. unless the contract is exempted (see 48 (e) Cost Accounting Standards—Edu- CFR 9903.201–1 (FAR appendix B)), the cational Institutions. (1) The contracting contract is subject to modified cov- officer shall insert the clause at FAR erage (see 48 CFR 9903.201–2 (FAR ap- 52.230–5, Cost Accounting Standards— pendix B)), or the clause prescribed in Educational Institution, in negotiated paragraph (c) of this subsection is used. contracts awarded to educational insti- (2) The clause at FAR 52.230–2 re- tutions, unless the contract is exempt- quires the contractor to comply with ed (see 48 CFR 9903.201–1 (FAR appendix all CAS specified in 48 CFR part 9904 B)), the contract is to be performed by (FAR appendix B), to disclose actual an FFRDC (see 48 CFR 9903.201–2(c)(5) cost accounting practices (applicable to CAS-covered contracts only), and to (FAR appendix B)), or the provision at follow disclosed and established cost 48 CFR 9903.201–2(c)(6) (FAR appendix accounting practices consistently. B) applies. (b) Disclosure and Consistency of Cost (2) The clause at FAR 52.230–5 re- Accounting Practices. (1) The contract- quires the educational institution to ing officer shall insert the clause at comply with all CAS specified in 48 FAR 52.230–3, Disclosure and Consist- CFR part 9905 (FAR appendix B), to dis- ency of Cost Accounting Practices, in close actual cost accounting practices negotiated contracts when the contract as required by 48 CFR 9903.202–1(f) (FAR amount is over $500,000, but less than appendix B), and to follow disclosed $25 million, and the offeror certifies it and established cost accounting prac- is eligible for and elects to use modi- tices consistently. fied CAS coverage (see 48 CFR 9903.201– 2 (FAR appendix B), unless the clause [61 FR 18917, Apr. 29, 1996] prescribed in paragraph (c) of this sub- 30.201–5 Waiver. section is used). – (2) The clause at FAR 52.230–3 re- In some instances, contractors or quires the contractor to comply with 48 subcontractors may refuse to accept all CFR 9904.401, 9904.402, 9904.405, and or part of the requirements of the CAS 9904.406 (FAR appendix B) to disclose (if clauses (FAR 52.230–2, Cost Accounting it meets certain requirements) actual Standards, FAR 52.230–3, Disclosure cost accounting practices, and to fol- and Consistency of Cost Accounting

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Practices, and FAR 52.230–5, Cost Ac- tice in the solicitation. The contract- counting Standards—Educational In- ing officer must then ensure that the stitution). If the contracting officer de- offeror has made the required solicita- termines that it is impractical to ob- tion certifications and that required tain the materials, supplies, or services Disclosure Statements are submitted. from any other source, the contracting (Also see 48 CFR 9903.201–3 and 9903.202 officer shall prepare a request for waiv- (FAR appendix B).) er in accordance with 48 CFR 9903.201– (b) The contracting officer shall not 5 (FAR appendix B). award a CAS-covered contract until [61 FR 18917, Apr. 29, 1996] the ACO has made a written determination that a required Disclosure 30.201–6 Findings. Statement is adequate unless, in order See 48 CFR 9903.201–6 (FAR appendix to protect the Government’s interest, B). the contracting officer waives the requirement for an adequacy determina- [61 FR 18917, Apr. 29, 1996] tion before award. In this event, a determination of adequacy shall be re- 30.201–7 Cognizant Federal agency required as soon as possible after the sponsibilities. award. See 48 CFR 9903.201–7 (FAR appendix (c) The cognizant auditor is respon- B). sible for conducting reviews of Disclo- [61 FR 18917, Apr. 29, 1996] sure Statements for adequacy and compliance. 30.202 Disclosure requirements. (d) The cognizant ACO is responsible for determinations of adequacy and 30.202–1 General requirements. compliance of the Disclosure State- See 48 CFR 9903.202–1 (FAR appendix ment. B). [57 FR 39587, Aug. 31, 1992, as amended at 61 [61 FR 18917, Apr. 29, 1996] FR 18917, Apr. 29, 1996]

30.202–2 Impracticality of submission. 30.202–7 Determinations. See 48 CFR 9903.202–2 (FAR appendix (a) Adequacy determination. As pre- B). scribed by 48 CFR 9903.202–6 (FAR ap- [61 FR 18917, Apr. 29, 1996] pendix B), the cognizant auditor shall conduct a review of the Disclosure 30.202–3 Amendments and revisions. Statement to ascertain whether it is current, accurate, and complete and See 48 CFR 9903.202–3 (FAR appendix shall report the results to the cog- B). nizant ACO, who shall determine [61 FR 18917, Apr. 29, 1996] whether or not it adequately describes the offeror’s cost accounting practices. 30.202–4 Privileged and confidential If the ACO identifies any areas of inad- information. equacy, the ACO shall request a revised See 48 CFR 9903.202–4 (FAR appendix Disclosure Statement. If the Disclosure B). Statement is adequate, the ACO shall [61 FR 18917, Apr. 29, 1996] notify the offeror in writing, with copies to the cognizant auditor and con- 30.202–5 Filing disclosure statements. tracting officer. The notice of adequacy shall state that a disclosed prac- See 48 CFR 9903.202–5 (FAR appendix tice shall not, by virtue of such disclo- B). sure, be considered an approved prac- [61 FR 18917, Apr. 29, 1996] tice for pricing proposals or accumulating and reporting contract perform- 30.202–6 Responsibilities. ance cost data. Generally, the ACO (a) The contracting officer is respon- shall furnish the contractor notifica- sible for determining when a proposed tion of adequacy or inadequacy within contract may require CAS coverage 30 days after the Disclosure Statement and for including the appropriate no- has been received by the ACO.

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(b) Compliance determination. After Subpart 30.6—CAS Administration the notification of adequacy, the cognizant auditor shall conduct a detailed 30.601 Responsibility. compliance review to ascertain wheth- (a) The cognizant ACO shall perform er or not the disclosed practices com- CAS administration for all contracts in ply with Part 31 and the CAS and shall a business unit notwithstanding reten- advise the ACO of the results. The ACO tion of other administration functions shall take action regarding noncompli- by the contracting officer. ance with CAS under FAR 30.602–2. The (b) Within 30 days after the award of ACO may require a revised Disclosure any new contract or subcontract sub- Statement and adjustment of the ject to CAS, the contracting officer, prime contract price or cost allowance. contractor, or subcontractor making Noncompliance with part 31 shall be the award shall request the cognizant processed separately, in accordance ACO to perform administration for with normal administrative practices. CAS matters (see subpart 42.2). [57 FR 39587, Aug. 31, 1992, as amended at 61 [57 FR 39587, Aug. 31, 1992, as amended at 59 FR 18917, Apr. 29, 1996] FR 67043, Dec. 28, 1994]

30.202–8 Subcontractor disclosure 30.602 Changes to disclosed or estab- statements. lished cost accounting practices. Adjustments to contracts and with- (a) When the Government requires holding amounts payable for CAS non- determinations of adequacy or inad- compliance, new standards, or vol- equacy, the ACO cognizant of the sub- untary changes are required only if the contractor shall provide such deter- amounts involved are material. In de- mination to the ACO cognizant of the termining materiality, the ACO shall prime contractor or next higher tier use the criteria in 48 CFR 9903.305 (FAR subcontractor. The ACO cognizant of appendix B). The ACO may forego ac- higher tier subcontractors or prime tion to require that a cost impact pro- contractors shall not reverse the deter- posal be submitted or to adjust con- mination of the ACO cognizant of the tracts, if the ACO determines the subcontractor. amount involved is immaterial. How- (b) Any determination that it is im- ever, in the case of noncompliance is- practical to secure a subcontractor’s sues, the ACO shall inform the contrac- Disclosure Statement must be made in tors that: accordance with 48 CFR 9903.202–2 (FAR (a) The Government reserves the appendix B). right to make appropriate contract adjustments if, in the future, the ACO de- [57 FR 39587, Aug. 31, 1992, as amended at 61 termines that the cost impact has be- FR 18918, Apr. 29, 1996] come material and (b) The contractor is not excused Subpart 30.3—CAS Rules and from the obligation to comply with the Regulations [Reserved] applicable Standard or rules and regulations involved. NOTE: See 48 CFR 9903.3 (FAR appendix B). [57 FR 39587, Aug. 31, 1992, as amended at 61 FR 18918, Apr. 29, 1996] Subpart 30.4—Cost Accounting Standards [Reserved] 30.602–1 Equitable adjustments for new or modified standards. NOTE: See 48 CFR part 9904 (FAR appendix (a) New or modified standards. (1) The B). provision at 52.230–1, Cost Accounting Standards Notices and Certification, Subpart 30.5—Cost Accounting requires offerors to state whether or Standards for Educational In- not the award of the contemplated con- stitutions [Reserved] tract would require a change to established cost accounting practices affect- NOTE: See 48 CFR part 9905 (FAR appendix ing existing contracts and sub- B). contracts. The contracting officer shall

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ensure that the contractor’s response (i) Execute supplemental agreements to the notice is made known to the to contracts of the ACO’s own agency ACO. (and, if additional funds are required, (2) Contracts and subcontracts con- request them from the appropriate containing the clause at 52.230–2, Cost Ac- tracting officer); counting Standards, or FAR 52.230–5, (ii) Prepare a negotiation memoran- Cost Accounting Standards—Edu- dum and send copies to cognizant audi- cational Institution, may require equi- tors and contracting officers of other table adjustments to comply with new agencies having prime contracts af- or modified CAS. Such adjustments are fected by the negotiation (those agen- limited to contracts and subcontracts cies shall execute supplemental agree- awarded before the effective date of ments in the amounts negotiated); and each new or modified standard. A new (iii) Furnish copies of the memoran- or modified standard becomes applica- dum indicating the effect on costs to ble prospectively to these contracts the ACO of the next higher tier sub- and subcontracts when a new contract contractor or prime contractor, as ap- or subcontract containing the clause at propriate, if a subcontract is to be ad- 52.230–2 or 52.230–5 is awarded on or justed. This memorandum shall be the after the effective date of the new or basis for negotiation between the sub- modified standard. contractor and the next higher tier (3) Contracting officers shall encour- subcontractor or prime contractor and age contractors to submit to the ACO for execution of a supplemental agree- any change in accounting practice in ment to the subcontract. anticipation of complying with a new (2) If the parties fail to agree on the or modified standard as soon as prac- cost or price adjustment, the ACO may tical after the new or modified Stand- make a unilateral adjustment, subject ard has been promulgated by the to contractor appeal as provided in the CASB. clause at 52.233–1, Disputes. (b) Accounting changes. (1) The clause (d) Remedies for contractor failure to at FAR 52.230–6, Administration of Cost make required submissions. (1) If the con- Accounting Standards, requires the tractor does not submit the accounting contractor to submit a description of change description or the general dol- any change in cost accounting prac- lar magnitude of the change or cost im- tices required to comply with a new or pact proposal (in the form and manner modified CAS within 60 days (or other specified), the ACO, with the assistance mutually agreed to date) after award of of the auditor, shall estimate the gen- a contract requiring the change. eral dollar magnitude of the cost im- (2) The ACO, with the assistance of pact on CAS-covered contracts and the auditor, shall review the proposed subcontracts. The ACO may then with- change concurrently for adequacy and hold an amount not to exceed 10 per- compliance (see 30.202–7). If the descrip- cent of each subsequent amount deter- tion of the change meets both tests, mined payable related to the contrac- the ACO shall notify the contractor tor’s CAS-covered prime contracts, up and request submission of a cost im- to the estimated general dollar mag- pact proposal in accordance with FAR nitude of the cost impact, until the re- 30.602. quired submission is furnished by the (c) Contract price adjustments. (1) The contractor. ACO shall promptly analyze the cost (2) If the contractor has not submit- impact proposal with the assistance of ted the cost impact proposal before the the auditor, determine the impact, and total withheld amount reaches the es- negotiate the contract price adjust- timated general dollar magnitude and ment on behalf of all Government the ACO determines that an adjust- agencies. The ACO shall invite con- ment is required (see 30.602), the ACO tracting officers to participate in nego- shall request the contractor to agree to tiations of adjustments when the price the cost or price adjustment. The con- of any of their contracts may be in- tractor shall also be advised that in the creased or decreased by $10,000 or more. event no agreement on the cost or At the conclusion of negotiations, the price adjustment is reached within 20 ACO shall— days, the ACO may make a unilateral

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adjustment, subject to contractor ap- cost impact proposal in accordance peal as provided in the clause at 52.233– with FAR 30.602. 1, Disputes. (c) Contract price adjustments. (1) The ACO shall request that the contractor [57 FR 39587, Aug. 31, 1992, as amended at 59 submit a cost impact proposal within FR 67043, Dec. 28, 1994; 61 FR 18918, Apr. 29, 1996] the time specified in the clause at FAR 52.230–6, Administration of Cost Ac- 30.602–2 Noncompliance with CAS re- counting Standards. quirements. (2) Upon receipt of the cost impact proposal, the ACO shall then follow the (a) Determination of noncompliance. (1) procedures in 30.602–1(c)(1). In accord- Within 15 days of the receipt of a re- ance with the clause at 52.230–2, Cost port of alleged noncompliance from the Accounting Standards, or FAR 52.230–5, cognizant auditor, the ACO shall make Cost Accounting Standards—Edu- an initial finding of compliance or non- cational Institution, the ACO shall in- compliance and advise the auditor. clude and separately identify, as part (2) If an initial finding of noncompli- of the computation of the contract ance is made, the ACO shall imme- price adjustment(s), applicable interest diately notify the contractor in writing on any increased costs paid to the con- of the exact nature of the noncompli- tractor as a result of the noncompliance and allow the contractor 60 days ance. Interest shall be computed from within which to agree or to submit rea- the date of overpayment to the time sons why the existing practices are the adjustment is effected. If the costs considered to be in compliance. were incurred and paid evenly over the (3) If the contractor agrees with the fiscal years during which the non- initial finding of noncompliance, the compliance occurred, then the mid- ACO shall review the contractor sub- point of the period in which the non- missions required by paragraph (a) of compliance began may be considered the clause at FAR 52.230–6, Administra- the baseline for the computation of in- tion of Cost Accounting Standards. terest. An alternate equitable method (4) If the contractor disagrees with should be used if the costs were not in- the initial noncompliance finding, the curred and paid evenly over the fiscal ACO shall review the reasons why the years during which the noncompliance contractor considers the existing prac- occurred. Interest under 52.230–2 should tices to be in compliance and make a be computed pursuant to Public Law determination of compliance or non- 100–679. compliance. If the ACO determines (d) Remedies for contractor failure to that the contractor’s practices are in make required submissions. (1) If the con- noncompliance, a written explanation tractor does not submit the accounting shall be provided as to why the ACO change description or the general dol- disagrees with the contractor’s ration- lar magnitude of the change or cost im- ale. The ACO shall notify the contrac- pact proposal (in the form and manner tor and the auditor in writing of the specified), the ACO, with the assistance determination. If the ACO makes a de- of the cognizant auditor, shall estimate termination of noncompliance, the pro- the general dollar magnitude of the cedures in (b) through (d), as appro- cost impact on CAS-covered contracts priate, shall be followed. and subcontracts. The ACO may then (b) Accounting changes. (1) The clause withhold an amount not to exceed 10 at FAR 52.230–6, Administration of Cost percent of each subsequent amount de- Accounting Standards, requires the termined payable related to the con- contractor to submit a description of tractor’s CAS-covered prime contracts, any cost accounting practice change up to the estimated general dollar needed to correct a noncompliance. magnitude of the cost impact until the (2) The ACO shall review the pro- required submission is furnished by the posed change concurrently for ade- contractor. quacy and compliance (see 30.202–7). If (2) If the contractor has not submit- the description of the change meets ted the cost impact proposal before the both tests, the ACO shall notify the total withheld amount reaches the es- contractor and request submission of a timated general dollar magnitude and

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the ACO determines that an adjust- the description of the change meets ment is required (see 30.602), the ACO both tests, the ACO shall notify the shall notify the contractor and request contractor and request submission of a agreement as to the cost or price ad- cost impact proposal in accordance justment together with any applicable with FAR 30.602. interest as computed in accordance (c) Contract price adjustments. (1) With with 30.602–2(c)(2). The contractor shall the assistance of the auditor, the ACO also be advised that in the event no shall promptly analyze the cost impact agreement on the cost or price adjust- proposal to determine whether or not ment is reached within 20 days, the the proposed change will result in in- ACO may make a unilateral adjust- creased costs being paid by the Govern- ment, subject to contractor appeal, as ment. The ACO shall consider all of the provided in the clause at 52.233–1, Dis- contractor’s affected CAS-covered con- putes. (3) If the ACO determines that there tracts and subcontracts, but any cost is no material increase in costs as a re- changes to higher-tier subcontracts or sult of the noncompliance, the ACO contracts of other contractors over and shall notify the contractor in writing above the cost of the subcontract ad- that the contractor is in noncompli- justment shall not be considered. ance, that corrective action should be (2) The ACO shall then follow the taken, and that if such noncompliance procedures in 30.602–1(c)(1). subsequently results in materially in- (d) Remedies for contractor failure to creased costs to the Government, the make required submissions. (1) If the con- provisions of the clause at 52.230–2, tractor does not submit the accounting Cost Accounting Standards, 52.230–5, change description or the general dol- Cost Accounting Standards—Edu- lar magnitude of the change or cost im- cational Institution, and/or the clause pact proposal (in the form and manner at 52.230–3, Disclosure and Consistency specified), the ACO, with the assistance of Cost Accounting Practices, will be of the cognizant auditor, shall estimate enforced. the general dollar magnitude of the [57 FR 39590, Aug. 31, 1992; 57 FR 43409, Sept. cost impact on CAS-covered contracts 21, 1992, as amended at 57 FR 47373, Oct. 15, and subcontracts. The ACO may then 1992; 59 FR 67043, Dec. 28, 1994; 61 FR 18918, withhold an amount not to exceed 10 Apr. 29, 1996] percent of each subsequent amount determined payable related to the con- 30.602–3 Voluntary changes. tractor’s CAS-covered prime contracts (a) General. (1) The contractor may up to the estimated general dollar voluntarily change its disclosed or es- magnitude of the cost impact, until the tablished cost accounting practices. required submission is furnished by the (2) The contract price may be ad- contractor. justed for voluntary changes. However, (2) If the contractor has not submit- increased costs resulting from a vol- ted the cost impact proposal before the untary change may be allowed only if total withheld amount reaches the es- the ACO determines that the change is timated general dollar magnitude and desirable and not detrimental to the the ACO determines that an adjust- interest of the Government. ment is appropriate (see 30.602), the (b) Accounting changes. (1) The clause ACO shall request the contractor to at FAR 52.230–6, Administration of Cost agree to the cost or price adjustment. Accounting Standards, requires the The contractor shall also be advised contractor to notify the ACO and sub- that, in the event no agreement on the mit a description of any voluntary cost cost or price adjustment is reached accounting practice change not less within 20 days, the ACO may make a than 60 days (or such other date as may be mutually agreed to) before imple- unilateral adjustment subject to con- mentation of the voluntary change. tractor appeal, as provided in the (2) The ACO, with the assistance of clause at 52.233–1, Disputes. the cognizant auditor, shall review the [57 FR 39587, Aug. 31, 1992, as amended at 59 proposed change concurrently for ade- FR 67043, Dec. 28, 1994; 61 FR 18918, Apr. 29, quacy and compliance (see 30.202–7). If 1996]

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30.603 Subcontract administration. 31.204 Application of principles and procedures. When a negotiated CAS price adjust- 31.205 Selected costs. ment or a determination of noncompli- 31.205–1 Public relations and advertising ance is required at the subcontract costs. level, the ACO cognizant of the sub- 31.205–2 Automatic data processing equip- contractor shall make the determina- ment leasing costs. tion and advise the ACO cognizant of 31.205–3 Bad debts. the prime contractor or next higher 31.205–4 Bonding costs. tier subcontractor of the decision. The 31.205–5 Civil defense costs. ACOs cognizant of higher tier sub- 31.205–6 Compensation for personal services. contractors or prime contractors shall 31.205–7 Contingencies. not reverse the determination of the 31.205–8 Contributions or donations. 31.205–9 [Reserved] ACO cognizant of the subcontractor. 31.205–10 Cost of money. [57 FR 39590, Aug. 31, 1992; 57 FR 43495, Sept. 31.205–11 Depreciation. 21, 1992; 61 FR 18918, Apr. 29, 1996] 31.205–12 Economic planning costs. 31.205–13 Employee morale, health, welfare, food service, and dormitory costs and PART 31—CONTRACT COST credits. PRINCIPLES AND PROCEDURES 31.205–14 Entertainment costs. 31.205–15 Fines, penalties, and mischarging Sec. costs. 31.000 Scope of part. 31.205–16 Gains and losses on disposition or 31.001 Definitions. impairment of depreciable property or 31.002 Availability of accounting guide. other capital assets. 31.205–17 Idle facilities and idle capacity Subpart 31.1—Applicability costs. 31.205–18 Independent research and develop- 31.100 Scope of subpart. ment and bid and proposal costs. 31.101 Objectives. 31.205–19 Insurance and indemnification. 31.102 Fixed-price contracts. 31.103 Contracts with commercial organiza- 31.205–20 Interest and other financial costs. tions. 31.205–21 Labor relations costs. 31.104 Contracts with educational institu- 31.205–22 Lobbying and political activity tions. costs. 31.105 Construction and architect-engineer 31.205–23 Losses on other contracts. contracts. 31.205–24 Maintenance and repair costs. 31.106 Facilities contracts. 31.205–25 Manufacturing and production en- 31.106–1 Applicable cost principles. gineering costs. 31.106–2 Exceptions to general rules on al- 31.205–26 Material costs. lowability and allocability. 31.205–27 Organization costs. 31.106–3 Contractor’s commercial items. 31.205–28 Other business expenses. 31.107 Contracts with State, local, and fed- 31.205–29 Plant protection costs. erally recognized Indian tribal govern- 31.205–30 Patent costs. ments. 31.205–31 Plant reconversion costs. 31.108 Contracts with nonprofit organiza- 31.205–32 Precontract costs. tions. 31.205–33 Professional and consultant serv- 31.109 Advance agreements. ice costs. 31.110 Indirect cost rate certification and 31.205–34 Recruitment costs. penalties on unallowable costs. 31.205–35 Relocation costs. 31.205–36 Rental costs. Subpart 31.2—Contracts With Commercial 31.205–37 Royalties and other costs for use Organizations of patents. 31.201 General. 31.205–38 Selling costs. 31.201–1 Composition of total cost. 31.205–39 Service and warranty costs. 31.201–2 Determining allowability. 31.205–40 Special tooling and special test 31.201–3 Determining reasonableness. equipment costs. 31.201–4 Determining allocability. 31.205–41 Taxes. 31.201–5 Credits. 31.205–42 Termination costs. 31.201–6 Accounting for unallowable costs. 31.205–43 Trade, business, technical, and 31.201–7 Construction and architect-engi- professional activity costs. neer contracts. 31.205–44 Training and education costs. 31.202 Direct costs. 31.205–45 Transporation costs. 31.203 Indirect costs. 31.205–46 Travel costs.

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31.205–47 Costs related to legal and other ial liability at a plan’s inception date proceedings. is the present value of the units of ben- 31.205–48 Deferred research and development efit credited to employees for service costs. 31.205–49 Goodwill. prior to that date. (This method is also 31.205–50 [Reserved] known as the unit credit cost method.) 31.205–51 Costs of alcoholic beverages. Accumulating costs means collecting 31.205–52 Asset valuations resulting from cost data in an organized manner, such business combinations. as through a system of accounts. Actual cash value means the cost of Subpart 31.3—Contracts With Educational replacing damaged property with other Institutions property of like kind and quality in the 31.301 Purpose. physical condition of the property im- 31.302 General. mediately before the damage. 31.303 Requirements. Actual costs, as used in this part Subparts 31.4—31.5 [Reserved] (other than subpart 31.6), means amounts determined on the basis of Subpart 31.6—Contracts With State, Local, costs incurred, as distinguished from and Federally Recognized Indian Trib- forecasted costs. Actual costs include al Governments standard costs properly adjusted for applicable variances. 31.601 Purpose. 31.602 General. Actuarial assumption means a pre- 31.603 Requirements. diction of future conditions affecting pension costs; e.g., mortality rate, em- Subpart 31.7—Contracts With Nonprofit ployee turnover, compensation levels, Organizations pension fund earnings, and changes in 31.701 Purpose. values of pension funds assets. 31.702 General. Actuarial cost method means a tech- 31.703 Requirements. nique which uses actuarial assump-

AUTHORITY: 40 U.S.C. 486(c); 10 U.S.C. Chap- tions to measure the present value of ter 137; and 42 U.S.C. 2473(c). future pension benefits and pension SOURCE: 48 FR 42301, Sept. 19, 1983, unless fund administrative expenses, and otherwise noted. which assigns the cost of such benefits EDITORIAL NOTE: Nomenclature changes for and expenses to cost accounting peri- part 31 appear at 52 FR 35669, Sept. 22, 1987. ods. Actuarial gain and loss means the ef- 31.000 Scope of part. fect on pension cost resulting from dif- This part contains cost principles ferences between actuarial assump- and procedures for (a) the pricing of tions and actual experience. contracts, subcontracts, and modifica- Actuarial liability means pension cost tions to contracts and subcontracts attributable, under the actuarial cost whenever cost analysis is performed method in use, to years before the date (see 15.805–3) and (b) the determination, of a particular actuarial valuation. As negotiation, or allowance of costs when of such date, the actuarial liability required by a contract clause. represents the excess of the present value of the future benefits and admin- 31.001 Definitions. istrative expenses over the present Accrued benefit cost method means an value of future contributions, for the actuarial cost method under which normal cost for all plan participants units of benefit are assigned to each and beneficiaries. The excess of the ac- cost accounting period and are valued tuarial liability over the value of the as they accrue; i.e., based on the serv- assets of a pension plan is the unfunded ices performed by each employee in the actuarial liability. period involved. The measure of nor- Actuarial valuation means the deter- mal cost under this method for each mination, as of a specified date, of the cost accounting period is the present normal cost, actuarial liability, value value of the units of benefit deemed to of the assets of a pension fund, and be credited to employees for service in other relevant values for the pension that period. The measure of the actuar- plan.

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Allocate means to assign an item of accounting period or periods for serv- cost, or a group of items of cost, to one ices rendered in one or more cost ac- or more cost objectives. This term in- counting periods before the date of the cludes both direct assignment of cost receipt of compensation by the em- and the reassignment of a share from ployee. This definition shall not in- an indirect cost pool. clude the amount of year end accruals Automatic data processing equipment for salaries, wages, or bonuses that are (ADPE), as used in this part means: to be paid within a reasonable period of (a) Digital and analog computer com- time after the end of a cost accounting ponents and systems, irrespective of period. type of use, size, capacity, or price; Defined-benefit pension plan means a (b) All peripheral, auxiliary, and ac- pension plan in which the benefits to cessorial equipment used in support of be paid, or the basis for determining digital and/or analog computers, either such benefits, are established in ad- cable connected, or self standing, and vance and the contributions are in- whether selected or acquired with the tended to provide the stated benefits. computers or separately; Defined-contribution pension plan (c) Punched card machines (PCM) means a pension plan in which the con- and systems used in conjunction with tributions to be made are established or independently of digital or analog in advance and the benefits are deter- computers; and mined thereby. (d) Digital and analog terminal and Directly associated cost means any conversion equipment that is acquired cost which is generated solely as a re- solely or primarily for use with a sys- sult of the incurrence of another cost, tem which employs a computer or and which would not have been in- punched card machines. curred had the other cost not been in- Business unit means any segment of curred. an organization, or an entire business organization which is not divided into Estimating costs means the process of segments. forecasting a future result in terms of cost, based upon information available Compensated personal absence means any absence from work for reasons at the time. such as illness, vacation, holidays, jury Expressly unallowable cost means a duty, military training, or personal ac- particular item or type of cost which, tivities for which an employer pays under the express provisions of an ap- compensation directly to an employee plicable law, regulation, or contract, is in accordance with a plan or custom of specifically named and stated to be un- the employer. allowable. Cost input means the cost, except Facilities capital means the net book general and administrative (G&A) ex- value of tangible capital assets and of penses, which for contract costing pur- those intangible capital assets that are poses is allocable to the production of subject to amortization. goods and services during a cost ac- Final cost objective, as used in this counting period. part (other than subparts 31.3 and 31.6), Cost objective, as used in this part means a cost objective that has allo- (other than subpart 31.6), means a func- cated to it both direct and indirect tion, organizational subdivision, con- costs and, in the contractor’s accumu- tract, or other work unit for which cost lation system, is one of the final accu- data are desired and for which provi- mulation points. sion is made to accumulate and meas- Fiscal year, as used in this part, ure the cost of processes, products, means the accounting period for which jobs, capitalized projects, etc. annual financial statements are regu- Cost of capital committed to facilities larly prepared, generally a period of 12 means an imputed cost determined by months, 52 weeks, or 53 weeks. applying a cost of money rate to facili- Funded pension cost, as used in this ties capital. part, means the portion of pension Deferred compensation means an costs for a current or prior cost ac- award made by an employer to com- counting period that has been paid to a pensate an employee in a future cost funding agency.

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General and administrative (G&A) ex- paid to insurance companies, trustees, pense means any management, finan- or technical consultants. cial, and other expense which is in- Intangible capital asset means an asset curred by or allocated to a business that has no physical substance, has unit and which is for the general man- more than minimal value, and is ex- agement and administration of the pected to be held by an enterprise for business unit as a whole. G&A expense continued use or possession beyond the does not include those management ex- current accounting period for the bene- penses whose beneficial or causal rela- fits it yields. tionship to cost objectives can be more Job, as used in this part, means a ho- directly measured by a base other than mogeneous cluster of work tasks, the a cost input base representing the total completion of which serves an enduring activity of a business unit during a purpose for the organization. Taken as cost accounting period. a whole, the collection of tasks, duties, Home office means an office respon- and responsibilities constitutes the as- sible for directing or managing two or signment for one or more individuals more, but not necessarily all, segments whose work is of the same nature and of an organization. It typically estab- is performed at the same skill/ respon- lishes policy for, and provides guidance sibility level—as opposed to a position, to, the segments in their operations. It which is a collection of tasks assigned usually performs management, super- to a specific individual. Within a job, visory, or administrative functions, there may be pay categories which are and may also perform service functions dependent on the degree of supervision in support of the operations of the var- required by the employee while per- ious segments. An organization which forming assigned tasks which are per- has intermediate levels, such as formed by all persons with the same groups, may have several home offices job. which report to a common home office. Job class of employees, as used in this An intermediate organization may be part, means employees performing in both a segment and a home office. positions within the same job. Immediate-gain actuarial cost method Labor cost at standard means a means any of the several actuarial cost preestablished measure of the labor methods under which actuarial gains element of cost, computed by multiply- and losses are included as part of the ing labor-rate standard by labor-time unfunded actuarial liability of the pen- standard. sion plan, rather than as part of the Labor market, as used in this part, normal cost of the plan. means a place where individuals ex- Independent research and development change their labor for compensation. (IR&D) cost means the cost of effort Labor markets are identified and de- which is neither sponsored by a grant, fined by a combination of the following nor required in performing a contract, factors: and which falls within any of the fol- (1) Geography, lowing four areas: (a) basic research, (2) Education and/or technical back- (b) applied research, (c) development, ground required, and (d) systems and other concept for- (3) Experience required by the job, mulation studies. (4) Licensing or certification require- Indirect cost pools, as used in this part ments, (other than subparts 31.3 and 31.6), (5) Occupational membership, and means groupings of incurred costs iden- (6) Industry. tified with two or more cost objectives Labor-rate standard means a but not identified specifically with any preestablished measure, expressed in final cost objective. monetary terms, of the price of labor. Insurance administration expenses Labor-time standard means a means the contractor’s costs of admin- preestablished measure, expressed in istering an insurance program; e.g., the temporal terms, of the quantity of costs of operating an insurance or risk- labor. management department, processing Material cost at standard means a claims, actuarial fees, and service fees preestablished measure of the material

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elements of cost, computed by mul- ployer or any member or former mem- tiplying material-price standard by ber of an employee organization, who is material-quantity standard. or may become eligible to receive a Material-price standard means a benefit from a pension plan which cov- preestablished measure, expressed in ers employees of such employer or monetary terms, of the price of mate- members of such organization who rial. have satisfied the plan’s participation Material-quantity standard means a requirements, or whose beneficiaries preestablished measure, expressed in are receiving or may be eligible to re- physical terms, of the quantity of ma- ceive any such benefit. A participant terial. whose employment status with the em- Moving average cost means an inven- ployer has not been terminated is an tory costing method under which an active participant of the employer’s average unit cost is computed after pension plan. each acquisition by adding the cost of Pricing means the process of estab- the newly acquired units to the cost of lishing a reasonable amount or the units of inventory on hand and di- amounts to be paid for supplies or serv- viding this figure by the new total ices. number of units. Profit center, as used in this part Normal cost means the annual cost at- (other than subparts 31.3 and 31.6), tributable, under the actuarial cost means the smallest organizationally method in use, to years subsequent to a independent segment of a company particular valuation date. charged by management with profit Original complement of low cost equip- and loss responsibilities. ment means a group of items acquired Projected average loss means the esti- for the initial outfitting of a tangible mated long-term average loss per pe- capital asset or an operational unit, or riod for periods of comparable exposure a new addition to either. The items in to risk of loss. the group individually cost less than Projected benefit cost method means the minimum amount established by any of the several actuarial cost meth- the contractor for capitalization for ods which distribute the estimated the classes of assets acquired but in the total cost of all the employees’ pro- aggregate they represent a material in- spective benefits over a period of years, vestment. The group, as a complement, usually their working careers. is expected to be held for continued Proposal means any offer or other service beyond the current period. Ini- submission used as a basis for pricing a tial outfitting of the unit is completed contract, contract modification, or ter- when the unit is ready and available mination settlement or for securing for normal operations. payments thereunder. Pay-as-you-go cost method means a Residual value means the proceeds, method of recognizing pension cost less removal and disposal costs, if any, only when benefits are paid to retired realized upon disposition of a tangible employees or their beneficiaries. capital asset. It usually is measured by Pension plan means a deferred com- the net proceeds from the sale or other pensation plan established and main- disposition of the asset, or its fair tained by one or more employers to value if the asset is traded in on an- provide systematically for the payment other asset. The estimated residual of benefits to plan participants after value is a current forecast of the resid- their retirements; provided, that the ual value. benefits are paid for life or are payable Segment means one of two or more for life at the option of the employees. divisons, product departments, plants, Additional benefits such as permanent or other subdivisions of an organiza- and total disability and death pay- tion reporting directly to a home of- ments, and survivorship payments to fice, usually identified with respon- beneficiaries of deceased employees sibility for profit and/or producing a may be an integral part of a pension product or service. The term includes plan. Government-owned contractor-oper- Pension plan participant means any ated (GOCO) facilities, and joint ven- employee or former employee of an em- tures and subsidiaries (domestic and

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foreign) in which the organization has tablished for the accumulation of con- a majority ownership. The term also tributions. includes those joint ventures and sub- Variance means the difference be- sidiaries (domestic and foreign) in tween a preestablished measure and an which the organization has less than a actual measure. majority of ownership, but over which Weighted average cost means an inven- it exercises control. tory costing method under which an Self-insurance means the assumption average unit cost is computed periodi- or retention of the risk of loss by the cally by dividing the sum of the cost of contractor, whether voluntarily or in- beginning inventory plus the cost of voluntarily. Self-insurance includes acquisitions by the total number of the deductible portion of purchased in- units included in these two categories. surance. [48 FR 42301, Sept. 17, 1983, as amended at 54 Self-insurance charge means a cost FR 13024, Mar. 29, 1989; 61 FR 39217, July 26, which represents the projected average 1996] loss under a self-insurance plan. Service life means the period of useful- 31.002 Availability of accounting guide. ness of a tangible capital asset (or group of assets) to its current owner. Contractors needing assistance in de- The period may be expressed in units of veloping or improving their accounting time or output. The estimated service systems and procedures may request a life of a tangible capital asset (or group copy of the guide entitled ‘‘Guidance of assets) is a current forecast of its for New Contractors’’ (DCAAP 7641.90). service life and is the period over which The guide is available from: Head- depreciation cost is to be assigned. quarters, Defense Contract Audit Agen- Spread-gain actuarial cost method cy, Operating Administrative Office, means any of the several projected ben- 8725 John J. Kingman Road, Suite 2135, efit actuarial cost methods under Fort Belvoir, Virginia 22060–6219; Tele- which actuarial gains and losses are in- phone No. (703) 767–1066; Telefax No. cluded as part of the current and future (703) 767–1061. normal costs of the pension plan. [61 FR 2640, Jan. 26, 1996] Standard cost means any cost computed with the use of preestablished Subpart 31.1—Applicability measures. Tangible capital asset means an asset 31.100 Scope of subpart. that has physical substance, more than This subpart describes the applicabil- minimal value, and is expected to be ity of the cost principles and proce- held by an enterprise for continued use dures in succeeding subparts of this or possession beyond the current ac- part to various types of contracts and counting period for the services it subcontracts. It also describes the need yields. for advance agreements. Termination gain or loss means an actuarial gain or loss resulting from the 31.101 Objectives. difference between the assumed and ac- In recognition of differing organiza- tual rates at which pension plan par- tional characteristics, the cost prin- ticipants separate from employment ciples and procedures in the succeeding for reasons other than retirement, dis- subparts are grouped basically by orga- ability, or death. nizational type; e.g., commercial con- Unallowable cost means any cost cerns and educational institutions. The which, under the provisions of any per- overall objective is to provide that, to tinent law, regulation, or contract, the extent practicable, all organiza- cannot be included in prices, cost-reim- tions of similar types doing similar bursements, or settlements under a work will follow the same cost prin- Government contract to which it is al- ciples and procedures. To achieve this locable. uniformity, individual deviations con- Unfunded pension plan as used in this cerning cost principles require advance part, means a defined benefit pension approval of the agency head or des- plan for which no funding agency is es- ignee. Class deviations for the civilian

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agencies require advance approval of analysis is performed as required by the Civilian Agency Acquisition Coun- 15.805–3. cil. Class deviations for the National (b) In addition, the contracting offi- Aeronautics and Space Administration cer shall incorporate the cost prin- require advance approval of the Associ- ciples and procedures in subpart 31.2 ate Administrator for Procurement. and agency supplements by reference Class deviations for the Department of in contracts with commercial organiza- Defense require advance approval of tions as the basis for— the Director of Defense Procurement, (1) Determining reimbursable costs Office of the Under Secretary of De- under (i) cost-reimbursement contracts fense for Acquisition and Technology. and cost-reimbursement subcontracts [48 FR 42301, Sept. 19, 1983, as amended at 56 under these contracts performed by FR 67133, Dec. 27, 1991; 61 FR 31655, June 20, commercial organizations and (ii) the 1996] cost-reimbursement portion of time- and-materials contracts except when 31.102 Fixed-price contracts. material is priced on a basis other than The applicable subparts of part 31 at cost (see 16.601(b)(3)); shall be used in the pricing of fixed- (2) Negotiating indirect cost rates price contracts, subcontracts, and (see subpart 42.7); modifications to contracts and sub- (3) Proposing, negotiating, or deter- contracts whenever (a) cost analysis is mining costs under terminated con- performed, or (b) a fixed-price contract tracts (see 49.103 and 49.113); clause requires the determination or (4) Price revision of fixed-price incen- negotiation of costs. However, applica- tive contracts (see 16.204 and 16.403); tion of cost principles to fixed-price (5) Price redetermination of price re- contracts and subcontracts shall not be determination contracts (see 16.205 and construed as a requirement to nego- 16.206); and tiate agreements on individual ele- (6) Pricing changes and other con- ments of cost in arriving at agreement tract modifications. on the total price. The final price accepted by the parties reflects agree- 31.104 Contracts with educational in- ment only on the total price. Further, stitutions. notwithstanding the mandatory use of cost principles, the objective will con- This category includes all contracts tinue to be to negotiate prices that are and contract modifications for research fair and reasonable, cost and other fac- and development, training, and other tors considered. work performed by educational institutions. 31.103 Contracts with commercial or- (a) The contracting officer shall in- ganizations. corporate the cost principles and proce- This category includes all contracts dures in subpart 31.3 by reference in and contract modifications for sup- cost-reimbursement contracts with plies, services, or experimental, devel- educational institutions as the basis opmental, or research work negotiated for— with organizations other than edu- (1) Determining reimbursable costs cational institutions (see 31.104), con- under the contracts and cost-reim- struction and architect-engineer con- bursement subcontracts thereunder tracts (see 31.105), State and local gov- performed by educational institutions; ernments (see 31.107) and nonprofit or- (2) Negotiating indirect cost rates; ganizations (see 31.108) on the basis of and cost. (3) Settling costs of cost-reimburse- (a) The cost principles and proce- ment terminated contracts (see sub- dures in subpart 31.2 and agency sup- part 49.3 and 49.109–7). plements shall be used in pricing nego- (b) The cost principles in this subpart tiated supply, service, experimental, are to be used as a guide in evaluating developmental, and research contracts costs in connection with negotiating and contract modifications with com- fixed-price contracts and termination mercial organizations whenever cost settlements.

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31.105 Construction and architect-en- derstanding and avoid possible subse- gineer contracts. quent disputes or disallowances. (a) This category includes all con- (2) Construction equipment, as used in tracts and contract modifications ne- this section, means equipment (includ- gotiated on the basis of cost with orga- ing marine equipment) in sound work- nizations other than educational insti- able condition, either owned or con- tutions (see 31.104), State and local trolled by the contractor or the sub- governments (see 31.107), and nonprofit contractor at any tier, or obtained organizations except those exempted from a commercial rental source, and under OMB Circular A–122 (see 31–108) furnished for use under Government for construction management or con- contracts. struction, alteration or repair of build- (i) Allowable ownership and operat- ings, bridges, roads, or other kinds of ing costs shall be determined as fol- real property. It also includes archi- lows: tect-engineer contracts related to con- (A) Actual cost data shall be used struction projects. It does not include when such data can be determined for contracts for vessels, aircraft, or other both ownership and operating costs for kinds of personal property. each piece of equipment, or groups of (b) Except as otherwise provided in similar serial or series equipment, (d) below, the cost principles and pro- from the contractor’s accounting cedures in subpart 31.2 shall be used in records. When such costs cannot be so the pricing of contracts and contract determined, the contracting agency modifications in this category if cost may specify the use of a particular analysis is performed as required by schedule of predetermined rates or any 15.805–3. part thereof to determine ownership (c) In addition, the contracting offi- and operating costs of construction cer shall incorporate the cost prin- equipment (see subdivisions (d)(2)(i)(B) ciples and procedures in subpart 31.2 and (C) of this section). However, costs (as modified by (d) below) by reference otherwise unallowable under this part in contracts in this category as the shall not become allowable through the basis for— use of any schedule (see 31.109(c)). For (1) Determining reimbursable costs example, schedules need to be adjusted under cost-reimbursement contracts, for Government contract costing pur- including cost-reimbursement sub- poses if they are based on replacement contracts thereunder; cost, include unallowable interest (2) Negotiating indirect cost rates; costs, or use improper cost of money (3) Proposing, negotiating, or deter- rates or computations. Contracting of- mining costs under terminated con- ficers should review the computations tracts; and factors included within the speci- (4) Price revision of fixed-price incen- fied schedule and ensure that unallow- tive contracts; and able or unacceptably computed factors (5) Pricing changes and other con- are not allowed in cost submissions. tract modifications. (B) Predetermined schedules of con- (d) Except as otherwise provided in struction equipment use rates (e.g., the this paragraph (d), the allowability of Construction Equipment Ownership costs for construction and architect- and Operating Expense Schedule pub- engineer contracts shall be determined lished by the U.S. Army Corps of Engi- in accordance with subpart 31.2. neers, industry sponsored construction (1) Because of widely varying factors equipment cost guides, or commer- such as the nature, size, duration, and cially published schedules of construc- location of the construction project, tion equipment use cost) provide aver- advance agreements as set forth in age ownership and operating rates for 31.109, for such items as home office construction equipment. The allowance overhead, partners’ compensation, em- for ownership costs should include the ployment of consultants, and equip- cost of depreciation and may include ment usage costs, are particularly im- facilities capital cost of money. The al- portant in construction and architect- lowance for operating costs may in- engineer contracts. When appropriate clude costs for such items as fuel, fil- they serve to express the parties’ un- ters, oil, and grease; servicing, repairs,

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and maintenance; and tire wear and re- structures, and facilities are allowable. pair. Costs of labor, mobilization, de- Costs, less any applicable credits, in- mobilization, overhead, and profit are curred in constructing or fabricating generally not reflected in schedules, structures and facilities of a temporary and separate consideration may be nec- nature are allowable. essary. [48 FR 42301, Sept. 19, 1983, as amended at 50 (C) When a schedule of predetermined FR 23607, June 4, 1985; 52 FR 19804, May 27, use rates for construction equipment is 1987] used to determine direct costs, all costs of equipment that are included in 31.106 Facilities contracts. the cost allowances provided by the schedule shall be identified and elimi- 31.106–1 Applicable cost principles. nated from the contractor’s other di- The cost principles and procedures rect and indirect costs charged to the applicable to the evaluation and deter- contract. If the contractor’s account- mination of costs under facilities con- ing system provides for site or home of- tracts (as defined in 45.301), and sub- fice overhead allocations, all costs contracts thereunder, will be governed which are included in the equipment by the type of entity to which a facili- allowances may need to be included in ties contract is awarded. Except as oth- any cost input base before computing erwise provided in 31.106–2 below, sub- the contractor’s overhead rate. In peri- part 31.2 applies to facilities contracts ods of suspension of work pursuant to a awarded to commercial organizations; contract clause, the allowance for subpart 31.3 applies to facilities con- equipment ownership shall not exceed tracts awarded to educational institu- an amount for standby cost as deter- tions; and 31.105 applies to facilities mined by the schedule or contract pro- contracts awarded to construction con- vision. tractors. Whichever cost principles are (ii) Reasonable costs of renting con- appropriate will be used in the pricing struction equipment are allowable (but of facilities contracts and contract see paragraph (C) below). modifications if cost analysis is per- (A) Costs, such as maintenance and formed as required by 15.805–3. In addi- minor or running repairs incident to tion, the contracting officer shall in- operating such rented equipment, that corporate the cost principles and proce- are not included in the rental rate are dures appropriate in the circumstances allowable. (e.g., subpart 31.2; subpart 31.3; or (B) Costs incident to major repair 31.105) by reference in facilities con- and overhaul of rental equipment are tracts as the basis for— unallowable. (a) Determining reimbursable costs (C) The allowability of charges for under facilities contracts, including construction equipment rented from cost-reimbursement subcontracts any division, subsidiary, or organiza- thereunder; tion under common control, will be de- (b) Negotiating indirect cost rates; termined in accordance with 31.205– and 36(b)(3). (c) Determining costs of terminated (3) Costs incurred at the job site inci- contracts when the contractor elects to dent to performing the work, such as voucher out costs (see subpart 49.3), and the cost of superintendence, for settlement by determination (see timekeeping and clerical work, engi- 49.109–7). neering, utility costs, supplies, material handling, restoration and cleanup, 31.106–2 Exceptions to general rules etc., are allowable as direct or indirect on allowability and allocability. costs, provided the accounting practice (a) A contractor’s established ac- used is in accordance with the contrac- counting system and procedures are tor’s established and consistently fol- normally directed to the equitable allowed cost accounting practices for all location of costs to the types of prod- work. ucts which the contractor produces or (4) Rental and any other costs, less services rendered in the course of nor- any applicable credits incurred in ac- mal operating activities. The acquisi- quiring the temporary use of land, tion of, or work on, facilities for the

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Government normally does not involve (e) Where a facilities contract calls the manufacturing processes, plant de- for the construction, production, or re- partmental operations, cost patterns of habilitation of equipment or other work, administrative and managerial items that are involved in the regular control, or clerical effort usual to pro- course of the contractor’s business by duction of the contractor’s normal the use of the contractor’s direct labor products or services. and manufacturing processes, the indi- (b) Advance agreements (see 31.109) rect costs normally allocated to all should be made between the contractor that work may be allocated to the fa- and the contracting officer as to indi- cilities contract. rect cost items to be applied to the facilities acquisition. A contractor’s nor- 31.106–3 Contractor’s commercial mal accounting practice for allocating items. indirect costs to the acquisition of con- If facilities constituting the contrac- tractor facilities may range from tor’s usual commercial items (or only charging all these costs to this acquisi- minor modifications thereof) are action to not charging any. When nec- quired by the Government under the essary to produce an equitable result, contract, the Government shall not the contractor’s usual method of allo- pay any amount in excess of the con- cating indirect cost shall be varied, and tractor’s most favored customer price appropriate adjustment shall be made or the price of other suppliers for like to the pools of indirect cost and the quantities of the same or substantially bases of their distribution. the same items, whichever is lower. (c) The purchase of completed facilities (or services in connection with the [48 FR 42301, Sept. 19, 1983, as amended at 60 facilities) from outside sources does FR 48248, Sept. 18, 1995] not involve the contractor’s direct labor or indirect plant maintenance 31.107 Contracts with State, local, and personnel. Accordingly, indirect manu- federally recognized Indian tribal facturing and plant overhead costs, governments. which are primarily incurred or gen- (a) Subpart 31.6 provides principles erated by reason of direct labor or and standards for determining costs ap- maintenance labor operations, are not plicable to contracts with State, local, allocable to the acquisition of such fa- and federally recognized Indian tribal cilities. governments. They provide the basis (d) Contracts providing for the instal- for a uniform approach to the problem lation of new facilities or the rehabili- of determining costs and to promote ef- tation of existing facilities may in- ficiency and better relationships be- volve the use of the contractor’s plant tween State, local, and federally recog- maintenance labor, as distinguished nized Indian tribal governments, and from direct labor engaged in the pro- Federal Government entities. They duction of the company’s normal prod- apply to all programs that involve con- ucts. In such instances, only those tracts with State, local, and federally types of indirect manufacturing and recognized Indian tribal governments, plant operating costs that are related except contracts with— to or incurred by reason of the expendi- (1) Publicly financed educational in- tures of the classes of labor used for stitutions subject to subpart 31.3; or the performance of the facilities work (2) Publicly owned hospitals and may be allocated to the facilities con- other providers of medical care subject tract. Thus, a facilities contract which to requirements promulgated by the involves the use of plant maintenance sponsoring Government agencies. labor only would not be subject to an (b) The Office of Management and allocation of such cost items as direct Budget will approve any other excep- productive labor supervision, deprecia- tions in particular cases when adequate tion, and maintenance expense applicable to productive machinery and equip- justification is presented. ment, or raw material and finished [48 FR 42301, Sept. 19, 1983, as amended at 52 goods storage costs. FR 30076, Aug. 12, 1987]

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31.108 Contracts with nonprofit orga- tracting officer established in part 42, nizations. shall negotiate advance agreements ex- Subpart 31.7 provides principles and cept that an advance agreement affect- standards for determining costs appli- ing only one contract, or class of con- cable to contracts with nonprofit orga- tracts from a single contracting office, nizations other than educational insti- shall be negotiated by a contracting of- tutions, State and local governments, ficer in the contracting office, or an and those nonprofit organizations ex- ACO when delegated by the contracting empted under OMB Circular No. A–122. officer. When the negotiation authority is delegated, the ACO shall coordinate 31.109 Advance agreements. the proposed agreement with the con- (a) The extent of allowability of the tracting officer before executing the costs covered in this part applies advance agreement. broadly to many accounting systems in (f) Before negotiating an advance varying contract situations. Thus, the agreement, the Government negotiator reasonableness, the allocability and shall— the allowability under the specific cost (1) Determine if other contracting of- principles at subparts 31.2, 31.3, 31.6, fices inside the agency or in other and 31.7 of certain costs may be dif- agencies have a significant unliqui- ficult to determine. To avoid possible dated dollar balance in contracts with subsequent disallowance or dispute the same contractor; based on unreasonableness, (2) Inform any such office or agency unallocability or unallowability under of the matters under consideration for the specific cost principles at subparts negotiation; and 31.2, 31.3, 31.6, and 31.7, contracting offi- (3) As appropriate, invite the office or cers and contractors should seek ad- agency and the cognizant audit agency vance agreement on the treatment of to participate in prenegotiation discus- special or unusual costs. However, an sions and/or in the subsequent negotia- advance agreement is not an absolute tions. requirement and the absence of an ad- (g) Upon completion of the negotia- vance agreement on any cost will not, tion, the sponsor shall prepare and dis- in itself, affect the reasonableness, tribute to other interested agencies allocability or the allowability under and offices, including the audit agency, the specific cost principles at subparts copies of the executed agreement and a 31.2, 31.3, 31.6, and 31.7 of that cost. memorandum providing the informa- (b) Advance agreements may be nego- tion specified in 15.808, Price negotia- tiated either before or during a con- tion memorandum, as applicable. tract but should be negotiated before (h) Examples of costs for which ad- incurrence of the costs involved. The vance agreements may be particularly agreements must be in writing, exe- important are— cuted by both contracting parties, and (1) Compensation for personal serv- incorporated into applicable current ices, including but not limited to al- and future contracts. An advance lowances for off-site pay, incentive agreement shall contain a statement of pay, location allowances, hardship pay, its applicability and duration. cost of living differential, and termi- (c) The contracting officer is not au- nation of defined benefit pension plans; thorized by this 31.109 to agree to a treatment of costs inconsistent with (2) Use charges for fully depreciated this part. For example, an advance assets; agreement may not provide that, not- (3) Deferred maintenance costs; withstanding 31.205–20, interest is al- (4) Precontract costs; lowable. (5) Independent research and develop- (d) Advance agreements may be nego- ment and bid and proposal costs; tiated with a particular contractor for (6) Royalties and other costs for use a single contract, a group of contracts, of patents; or all the contracts of a contracting of- (7) Selling and distribution costs; fice, an agency, or several agencies. (8) Travel and relocation costs, as re- (e) The cognizant administrative con- lated to special or mass personnel tracting officer (ACO), or other con- movements, as related to travel via

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contractor-owned, -leased, or -char- Subpart 31.2—Contracts With tered aircraft, or as related to maxi- Commercial Organizations mum per diem rates; (9) Costs of idle facilities and idle ca- 31.201 General. pacity; (10) Costs of automatic data process- 31.201–1 Composition of total cost. ing equipment; (a) The total cost of a contract is the (11) Severance pay to employees on sum of the direct and indirect costs al- support service contracts; locable to the contract, incurred or to be incurred, less any allocable credits, (12) Plant reconversion; plus any allocable cost of money pursu- (13) Professional services (e.g., legal, ant to 31.205–10. In ascertaining what accounting, and engineering); constitutes a cost, any generally ac- (14) General and administrative costs cepted method of determining or esti- (e.g., corporate, division, or branch al- mating costs that is equitable and is locations) attributable to the general consistently applied may be used, in- management, supervision, and conduct cluding standard costs properly ad- of the contractor’s business as a whole. justed for applicable variances. See These costs are particularly significant 31.201–2(b) and (c) for Cost Accounting in construction, job-site, architect-en- Standards (CAS) requirements. gineer, facilities, and Government- (b) While the total cost of a contract owned contractor operated (GOCO) includes all costs properly allocable to plant contracts (see 31.203(f)); the contract, the allowable costs to the (15) Costs of construction plant and Government are limited to those allo- equipment (see 31.105(d)). cable costs which are allowable pursu- (16) Costs of public relations and ad- ant to part 31 and applicable agency supplements. vertising; and (17) Training and education costs (see [48 FR 42301, Sept. 19, 1983, as amended at 59 31.205–44(h)). FR 67045, Dec. 28, 1994] [48 FR 42301, Sept. 19, 1983, as amended at 51 31.201–2 Determining allowability. FR 12298, Apr. 9, 1986; 51 FR 27489, July 31, (a) The factors to be considered in de- 1986; 52 FR 9038, Mar. 20, 1987; 52 FR 27806, termining whether a cost is allowable July 24, 1987; 54 FR 34755, Aug. 21, 1989; 59 FR include the following: 67045, Dec. 28, 1994] (1) Reasonableness. (2) Allocability. 31.110 Indirect cost rate certification and penalties on unallowable costs. (3) Standards promulgated by the CAS Board, if applicable; otherwise, (a) Certain contracts require certifi- generally accepted accounting prin- cation of the indirect cost rates pro- ciples and practices appropriate to the posed for progress, billing, or final pay- particular circumstances. ment purposes. See 42.703–2 for admin- (4) Terms of the contract. istrative procedures regarding the cer- (5) Any limitations set forth in this tification provisions and the related subpart. contract clause prescription. (b) Certain cost principles in this (b) If unallowable costs are included subpart incorporate the measurement, in final indirect cost settlement pro- assignment, and allocability rules of posals, penalties may be assessed. See selected CAS and limit the allowability 42.709 for administrative procedures re- of costs to the amounts determined garding the penalty assessment provi- using the criteria in those selected sions and the related contract clause standards. Only those CAS or portions of standards specifically made applica- prescription. ble by the cost principles in this sub- [60 FR 42658, Aug. 16, 1995] part are mandatory unless the contract

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is CAS-covered (see 48 CFR 9903). Busi- (1) Whether it is the type of cost gen- ness units that are not otherwise sub- erally recognized as ordinary and nec- ject to these standards under a CAS essary for the conduct of the contrac- clause are subject to the selected tor’s business or the contract perform- standards only for the purpose of deter- ance; mining allowability of costs on Govern- (2) Generally accepted sound business ment contracts. Including the selected practices, arm’s length bargaining, and standards in the cost principles does Federal and State laws and regula- not subject the business unit to any tions; other CAS rules and regulations. The (3) The contractor’s responsibilities applicability of the CAS rules and reg- to the Government, other customers, ulations is determined by the CAS the owners of the business, employees, clause, if any, in the contract and the and the public at large; and requirements of the standards them- (4) Any significant deviations from selves. the contractor’s established practices. (c) When contractor accounting practices are inconsistent with this subpart [52 FR 19804, May 27, 1987] 31.2, costs resulting from such inconsistent practices shall not be allowed 31.201–4 Determining allocability. in excess of the amount that would A cost is allocable if it is assignable have resulted from using practices con- or chargeable to one or more cost ob- sistent with this subpart. jectives on the basis of relative bene- (d) A contractor is responsible for ac- fits received or other equitable rela- counting for costs appropriately and tionship. Subject to the foregoing, a for maintaining records, including sup- cost is allocable to a Government con- porting documentation, adequate to tract if it— demonstrate that costs claimed have (a) Is incurred specifically for the been incurred, are allocable to the con- contract; tract, and comply with applicable cost (b) Benefits both the contract and principles in this subpart and agency other work, and can be distributed to supplements. The contracting officer them in reasonable proportion to the may disallow all or part of a claimed benefits received; or cost which is inadequately supported. (c) Is necessary to the overall oper- [48 FR 42301, Sept. 19, 1983, as amended at 57 ation of the business, although a direct FR 39590, Aug. 31, 1992; 61 FR 31656, June 20, relationship to any particular cost ob- 1996] jective cannot be shown.

31.201–3 Determining reasonableness. 31.201–5 Credits. (a) A cost is reasonable if, in its na- The applicable portion of any in- ture and amount, it does not exceed come, rebate, allowance, or other cred- that which would be incurred by a pru- it relating to any allowable cost and dent person in the conduct of competi- received by or accruing to the contrac- tive business. Reasonableness of spe- tor shall be credited to the Govern- cific costs must be examined with par- ment either as a cost reduction or by ticular care in connection with firms cash refund. See 31.205–6(j)(4) for rules or their separate divisions that may related to refund or credit to the Gov- not be subject to effective competitive ernment upon termination of an over- restraints. No presumption of reason- funded defined benefit pension plan. ableness shall be attached to the incurrence of costs by a contractor. If an [48 FR 42301, Sept. 19, 1983, as amended at 54 initial review of the facts results in a FR 34755, Aug. 21, 1989] challenge of a specific cost by the contracting officer or the contracting offi- 31.201–6 Accounting for unallowable cer’s representative, the burden of costs. proof shall be upon the contractor to (a) Costs that are expressly unallow- establish that such cost is reasonable. able or mutually agreed to be unallow- (b) What is reasonable depends upon able, including mutually agreed to be a variety of considerations and cir- unallowable directly associated costs, cumstances, including— shall be identified and excluded from

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any billing, claim, or proposal applica- penses are, themselves, unallowable). ble to a Government contract. A di- The time spent in proscribed activities rectly associated cost is any cost which should be compared to total time spent is generated solely as a result of incur- on company activities to determine if ring another cost, and which would not the costs are material. Time spent by have been incurred had the other cost employees outside the normal working not been incurred. When an unallow- hours should not be considered except able cost is incurred, its directly asso- when it is evident that an employee en- ciated costs are also unallowable. gages so frequently in company activi- (b) Costs which specifically become ties during periods outside normal designated as unallowable or as unal- working hours as to indicate that such lowable directly associated costs of un- activities are a part of the employee’s allowable costs as a result of a written regular duties. decision furnished by a contracting of- (3) When a selected item of cost ficer shall be identified if included in under 31.205 provides that directly as- or used in computing any billing, sociated costs be unallowable, it is in- claim, or proposal applicable to a Gov- tended that such directly associated ernment contract. This identification costs be unallowable only if deter- requirement applies also to any costs mined to be material in amount in ac- incurred for the same purpose under cordance with the criteria provided in like circumstances as the costs specifi- paragraphs (e)(1) and (e)(2) above, ex- cally identified as unallowable under cept in those situations where allow- either this paragraph or paragraph (a) ance of any of the directly associated above. costs involved would be considered to (c) The practices for accounting for be contrary to public policy. and presentation of unallowable costs [48 FR 42301, Sept. 19, 1983, as amended at 59 will be those as described in 48 CFR FR 67045, Dec. 28, 1994] 9904.405–50, Accounting for Unallowable Costs. 31.201–7 Construction and architect- (d) If a directly associated cost is in- engineer contracts. cluded in a cost pool which is allocated Specific principles and procedures for over a base that includes the unallow- evaluating and determining costs in able cost with which it is associated, connection with contracts and sub- the directly associated cost shall re- contracts for construction, and archi- main in the cost pool. Since the unal- tect-engineer contracts related to con- lowable costs will attract their alloca- struction projects, are in 31.105. The ble share of costs from the cost pool, applicability of these principles and no further action is required to assure procedures is set forth in 31.000 and disallowance of the directly associated 31.100. costs. In all other cases, the directly associated costs, if material in amount, 31.202 Direct costs. must be purged from the cost pool as (a) A direct cost is any cost that can unallowable costs. be identified specifically with a par- (e)(1) In determining the materiality ticular final cost objective. No final of a directly associated cost, consider- cost objective shall have allocated to it ation should be given to the signifi- as a direct cost any cost, if other costs cance of (i) the actual dollar amount, incurred for the same purpose in like (ii) the cumulative effect of all directly circumstances have been included in associated costs in a cost pool, or (iii) any indirect cost pool to be allocated the ultimate effect on the cost of Gov- to that or any other final cost objec- ernment contracts. tive. Costs identified specifically with (2) Salary expenses of employees who the contract are direct costs of the participate in activities that generate contract and are to be charged directly unallowable costs shall be treated as to the contract. All costs specifically directly associated costs to the extent identified with other final cost objec- of the time spent on the proscribed ac- tives of the contractor are direct costs tivity, provided the costs are material of those cost objectives and are not to in accordance with subparagraph (e)(1) be charged to the contract directly or above (except when such salary ex- indirectly.

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(b) For reasons of practicality, any (c) Once an appropriate base for dis- direct cost of minor dollar amount may tributing indirect costs has been ac- be treated as an indirect cost if the accepted, it shall not be fragmented by counting treatment— removing individual elements. All (1) Is consistently applied to all final items properly includable in an indi- cost objectives; and rect cost base should bear a pro rata (2) Produces substantially the same share of indirect costs irrespective of results as treating the cost as a direct their acceptance as Government con- cost. tract costs. For example, when a cost input base is used for the distribution 31.203 Indirect costs. of G&A costs, all items that would properly be part of the cost input base, (a) An indirect cost is any cost not whether allowable or unallowable, directly identified with a single, final shall be included in the base and bear cost objective, but identified with two their pro rata share of G&A costs. or more final cost objectives or an in- (d) The contractor’s method of allo- termediate cost objective. It is not sub- cating indirect costs shall be in accord- ject to treatment as a direct cost. ance with standards promulgated by After direct costs have been deter- the CAS Board, if applicable to the mined and charged directly to the con- contract; otherwise, the method shall tract or other work, indirect costs are be in accordance with generally accept- those remaining to be allocated to the ed accounting principles which are con- several cost objectives. An indirect sistently applied. The method may re- cost shall not be allocated to a final quire examination when— cost objective if other costs incurred (1) Substantial differences occur be- for the same purpose in like cir- tween the cost patterns of work under cumstances have been included as a di- the contract and the contractor’s other rect cost of that or any other final cost work; objective. (2) Significant changes occur in the (b) Indirect costs shall be accumu- nature of the business, the extent of lated by logical cost groupings with subcontracting, fixed-asset improve- due consideration of the reasons for in- ment programs, inventories, the vol- curring such costs. Each grouping ume of sales and production, manufac- should be determined so as to permit turing processes, the contractor’s prod- distribution of the grouping on the ucts, or other relevant circumstances; basis of the benefits accruing to the or several cost objectives. Commonly, (3) Indirect cost groupings developed manufacturing overhead, selling ex- for a contractor’s primary location are penses, and general and administrative applied to offsite locations. Separate (G&A) expenses are separately grouped. cost groupings for costs allocable to Similarly, the particular case may re- offsite locations may be necessary to quire subdivision of these groupings, permit equitable distribution of costs e.g., building occupancy costs might be on the basis of the benefits accruing to separable from those of personnel ad- the several cost objectives. ministration within the manufacturing (e) A base period for allocating indi- overhead group. This necessitates se- rect costs is the cost accounting period lecting a distribution base common to during which such costs are incurred all cost objectives to which the group- and accumulated for distribution to ing is to be allocated. The base should work performed in that period. The cri- be selected so as to permit allocation teria and guidance in 48 CFR 9904.406 of the grouping on the basis of the ben- for selecting the cost accounting peri- efits accruing to the several cost objec- ods to be used in allocating indirect tives. When substantially the same re- costs are incorporated herein for appli- sults can be achieved through less pre- cation to contracts subject to full CAS cise methods, the number and composi- coverage. For contracts subject to tion of cost groupings should be gov- modified CAS coverage and for non- erned by practical considerations and CAS-covered contracts, the base period should not unduly complicate the allo- for allocating indirect costs will nor- cation. mally be the contractor’s fiscal year.

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But a shorter period may be appro- that it is either allowable or unallow- priate (1) for contracts in which per- able. The determination of allowability formance involves only a minor portion shall be based on the principles and of the fiscal year, or (2) when it is gen- standards in this subpart and the treat- eral practice in the industry to use a ment of similar or related selected shorter period. When a contract is per- items. When more than one subsection formed over an extended period, as in 31.205 is relevant to a contractor many base periods shall be used as are cost, the cost shall be apportioned required to represent the period of con- among the applicable subsections, and tract performance. the determination of allowability of (f) Special care should be exercised in each portion shall be based on the guid- applying the principles of paragraphs ance contained in the applicable sub- (b), (c), and (d) above when Govern- section. When a cost, to which more ment-owned contractor-operated than one subsection in 31.205 is rel- (GOCO) plants are involved. The dis- evant, cannot be apportioned, the de- tribution of corporate, division, or termination of allowability shall be branch office G&A expenses to such based on the guidance contained in the plants operating with little or no de- subsection that most specifically deals pendence on corporate administrative with, or best captures the essential na- activities may require more precise ture of, the cost at issue. cost groupings, detailed accounts screening, and carefully developed dis- [48 FR 42301, Sept. 19, 1983, as amended at 53 tribution bases. FR 17858, May 18, 1988] [48 FR 42301, Sept. 19, 1983, as amended at 57 31.205 Selected costs. FR 39590, Aug. 31, 1992] 31.205–1 Public relations and advertis- 31.204 Application of principles and ing costs. procedures. (a) Costs shall be allowed to the ex- (a) Public relations means all func- tent they are reasonable, allocable, and tions and activities dedicated to— determined to be allowable under (1) Maintaining, protecting, and en- 31.201, 31.202, 31.203, and 31.205. These hancing the image of a concern or its criteria apply to all of the selected products; or items that follow, even if particular (2) Maintaining or promoting recip- guidance is provided for certain items rocal understanding and favorable rela- for emphasis or clarity. tions with the public at large, or any (b) Costs incurred as reimbursements segment of the public. The term public or payments to a subcontractor under relations includes activities associated a cost-reimbursement, fixed-price in- with areas such as advertising, cus- centive, or price redeterminable type tomer relations, etc. subcontract of any tier above the first (b) Advertising means the use of firm-fixed-price subcontract or fixed- media to promote the sale of products price subcontract with economic price or services and to accomplish the ac- adjustment provisions are allowable to tivities referred to in paragraph (d) of the extent that allowance is consistent this subsection, regardless of the me- with the appropriate subpart of this dium employed, when the advertiser part 31 applicable to the subcontract has control over the form and content involved. Costs incurred as payments of what will appear, the media in which under firm-fixed-price subcontracts or it will appear, and when it will appear. fixed-price subcontracts with economic Advertising media include but are not price adjustment provisions or modi- limited to conventions, exhibits, free fications thereto, when cost analysis goods, samples, magazines, newspapers, was performed under 15.805–3, shall be trade papers, direct mail, dealer cards, allowable only to the extent that the window displays, outdoor advertising, price was negotiated in accordance radio, and television. with 31.102. (c) Public relations and advertising (c) Section 31.205 does not cover costs include the costs of media time every element of cost. Failure to in- and space, purchased services per- clude any item of cost does not imply formed by outside organizations, as

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well as the applicable portion of sala- (3) Costs of participation in commu- ries, travel, and fringe benefits of em- nity service activities (e.g., blood bank ployees engaged in the functions and drives, charity drives, savings bond activities identified in paragraphs (a) drives, disaster assistance, etc.). and (b) of this subsection. (4) Costs of plant tours and open (d) The only allowable advertising houses (but see subparagraph (f)(5) of costs are those that are— this subsection). (1) Specifically required by contract, (5) Costs of keel laying, ship launch- or that arise from requirements of Gov- ing, commissioning, and roll-out cere- ernment contracts and that are exclu- monies, to the extent specifically pro- sively for— vided for by contract. (i) Recruiting personnel required for (f) Unallowable public relations and performing contractual obligations, advertising costs include the following: when considered in conjunction with (1) All public relations and advertis- all other recruitment costs (but see ing costs, other than those specified in 31.205–34); paragraphs (d) and (e) of this sub- (ii) Acquiring scarce items for con- section, whose primary purpose is to tract performance; or promote the sale of products or serv- (iii) Disposing of scrap or surplus ma- ices by stimulating interest in a prod- terials acquired for contract performance. uct or product line (except for those costs made allowable under 31.205– (2) Costs of activities to promote sales of products normally sold to the 38(c)), or by disseminating messages U.S. Government, including trade calling favorable attention to the con- shows, which contain a significant ef- tractor for purposes of enhancing the fort to promote exports from the Unit- company image to sell the company’s ed States. Such costs are allowable, products or services. notwithstanding subparagraphs (f) (1) (2) All costs of trade shows and other and (3), subdivision (f)(4)(ii), and sub- special events which do not contain a paragraph (f)(5) of this subsection, sub- significant effort to promote the export ject to the limits contained in 31.205– sales of products normally sold to the 38(c)(2). However, such costs do not in- U.S. Government. clude the costs of memorabilia (e.g., (3) Costs of sponsoring meetings, con- models, gifts, and souvenirs), alcoholic ventions, symposia, seminars, and beverages, entertainment, and physical other special events when the principal facilities which are primarily used for purpose of the event is other than dis- entertainment rather than product semination of technical information or promotion. stimulation of production. (e) Allowable public relations costs (4) Costs of ceremonies such as (i) include the following: corporate celebrations and (ii) new (1) Costs specifically required by con- product announcements. tract. (5) Costs of promotional material, (2) Costs of— motion pictures, videotapes, brochures, (i) Responding to inquiries on com- handouts, magazines, and other media pany policies and activities; that are designed to call favorable at- (ii) Communicating with the public, tention to the contractor and its ac- press, stockholders, creditors, and cus- tivities (but see 31.205–13(a), Employee tomers; and morale, health, welfare, food service, (iii) Conducting general liaison with and dormitory costs and credits; 31.205– news media and Government public re- 21, Labor relations costs; 31.205–43(c), lations officers, to the extent that such Trade, business, technical, and profes- activities are limited to communication and liaison necessary to keep the sional activity costs; and 31.205–44, public informed on matters of public Training and education costs). concern such as notice of contract (6) Costs of souvenirs, models, im- awards, plant closings or openings, em- printed clothing, buttons, and other ployee layoffs or rehires, financial in- mementos provided to customers or the formation, etc. public.

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(7) Costs of memberships in civic and as an option to renew or purchase at a community organizations. bargain rental or price other than that normally given to industry at large) [51 FR 12298, Apr. 9, 1986, as amended at 53 FR 12130, Apr. 12, 1988; 53 FR 13274, Apr. 22, but represent charges only for the cur- 1988; 54 FR 34755, Aug. 21, 1989; 56 FR 15153, rent use of the equipment, including Apr. 15, 1991; 60 FR 42660, Aug. 16, 1995] incidental service costs such as maintenance, insurance, and applicable 31.205–2 Automatic data processing taxes. equipment leasing costs. (iii) The contracting officer’s ap- (a) This subsection applies to all con- proval was obtained for the leasing ar- tractor-leased automatic data process- rangement (see paragraph (d)(3) below) ing equipment (ADPE), as defined in when the total cost of leasing— 31.001 (except as components of an end (A) The ADPE is to be allocated to item to be delivered to the Govern- one or more Government contracts ment), acquired under operating leases, which require negotiating or determin- as defined in Statement of Financial ing costs, or Accounting Standard No. 13 (FAS–13), (B) ADPE in a single plant, division, Accounting for Leases, issued by the or cost center exceeds $500,000 a year Financial Accounting Standards Board. and 50 percent or more of the total Compliance with 31.205–11(m) requires leasing cost is to be allocated to one or that ADPE acquired by means of cap- more Government contracts which re- ital leases, as defined in FAS–13, shall quire negotiating or determining costs. be treated as purchased assets; i.e., be (3) Rental costs under a sale and capitalized and the capitalized value of leaseback arrangement are allowable such assets be distributed over their only up to the amount that would have useful lives as depreciation charges or been allowed had the contractor re- over the leased life as amortization tained title to the ADPE. charges as appropriate. Allowability of (4) Allowable rental costs of ADPE costs related to contractor-owned leased from any division, subsidiary, or ADPE is governed by other require- organization under a common control ments of this subpart. are limited to the cost of ownership (b)(1) If the contractor leases ADPE (excluding interest or other costs unal- but cannot demonstrate, on the basis lowable under this subpart 31.2 and in- of facts existent at the time of the de- cluding the cost of money (see 31.205– cision to lease or continue leasing and 10)). When there is an established prac- documented in accordance with para- tice of leasing the same or similar graph (d) below, that leasing will result equipment to unaffiliated lessees, rent- in less cost to the Government over the al costs shall be allowed in accordance anticipated useful life (see paragraph with paragraphs (b)(1) and (2) above, (c) below), then rental costs are allow- except that the purchase price and able only up to the amount that would costs of ownership shall be determined be allowed had the contractor pur- under 31.205–26(e). chased the ADPE. (c)(1) An estimate of the anticipated (2) The costs of leasing ADPE are al- useful life of the ADPE may represent lowable only to the extent that the the application life (utility in a given contractor can annually demonstrate function), technological life (utility be- in accordance with paragraph (d) below fore becoming obsolete in whole or in (whether or not the term of lease is re- part), or physical life (utility before newed or otherwise extended) that wearing out) depending upon the facts these costs meet the following criteria: and circumstances and the particular (i) The costs are reasonable and nec- facilities involved. Each case must be essary for the conduct of the contrac- evaluated individually. In estimating tor’s business in light of factors such anticipated useful life, the contractor as the contractor’s requirements for may use the application life if it can be ADPE, costs of comparable facilities, demonstrated that the ADPE has util- the various types of leases available, ity only in a given function and the du- and the terms of the rental agreement. ration of the function can be deter- (ii) The costs do not give rise to a mined. Technological life may be used material equity in the facilities (such if the contractor can demonstrate that

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existing ADPE must be replaced be- change existing ADPE capability and cause of— the need to continue leasing shall con- (i) Specific program objectives or sist of current data as specified in subcontract requirements that cannot be divisions (d)(1)(i) through (iii) above. accomplished with the existing ADPE; (3) If the contractor’s prospective (ii) Cost reductions that will produce ADPE lease cost meets the threshold in identifiable savings in production or 31.205–2(b)(2)(iii) above, the contractor overhead costs; shall furnish data supporting the ini- (iii) Increase in workload volume tial decision to lease (see paragraph that cannot be accomplished effi- (b)(1) above). If the total cost of leasing ciently by modifying or augmenting ADPE in a single plant, division, or existing ADPE; or cost center exceeds $500,000 per year (iv) Consistent pattern of capacity and 50 percent or more of the total operation (2 1⁄2–3 shifts) on existing leasing cost is allocated to Government ADPE. contracts which require negotiating or (2) Technological advances will not determining costs, the contractor shall justify replacing existing ADPE before furnish data supporting the annual jus- the end of its physical life if it will be tification for retaining or changing ex- able to satisfy future requirements or isting ADPE capability and the need to demands. continue leasing shall also be furnished (3) In estimating the least cost to the (see paragraph (b)(2) above). Government for useful life, the cumulative costs that would be allowed if 31.205–3 Bad debts. the contractor owned the ADPE should Bad debts, including actual or esti- be compared with cumulative costs mated losses arising from uncollectible that would be allowed under any of the accounts receivable due from cus- various types of leasing arrangements tomers and other claims, and any di- available. For the purpose of this com- rectly associated costs such as collec- parison, the costs of ADPE exclude in- tion costs, and legal costs are unallow- terest or other unallowable costs pur- able. suant to this subpart 31.2; they include but are not limited to the costs of oper- 31.205–4 Bonding costs. ation, maintenance, insurance, depre- (a) Bonding costs arise when the Gov- ciation, facilities capital cost of ernment requires assurance against fi- money, rental, and the cost of machine nancial loss to itself or others by rea- services, as applicable. son of the act or default of the contrac- (d) (1) Except as provided in para- tor. They arise also in instances where graph (3) below, the contractor’s jus- the contractor requires similar assur- tification, under paragraph (b) above, ance. Included are such bonds as bid, of the leasing decisions shall consist of performance, payment, advance pay- the following supporting data, prepared ment, infringement, and fidelity bonds. before acquisition: (b) Costs of bonding required pursu- (i) Analysis of use of existing ADPE. ant to the terms of the contract are al- (ii) Application of the criteria in lowable. paragraph (b) above. (c) Costs of bonding required by the (iii) Specific objectives or require- contractor in the general conduct of its ments, generally in the form of a data business are allowable to the extent system study and specification. that such bonding is in accordance (iv) Solicitation of proposals, based with sound business practice and the on the data system specification, from rates and premiums are reasonable qualified sources. under the circumstances. (v) Proposals received in response to the solicitation and reasons for select- 31.205–5 Civil defense costs. ing the equipment chosen and for the (a) Civil defense costs are those in- decision to lease. curred in planning for, and protecting (2) Except as provided in paragraph life and property against, the possible (3) below, the contractor’s annual jus- effects of enemy attack. Costs of civil tification, under paragraph (b)(2) defense measures (including costs in above, of the decision to retain or excess of normal plant protection

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costs, first-aid training and supplies, (3) The compensation must be based fire fighting training and equipment, upon and conform to the terms and posting of additional exit notices and conditions of the contractor’s estab- directions, and other approved civil de- lished compensation plan or practice fense measures) undertaken on the con- followed so consistently as to imply, in tractor’s premises pursuant to sugges- effect, an agreement to make the pay- tions or requirements of civil defense ment. authorities are allowable when allo- (4) No presumption of allowability cated to all work of the contractor. will exist where the contractor intro- (b) Costs of capital assets acquired duces major revisions of existing com- for civil defense purposes are allowable pensation plans or new plans and the through depreciation (see 31.205–11). contractor— (c) Contributions to local civil de- (i) Has not notified the cognizant fense funds and projects are unallow- ACO of the changes either before their able. implementation or within a reasonable period after their implementation, and 31.205–6 Compensation for personal services. (ii) Has not provided the Govern- ment, either before implementation or (a) General. Compensation for per- within a reasonable period after it, an sonal services includes all remunera- opportunity to review the allowability tion paid currently or accrued, in of the changes. whatever form and whether paid immediately or deferred, for services ren- (5) Costs that are unallowable under dered by employees to the contractor other paragraphs of this subpart 31.2 during the period of contract perform- shall not be allowable under this sub- ance (except as otherwise provided for section 31.205–6 solely on the basis that in other paragraphs of this subsection). they constitute compensation for per- It includes, but is not limited to, sala- sonal services. ries; wages; directors’ and executive (b) Reasonableness. The compensation committee members’ fees; bonuses (infor personal services paid or accrued to cluding stock bonuses); incentive each employee must be reasonable for awards; employee stock options, and the work performed. Compensation will stock appreciation rights; employee be considered reasonable if each of the stock ownership plans; employee insur- allowable elements making up the em- ance; fringe benefits; contributions to ployee’s compensation package is rea- pension, other postretirement benefits, sonable. This paragraph addresses the annuity, and employee incentive com- reasonableness of compensation, except pensation plans; and allowances for off- when the compensation is set by provi- site pay, incentive pay, location allow- sions of a labor-management agree- ances, hardship pay, severance pay, and ment under terms of the Federal Labor cost of living differential. Compensa- Relations Act or similar state statutes. tion for personal services is allowable The tests for reasonableness of labor- subject to the following general cri- management agreements are set forth teria and additional requirements con- in paragraph (c) of this subsection. In tained in other parts of this cost prin- addition to the provisions of 31.201–3, in ciple: testing the reasonableness of individ- (1) Compensation for personal serv- ual elements for particular employees ices must be for work performed by the or job classes of employees, consider- employee in the current year and must ation should be given to factors deter- not represent a retroactive adjustment mined to be relevant by the contract- of prior years’ salaries or wages (but ing officer. see 31.205–6 (g), (h), (j), (k), (m), and (o) of this subsection). (1) Among others, factors which may be relevant include general conformity (2) The compensation in total must be reasonable for the work performed; with the compensation practices of however, specific restrictions on indi- other firms of the same size, the com- vidual compensation elements must be pensation practices of other firms in observed where they are prescribed. the same industry, the compensation

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practices of firms in the same geo- (D) Pension and savings plan bene- graphic area, the compensation prac- fits. tices of firms engaged in predomi- (E) Health insurance benefits. nantly non-Government work, and the (F) Life insurance benefits. cost of comparable services obtainable (G) Compensated personal absence from outside sources. The appropriate benefits. However, any of the above ele- factors for evaluating the reasonable- ments or portions thereof, whose ness of compensation depend on the de- amount is not measurable, shall not be gree to which those factors are rep- introduced or considered as an offset resentative of the labor market for the item. job being evaluated. The relative sig- (iii) In considering offsets, the mag- nificance of factors will vary according nitude of the compensation elements in to circumstances. In administering this question must be taken into account. principle, it is recognized that not In determining the magnitude of com- every compensation case need be sub- pensation elements, the timing of rejected in detail to the tests described ceipt by the employee must be consid- in this cost principle. The tests need be ered. applied only when a general review re- (2) Compensation costs under certain veals amounts or types of compensa- conditions give rise to the need for spe- tion that appear unreasonable or un- cial consideration. Among such condi- justified. Based on an initial review of tions are the following: the facts, contracting officers or their (i) Compensation to (A) owners of representatives may challenge the rea- closely held corporations, partners, sonableness of any individual element sole proprietors, or members of their or the sum of the individual elements immediate families, or (B) persons who of compensation paid or accrued to par- are contractually committed to ac- ticular employees or job classes of em- quire a substantial financial interest in ployees. In such cases, there is no pre- the contractor’s enterprise. Determina- sumption of reasonableness and, upon tion should be made that salaries are challenge, the contractor must dem- reasonable for the personal services onstrate the reasonableness of the rendered rather than being a distribu- compensation item in question. In tion of profits. Compensation in lieu of doing so, the contractor may intro- salary for services rendered by partners duce, and the contracting officer will and sole proprietors will be allowed to consider, not only any circumstances the extent that it is reasonable and surrounding the compensation item does not constitute a distribution of challenged, but also the magnitude of profits. For closely held corporations, other compensation elements which compensation costs covered by this may be lower than would be considered subdivision shall not be recognized in reasonable in themselves. However, the amounts exceeding those costs that are contractor’s right to introduce offset- deductible as compensation under the Internal Revenue Code and regulations ting compensation elements into con- under it. sideration is subject to the following (ii) Any change in a contractor’s limitations: compensation policy that results in a (i) Offsets will be considered only be- substantial increase in the contractor’s tween the allowable elements of an em- level of compensation, particularly ployee’s (or a job class of employees’) when it was concurrent with an in- compensation package or between the crease in the ratio of Government con- compensation packages of employees tracts to other business, or any change in jobs within the same job grade or in the treatment of allowability of spe- level. cific types of compensation due to (ii) Offsets will be considered only be- changes in Government policy. Con- tween the allowable portion of the fol- tracting officers or their representa- lowing compensation elements of em- tives should normally challenge in- ployees or job classes of employees: creased costs where major revisions of (A) Wages and salaries. existng compensation plans or new (B) Incentive bonuses. plans are introduced by the contractor, (C) Deferred compensation. and the contractor—

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(A) Has not notified the cognizant pear unreasonable is required to at- ACO of the changes either before their tract and hold necessary personnel. implementation or within a reasonable (d) Form of payment. (1) Compensation period after their implementation; and for personal services includes com- (B) Has not provided the Govern- pensation paid or to be paid in the fu- ment, either before implementation or ture to employees in the form of cash, within a reasonable period after it, an corporate securities, such as stocks, opportunity to review the reasonable- bonds, and other financial instruments ness of the changes. (see paragraph (d)(2) of this subsection (iii) The contractor’s business is such regarding valuation), or other assets, that its compensation levels are not products, or services. subject to the restraints that normally (2) When compensation is paid with occur in the conduct of competitive securities of the contractor or of an af- business. filiate, the following additional restric- (iv) The contractor incurs costs for tions apply: compensation in excess of the amounts (i) Valuation placed on the securities which are deductible under the Inter- shall be the fair market value on the nal Revenue Code and regulations is- measurement date (i.e., the first date sued under it. the number of shares awarded is (c) Labor-management agreements. If known) determined upon the most ob- costs of compensation established jective basis available. under ‘‘arm’s length’’ negotiated labor- (ii) Accruals for the cost of securities management agreements are otherwise before issuing the securities to the em- allowable, the costs are reasonable if, ployees shall be subject to adjustment as applied to work in performing Gov- according to the possibilities that the ernment contracts, they are not deter- employees will not receive the securi- mined to be unwarranted by the char- ties and that their interest in the ac- acter and circumstances of the work or cruals will be forfeited. discriminatory against the Govern- (e) Domestic and foreign differential ment. The application of the provisions pay. (1) When personal services are per- of a labor-management agreement de- formed in a foreign country, compensa- signed to apply to a given set of cir- tion may also include a differential cumstances and conditions of employ- that may properly consider all ex- ment (e.g, work involving extremely penses associated with foreign employ- hazardous activities or work not re- ment such as housing, cost of living ad- quiring recurrent use of overtime) is justments, transportation, bonuses, ad- unwarranted when applied to a Govern- ditional Federal, State, local or foreign ment contract involving significantly income taxes resulting from foreign as- different circumstances and conditions signment, and other related expenses. of employment (e.g., work involving (2) Although the additional taxes in less hazardous activities or work con- paragraph (1) above may be considered tinually requiring use of overtime). It in establishing foreign overseas dif- is discriminatory against the Govern- ferential, any increased compensation ment if it results in employee com- calculated directly on the basis of an pensation (in whatever form or name) employee’s specific increase in income in excess of that being paid for similar taxes is unallowable. Differential al- non-Government work under com- lowances for additional Federal, State, parable circumstances. Disallowance of or local income taxes resulting from costs will not be made under this para- domestic assignments are unallowable. graph (c) unless— (f) Bonuses and incentive compensation. (1) The contractor has been per- (1) Incentive compensation for manage- mitted an opportunity to justify the ment employees, cash bonuses, sugges- costs; and tion awards, safety awards, and incen- (2) Due consideration has been given tive compensation based on production, to whether unusual conditions pertain cost reduction, or efficient perform- to Government contract work, impos- ance are allowable provided the awards ing burdens, hardships, or hazards on are paid or accrued under an agreement the contractor’s employees, for which entered into in good faith between the compensation that might otherwise ap- contractor and the employees before

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the services are rendered or pursuant amounts accrued are allocated to all to an established plan or policy fol- work performed in the contractor’s lowed by the contractor so consistently plant. as to imply, in effect, an agreement to (iii) Abnormal or mass severance pay make such payment and the basis for is of such a conjectural nature that the award is supported. measurement of costs by means of an (2) When the bonus and incentive accrual will not achieve equity to both compensation payments are deferred, parties. Thus, accruals for this purpose the costs are subject to the require- are not allowable. However, the Gov- ments of paragraph (f)(1) above and of ernment recognizes its obligation to paragraph (k) below. participate, to the extent of its fair (g) Severance pay. (1) Severance pay, share, in any specific payment. Thus, also commonly referred to as dismissal allowability will be considered on a wages, is a payment in addition to reg- case-by-case basis. ular salaries and wages by contractors (3) Notwithstanding the reference to to workers whose employment is being geographical area in 31.205–6(b)(1), involuntarily terminated. Payments under 10 U.S.C. 2324(e)(1)(M) and 41 for early retirement incentive plans U.S.C. 256(e)(1)(M), the costs of sever- are covered in paragraph (j)(6) below. ance payments to foreign nationals em- (2) Severance pay to be allowable ployed under a service contract per- must meet the general allowability cri- formed outside the United States are teria in subdivision (g)(2)(i) below, and, unallowable to the extent that such depending upon whether the severance payments exceed amounts typically is normal or abnormal, criteria in sub- paid to employees providing similar division (g)(2)(ii) for normal severance services in the same industry in the pay or subdivision (g)(2)(iii) for abnor- United States. Further, under 10 U.S.C. mal severance pay also apply. In addi- 2324(e)(1)(N) and 41 U.S.C. 256(e)(1)(N), tion, paragraph (g)(3) of this subsection all such costs of severance payments applies if the severance cost is for for- which are otherwise allowable are un- eign nationals employed outside the allowable if the termination of employ- United States. ment of the foreign national is the re- (i) Severance pay is allowable only to sult of the closing of, or the curtail- the extent that, in each case, it is re- ment of activities at, a United States quired by (A) law; (B) employer-em- facility in that country at the request ployee agreement; (C) established pol- of the government of that country; this icy that constitutes, in effect, an im- does not apply if the closing of a facil- plied agreement on the contractor’s ity or curtailment of activities is made part; or (D) circumstances of the par- pursuant to a status-of-forces or other ticular employment. Payments made country-to-country agreement entered in the event of employment with a re- into with the government of that coun- placement contractor where continuity try before November 29, 1989. 10 U.S.C. of employment with credit for prior 2324(e)(3) and 41 U.S.C. 256(e)(2) permit length of service is preserved under the head of the agency, or designee, to substantially equal conditions of em- waive these cost allowability limita- ployment, or continued employment by tions under certain circumstances (see the contractor at another facility, sub- 37.113 and the solicitation provision at sidiary, affiliate, or parent company of 52.237–8). the contractor are not severance pay (h) Backpay. (1) Backpay resulting and are unallowable. from violations of Federal labor laws or (ii) Actual normal turnover sever- the Civil Rights Act of 1964. Backpay ance payments shall be allocated to all may result from a negotiated settle- work performed in the contractor’s ment, order, or court decree that re- plant, or where the contractor provides solves a violation of Federal labor laws for accrual of pay for normal or the Civil Rights Act of 1964. Such severances, that method will be accept- backpay falls into two categories: one able if the amount of the accrual is requiring the contractor to pay em- reasonable in light of payments actu- ployees additional compensation for ally made for normal severances over a work performed for which they were representative past period and if underpaid, and the other resulting

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from other violations, such as when the death payments and survivorship pay- employee was improperly discharged, ments to beneficiaries of deceased em- discriminated against, or other cir- ployees may be treated as pension cumstances for which the backpay was costs, provided the benefits are an inte- not additional compensation for work gral part of the pension plan and meet performed. Backpay resulting from un- all the criteria pertaining to pension derpaid work is compensation for the costs. work performed and is allowable. All (2) Pension plans are normally seg- other backpay resulting from violation regated into two types of plans: defined of Federal labor laws or the Civil benefit or defined contribution pension Rights Act of 1964 is unallowable. plans. The cost of all defined benefit (2) Other backpay. Backpay may also pension plans shall be measured, allo- result from payments to union employ- cated, and accounted for in compliance ees (union and non-union) for the dif- with the provisions of 48 CFR 9904.412, ference in their past and current wage Composition and Measurement of Pen- rates for working without a contract or sion Costs, and 48 CFR 9904.413, Adjust- labor agreement during labor management and Allocation of Pension Cost. ment negotiations. Such backpay is al- The costs of all defined contribution lowable. Backpay to nonunion employ- pension plans shall be measured, allo- ees based upon results of union agree- cated, and accounted for in accordance ment negotiations is allowable only if with the provisions of 48 CFR 9904.412. (i) a formal agreement or understand- Pension costs are allowable subject to ing exists between management and the referenced standards and the cost the employees concerning these pay- limitations and exclusions set forth in ments, or (ii) an established policy or subdivision (j)(2)(i) and in subpara- practice exists and is followed by the graphs (j) (3) through (8) of this subcontractor so consistently as to imply, section. in effect, an agreement to make such (i) Except for unfunded pension plans payment. as defined in 31.001, to be allowable in (i) Compensation based on changes in the current year, pension costs must be the prices of corporate securities or funded by the time set for filing the corporate security ownership, such as Federal income tax return or any ex- stock options, stock appreciation tension thereof. Pension costs assigned rights, phantom stock plans, and jun- to the current year, but not funded by ior stock conversions. the tax return time, shall not be allow- (1) Any compensation which is cal- able in any subsequent year. culated, or valued, based on changes in (ii) Pension payments must be rea- the price of corporate securities is un- sonable in amount and be paid pursu- allowable. ant to (A) an agreement entered into in (2) Any compensation represented by good faith between the contractor and dividend payments or which is cal- employees before the work or services culated based on dividend payments is are performed and (B) the terms and unallowable. conditions of the established plan. The (3) If a contractor pays an employee cost of changes in pension plans which in lieu of the employee receiving or ex- are discriminatory to the Government ercising a right, option, or benefit or are not intended to be applied con- which would have been unallowable sistently for all employees under simi- under this paragraph (i), such pay- lar circumstances in the future are not ments are also unallowable. allowable. (j) Pension costs. (1) A pension plan is (iii) Except as provided for early re- a deferred compensation plan that is tirement benefits in subparagraph (j) established and maintained by one or (7) of this subsection, one-time-only more employers to provide systemati- pension supplements not available to cally for paying benefits to plan par- all participants of the basic plan are ticipants after their retirement, pro- not allowable as pension costs unless vided that the benefits are paid for life the supplemental benefits represent a or are payable for life at the option of separate pension plan and the benefits the employee. Additional benefits such are payable for life at the option of the as permanent and total disability and employee.

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(iv) Increases in payments to pre- (iii) Increased pension costs caused viously retired plan participants cover- by delay in funding beyond 30 days ing cost-of-living adjustments are al- after each quarter of the year to which lowable if paid in accordance with a they are assignable are unallowable. If policy or practice consistently fol- a composite rate is used for allocating lowed. pension costs between the segments of (3) Defined benefit pension plans. This a company and if, because of dif- paragraph covers pension plans in ferences in the timing of the funding which the benefits to be paid or the by the segments, an inequity exists, al- basis for determining such benefits are lowable pension costs for each segment established in advance and the con- will be limited to that particular seg- tributions are intended to provide the ment’s calculation of pension costs as stated benefits. The cost limitations provided for in 48 CFR 9904.413–50(c)(5). and exclusions pertaining to defined Determination of unallowable costs benefit plans are as follows: shall be made in accordance with the (i)(A) Except for unfunded pension actuarial method used in calculating plans as defined in 31.001, normal costs pension costs. of pension plans not funded in the year (iv) Allowability of the cost of in- incurred, and all other components of demnifying the Pension Benefit Guar- pension costs (see 48 CFR 9904.412– anty Corporation (PBGC) under ERISA 40(a)(1)) assignable to the current ac- section 4062 or 4064 arising from termi- counting period but not funded during nating an employee deferred compensa- it, shall not be allowable in subsequent tion plan will be considered on a case- years (except that a payment made to by-case basis; provided that if insur- a fund by the time set for filing the ance was required by the PBGC under Federal income tax return or any ex- ERISA section 4023, it was so obtained tension thereof is considered to have and the indemnification payment is been made during such taxable year). not recoverable under the insurance. However, any part of a pension cost Consideration under the foregoing cir- that is computed for a cost accounting cumstances will be primarily for the period that is deferred pursuant to a purpose of appraising the extent to waiver granted under the provisions of which the indemnification payment is the Employee’s Retirement Income Se- allocable to Government work. If a curity Act of 1974 (ERISA) (see 48 CFR beneficial or other equitable relation- 9904.412–50(c)(3)), will be allowable in ship exists, the Government will par- those future accounting periods in ticipate, despite the requirements of which the funding does occur. The al- 31.205–19(a)(3) and (b), in the indem- lowability of these deferred contribu- nification payment to the extent of its tions will be limited to the amounts that would have been allowed had the fair share. funding occurred in the year the costs (v) Increased pension costs resulting would have been assigned except for from the withdrawal of assets from a the waiver. pension fund and transfer to another (B) Allowable costs for unfunded pen- employee benefit plan fund are unal- sion plans, as defined in 31.001, are lim- lowable except to the extent authorized ited to the amount computed in ac- by an advance agreement. The advance cordance with 48 CFR 9904.412 and 48 agreement shall: CFR 9904.413. (A) State the amount of the Govern- (ii) Any amount paid or funded before ment’s equitable share in the gross the time it becomes assignable and al- amount withdrawn; and lowable shall be applied to future (B) Provide that the Government re- years, in order of time, as if actually ceive a credit equal to the amount of paid and deductible in those years. The the Government’s equitable share of interest earned on such premature the gross withdrawal. If a transfer is funding, based on the valuation rate of made without such an agreement, para- return, may be excluded from future graph (j)(4) of this subsection will years’ computations of pension costs in apply to the transfer as a constructive accordance with 48 CFR 9904.412– withdrawal and receipt of the funds by 50(a)(7). the contractor.

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(4) Termination of defined benefit pen- requirement of the basic pension plan, sion plans. When excess or surplus as- to retire early. These plans normally sets revert to the contractor as a result are not applicable to all participants of of termination of a defined benefit pen- the basic plan and do not represent life sion plan, or such assets are construc- income settlements, and as such would tively received by it for any reason, the not qualify as pension costs. However, contractor shall make a refund or give for contract costing purposes, early re- a credit to the Government for its equi- tirement incentive payments are al- table share of the gross amount with- lowable subject to the pension cost cri- drawn. The Government’s equitable teria contained in subdivisions (j)(3)(i) share shall reflect the Government’s through (iv) provided— participation in pension costs through (i) The costs are accounted for and those contracts for which certified (see allocated in accordance with the con- 15.804) cost or pricing data were sub- tractor’s system of accounting for pen- mitted or which are subject to subpart sion costs. 31.2. (ii) The payments are made in ac- (5) Defined contribution pension plans. cordance with the terms and conditions This paragraph covers those pension of the contractor’s plan; plans in which the contributions to be (iii) The plan is applied only to ac- made are established in advance and tive employees. The cost of extending the level of benefits is determined by the plan to employees who retired or the contributions made. It also covers were terminated before the adoption of profit sharing, savings plans, and other the plan is unallowable; and such plans provided the plans fall within the definition of a pension plan in (iv) The total of the incentive pay- paragraph (j)(1) above. ments to any employee may not exceed (i) The pension cost assignable to a the amount of the employee’s annual cost accounting period is the net con- salary for the previous fiscal year be- tribution required to be made for that fore the employee’s retirement. period after taking into account divi- (8) Employee stock ownership plans dends and other credits, where applica- (ESOP) (i) An ESOP is an individual ble. However, any portion of pension stock bonus plan designed specifically cost computed for a cost accounting to invest in the stock of the employer period that is deferred pursuant to a corporation. The contractor’s contribu- waiver granted under the provisions of tions to an Employee Stock Ownership ERISA (see 48 CFR 9904.412–50(c)(3)) Trust (ESOT) may be in the form of will be allowable in those future ac- cash, stock, or property. Costs of counting periods when the funding does ESOP’s are allowable subject to the occur. The allowability of these de- following conditions: ferred contributions will be limited to (A) Contributions by the contractor the amounts that would have been al- in any one year may not exceed 15 per- lowed had the funding been made in the cent (25 percent when a money pur- year the costs would have been as- chase plan is included) of salaries and signed except for the waiver. wages of employees participating in (ii) Any amount paid or funded to the the plan in any particular year. trust before the time it becomes as- (B) The contribution rate (ratio of signable and allowable shall be applied contribution to salaries and wages of to future years, in order of time, as if participating employees) may not ex- actually paid and deductible in such ceed the last approved contribution years. rate except when approved by the con- (iii) The provisions of subdivision tracting officer based upon justifica- (j)(3)(iv) above concerning payments to tion provided by the contractor. When PBGC apply to defined contribution no contribution was made in the pre- plans. vious year for an existing ESOP, or (6) [Reserved] when a new ESOP is first established, (7) Early retirement incentive plans. An and the contractor proposes to make a early retirement incentive plan is a contribution in the current year, the plan under which employees receive a contribution rate shall be subject to bonus or incentive, over and above the the contracting officer’s approval.

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(C) When a plan or agreement exists roll-based tax credit (see Economic Re- wherein the liability for the contribu- covery Tax Act of 1981) are unallow- tion can be compelled for a specific able. year, the expense associated with that (iii) The requirements of subdivision liability is assignable only to that pe- (j)(3)(ii) above are applicable to Em- riod. Any portion of the contribution ployee Stock Ownership Plans. not funded by the time set for filing of (k) Deferred compensation. (1) Deferred the Federal income tax return for that compensation is an award given by an year or any extension thereof shall not employer to compensate an employee be allowable in subsequent years. in a future cost accounting period or (D) When a plan or agreement exists periods for services rendered in one or wherein the liability for the contribu- more cost accounting periods before tion cannot be compelled, the amount the date of receipt of compensation by contributed for any year is assignable the employee. Deferred compensation to that year provided the amount is does not include the amount of year- funded by the time set for filing of the end accruals for salaries, wages, or bo- Federal income tax return for that nuses that are paid within a reasonable year. period of time after the end of a cost (E) When the contribution is in the accounting period. Subject to 31.205– form of stock, the value of the stock 6(a), deferred awards are allowable contribution shall be limited to the when they are based on current or fu- fair market value of the stock on the ture services. Awards made in periods date that title is effectively trans- subsequent to the period when the ferred to the trust. Cash contributions work being remunerated was performed shall be allowable only when the con- are not allowable. tractor furnishes evidence satisfactory (2) The costs of deferred awards shall to the contracting officer demonstrat- be measured, allocated, and accounted ing that stock purchases by the ESOT for in compliance with the provisions are or will be at a fair market price; of 48 CFR 9904.415, Accounting for the e.g., makes arrangements with the trust permitting the contracting offi- Cost of Deferred Compensation. cer to examine purchases of stock by (3) Deferred compensation payments the trust to determine that prices paid to employees under awards made before are at fair market value. When exces- the effective date of 48 CFR 9904.415 are sive prices are paid, the amount of the allowable to the extent they would excess will be credited to the same in- have been allowable under prior acqui- direct cost pools that were charged for sition regulations. the ESOP contributions in the year in (l) Compensation incidental to business which the stock purchase occurs. How- acquisitions. The following costs are un- ever, when the trust purchases the allowable: stock with borrowed funds which will (1) Payments to employees under be repaid over a period of years by cash agreements in which they receive spe- contributions from the contractor to cial compensation, in excess of the con- the trust, the excess price over fair tractor’s normal severance pay prac- market value shall be credited to the tice, if their employment terminates indirect cost pools pro rata over the pe- following a change in the management riod of years during which the contrac- control over, or ownership of, the con- tor contributes the cash used by the tractor or a substantial portion of its trust to repay the loan. When the fair assets. market value of unissued stock or (2) Payments to employees under stock of a closely held corporation is plans introduced in connection with a not readily determinable, the valuation change (whether actual or prospective) will be made on a case-by-case basis in the management control over, or taking into consideration the guide- ownership of, the contractor or a sub- lines for valuation used by the IRS. stantial portion of its assets in which (ii) Amounts contributed to an ESOP those employees receive special com- arising from either (A) an additional pensation, which is contingent upon investment tax credit (see 1975 Tax Re- the employee remaining with the con- duction Act—TRASOP’s); or (B) a pay- tractor for a specified period of time.

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(m) Fringe benefits. (1) Fringe benefits not accrue PRB costs during the work- are allowances and services provided by ing lives of employees. Instead, it ac- the contractor to its employees as crues and pays the entire PRB liability compensation in addition to regular to an insurer or trustee in a lump sum wages and salaries. Fringe benefits in- upon the termination of employees (or clude, but are not limited to, the cost upon conversion to such a terminal- of vacations, sick leave, holidays, mili- funded plan) to establish and maintain tary leave, employee insurance, and a fund or reserve for the sole purpose of supplemental unemployment benefit providing PRB to retirees. The lump plans. Except as provided otherwise in sum is allowable if amortized over a subpart 31.2, the costs of fringe benefit period of 15 years. are allowable to the extent that they (iii) Accrual basis. Accrual costing are reasonable and are required by law, other than terminal funding must be employer-employee agreement, or an measured and assigned according to established policy of the contractor. Generally Accepted Accounting Prin- (2) That portion of the cost of com- ciples and be paid to an insurer or pany-furnished automobiles that re- trustee to establish and maintain a lates to personal use by employees (in- fund or reserve for the sole purpose of cluding transportation to and from providing PRB to retirees. The accrual work) is unallowable regardless of must also be calculated in accordance whether the cost is reported as taxable with generally accepted actuarial prin- income to the employees (see 31.205– ciples and practices as promulgated by 46(f)). the Actuarial Standards Board. (n) Employee rebate and purchase dis- (3) To be allowable, costs must be count plans. Rebates and purchase dis- funded by the time set for filing the counts, in whatever form, granted to Federal income tax return or any ex- employees on products or services pro- tension thereof. PRB costs assigned to duced by the contractor or affiliates the current year, but not funded or are unallowable. otherwise liquidated by the tax return (o) Postretirement benefits other than time, shall not be allowable in any sub- pensions (PRB). (1) PRB covers all bene- sequent year. fits, other than cash benefits and life insurance benefits paid by pension (4) Increased PRB costs caused by plans, provided to employees, their delay in funding beyond 30 days after beneficiaries, and covered dependents each quarter of the year to which they during the period following the em- are assignable are unallowable. ployees’ retirement. Benefits encom- (5) Costs of postretirement benefits passed include, but are not limited to, in paragraph (o)(2)(iii) of this section postretirement health care; life insur- attributable to past service (‘‘transi- ance provided outside a pension plan; tion obligation’’) as defined in Finan- and other welfare benefits such as tui- cial Accounting Standards Board tion assistance, day care, legal serv- Statement 106, paragraph 110, are al- ices, and housing subsidies provided lowable subject to the following limita- after retirement. tion: The allowable amount of such (2) To be allowable, PRB costs must costs assignable to a contractor fiscal be reasonable and incurred pursuant to year cannot exceed the amount of such law, employer-employee agreement, or costs which would be assigned to that an established policy of the contractor. contractor fiscal year under the de- In addition, to be allowable, PRB costs layed recognition methodology de- must also be calculated in accordance scribed in paragraphs 112 and 113 of with paragraphs (o)(2)(i), (ii), or (iii) of Statement 106. this section. (6) The Government shall receive an (i) Cash basis. Cost recognized as ben- equitable share of any amount of pre- efits when they are actually provided, viously funded PRB costs which revert must be paid to an insurer, provider, or or inure to the contractor. Such equi- other recipient for current year bene- table share shall reflect the Govern- fits or premiums. ment’s previous participation in PRB (ii) Terminal funding. If a contractor costs through those contracts for elects a terminal-funded plan, it does which certified cost or pricing data

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were required or which were subject to 31.205–8 Contributions or donations. subpart 31.2. Contributions or donations, including [48 FR 42301, Sept. 19, 1983, as amended at 51 cash, property and services, regardless FR 12299, Apr. 9, 1986; 51 FR 31426, Sept. 3, of recipient, are unallowable, except as 1986; 52 FR 19804, May 27, 1987; 53 FR 10830, provided in 31.205–1(e)(3). Apr. 1, 1988; 53 FR 34228, Sept. 2, 1988; 54 FR 13024, Mar. 29, 1989; 54 FR 34755, Aug. 21, 1989; [51 FR 12300, Apr. 9, 1986] 54 FR 18507, May 1, 1989; 54 FR 51401, Dec. 15, 1989; 56 FR 29127, June 25, 1991; 56 FR 41739, 31.205–9 [Reserved] Aug. 22, 1991; 57 FR 39590, 39591, Aug. 31, 1992; 57 FR 60584, Dec. 21, 1992; 59 FR 67046, Dec. 28, 31.205–10 Cost of money. 1994; 60 FR 42660, Aug. 16, 1995; 61 FR 39217, July 26, 1996] (a) Facilities capital cost of money—(1) General. (i) Facilities capital cost of 31.205–7 Contingencies. money (cost of capital committed to (a) Contingency, as used in this sub- facilities) is an imputed cost deter- part, means a possible future event or mined by applying a cost-of-money condition arising from presently rate to facilities capital employed in known or unknown causes, the out- contract performance. A cost-of-money come of which is indeterminable at the rate is uniformly imputed to all con- present time. tractors (see subdivision (ii) below). (b) Costs for contingencies are gen- Capital employed is determined with- erally unallowable for historical cost- out regard to whether its source is eq- ing purposes because such costing deals uity or borrowed capital. The resulting with costs incurred and recorded on the cost of money is not a form of interest contractor’s books. However, in some on borrowings (see 31.205–20). cases, as for example, terminations, a (ii) 48 CFR 9904.414, Cost of Money as contingency factor may be recognized an Element of the Cost of Facilities when it is applicable to a past period to Capital, establishes criteria for meas- give recognition to minor unsettled uring and allocating, as an element of factors in the interest of expediting contract cost, the cost of capital com- settlement. mitted to facilities. Cost-of-money fac- (c) In connection with estimates of tors are developed on Form CASB– future costs, contingencies fall into CMF, broken down by overhead pool at two categories: the business unit, using (A) business- (1) Those that may arise from pres- unit facilities capital data, (B) over- ently known and existing conditions, head allocation base data, and (C) the the effects of which are foreseeable within reasonable limits of accuracy; cost-of-money rate, which is based on e.g., anticipated costs of rejects and de- interest rates specified by the Sec- fective work. Contingencies of this cat- retary of the Treasury under Pub. L. egory are to be included in the esti- 92–41. mates of future costs so as to provide (2) Allowability. Whether or not the the best estimate of performance cost. contract is otherwise subject to CAS, (2) Those that may arise from pres- facilities capital cost of money is al- ently known or unknown conditions, lowable if— the effect of which cannot be measured (i) The contractor’s capital invest- so precisely as to provide equitable re- ment is measured, allocated to con- sults to the contractor and to the Gov- tracts, and costed in accordance with ernment; e.g., results of pending litiga- 48 CFR 9904.414; tion. Contingencies of this category are (ii) The contractor maintains ade- to be excluded from cost estimates quate records to demonstrate compli- under the several items of cost, but ance with this standard; should be disclosed separately (includ- (iii) The estimated facilities capital ing the basis upon which the contin- cost of money is specifically identified gency is computed) to facilitate the ne- or proposed in cost proposals relating gotiation of appropriate contractual to the contract under which this cost is coverage. (See, for example, 31.205–6(g), to be claimed; and 31.205–19, and 31.205–24.)

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(iv) The requirements of 31.205–52, (B) The contractor maintains ade- which limit the allowability of facili- quate records to demonstrate compli- ties capital cost of money, are ob- ance with this standard; served. (C) The cost of money for tangible (3) Accounting. The facilities capital capital assets is included in the cap- cost of money need not be entered on italized cost that provides the basis for the contractor’s books of account. allowable depreciation costs, or, in the However, the contractor shall (i) make case of intangible capital assets, the a memorandum entry of the cost and cost of money is included in the cost of (ii) maintain, in a manner that permits those assets for which amortization audit and verification, all relevant costs are allowable; and schedules, cost data, and other data (D) The requirements of 31.205–52, necessary to support the entry fully. which limit the allowability of cost of (4) Payment. Facilities capital cost of money for capital assets under con- money that is (i) allowable under para- struction, fabrication, or development, graph (2) above, and (ii) calculated, al- are observed. located, and documented in accordance (ii) Actual interest cost in lieu of the with this cost principle shall be an in- calculated imputed cost of money for curred cost for reimbursement purposes capital assets under construction, fab- under applicable cost-reimbursement rication, or development is unallow- contracts and for progress payment able. purposes under fixed-price contracts. (3) Accounting. The cost of money for (5) The cost of money resulting from capital assets under construction need including asset valuations resulting not be entered on the contractor’s from business combinations in the fa- books of account. However, the con- cilities capital employed base is unal- tractor shall (i) make a memorandum lowable (see 31.205–52). entry of the cost and (ii) maintain, in (b) Cost of money as an element of the a manner that permits audit and ver- cost of capital assets under construction— ification, all relevant schedules, cost (1) General. (i) Cost of money as an ele- data, and other data necessary to sup- ment of the cost of capital assets under port the entry fully. construction is an imputed cost deter- (4) Payment. The cost of money for mined by applying a cost-of-money capital assets under construction that rate to the investment in tangible and is allowable under paragraph (2) above intangible capital assets while they are of this cost principle shall be an in- being constructed, fabricated, or devel- curred cost for reimbursement purposes oped for a contractor’s own use. Cap- under applicable cost-reimbursement ital employed is determined without contracts and for progress payment regard to whether its source is equity purposes under fixed-price contracts. or borrowed capital. The resulting cost [48 FR 42301, Sept. 19, 1983, as amended at 49 of money is not a form of interest on FR 26743, June 29, 1984; 52 FR 35669, Sept. 22, borrowing (see 31.205–20). 1987; 55 FR 25530, June 21, 1990; 56 FR 29128, (ii) 48 CFR 9904.417, Cost of Money as June 25, 1991; 57 FR 39591, Aug. 31, 1992] an Element of the Cost of Capital As- sets Under Construction, establishes 31.205–11 Depreciation. criteria for measuring and allocating, (a) Depreciation is a charge to cur- as an element of contract cost, the cost rent operations which distributes the of capital committed to capital assets cost of a tangible capital asset, less es- under construction, fabrication, or de- timated residual value, over the esti- velopment. mated useful life of the asset in a sys- (2) Allowability. (i) Whether or not the tematic and logical manner. It does not contract is otherwise subject to CAS, involve a process of valuation. Useful and except as specified in subdivision life refers to the prospective period of (ii) below, the cost of money for capital economic usefulness in a particular assets under construction, fabrication, contractor’s operations as distin- or development is allowable if— guished from physical life; it is evi- (A) The cost of money is calculated, denced by the actual or estimated re- allocated to contracts, and costed in tirement and replacement practice of accordance with 48 CFR 9904.417; the contractor.

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(b) Contractors having contracts sub- (g) Special considerations are reject to 48 CFR 9904.409, Depreciation of quired for assets acquired before the ef- Tangible Capital Assets, must adhere fective date of this cost principle if, on to the requirement of that standard for that date, the undepreciated balance of all fully CAS-covered contracts and these assets resulting from deprecia- may elect to adopt the standard for all tion policies and procedures used pre- other contracts. All requirements of 48 viously for Government contracts and CFR 9904.409 are applicable if the elec- subcontracts is different from the tion is made, and its requirements su- undepreciated balance on the books persede any conflicting requirements and financial statements. The of this cost principle. Once electing to undepreciated balance for contract adopt 48 CFR 9904.409 for all contracts, cost purposes shall be depreciated over contractors must continue to follow it the remaining life using the methods until notification of final acceptance of and lives followed for book purposes. all deliverable items on all open nego- The aggregate depreciation of any tiated Government contracts. Para- asset allowable after the effective date graphs (c) through (e) below apply to of this 31.205–11 shall not exceed the contracts to which 48 CFR 9904.409 is cost basis of the asset less any depre- not applied. ciation allowed or allowable under (c) Normal depreciation on a contrac- prior acquisition regulations. tor’s plant, equipment, and other cap- (h) Depreciation should usually be al- ital facilities is an allowable contract located to the contract and other work cost, if the contractor is able to dem- as an indirect cost. The amount of de- onstrate that it is reasonable and allo- preciation allowed in any accounting cable (but see paragraph (i) below). period may, consistent with the basic (d) Depreciation shall be considered objectives in paragraph (a) above, vary reasonable if the contractor follows with volume of production or use of policies and procedures that are— multishift operations. (1) Consistent with those followed in (i) In the case of emergency facilities the same cost center for business other covered by certificates of necessity, a than Government; contractor may elect to use normal de- (2) Reflected in the contractor’s preciation without requesting a deter- books of accounts and financial state- mination of true depreciation, or may ments; and elect to use either normal or true depre- (3) Both used and acceptable for Fed- ciation after a determination of true de- eral income tax purposes. preciation has been made by an Emer- (e) When the depreciation reflected gency Facilities Depreciation Board on a contractor’s books of accounts (EFDB). The method elected must be and financial statements differs from followed consistently thoughout the that used and acceptable for Federal life of the emergency facility. When an income tax purposes, reimbursement election is made to use normal depre- shall be based on the asset cost amor- ciation, the criteria in paragraphs (c), tized over the estimated useful life of (d), (e), and (f) above shall apply for the property using depreciation meth- both the emergency period and the ods (straight line, sum of the years’ post-emergency period. When an elec- digits, etc.) acceptable for income tax tion is made to use true depreciation, purposes. Allowable depreciation shall the amount allowable as depreciation— not exceed the amounts used for book (1) With respect to the emergency pe- and statement purposes and shall be riod (five years), shall be computed in determined in a manner consistent accordance with the determination of with the depreciation policies and pro- the EFDB and allocated rateably over cedures followed in the same cost cen- the full five year emergency period; ter on non-Government business (but provided no other allowance is made see paragraph (o) of this subsection). which would duplicate the factors, such (f) Depreciation for reimbursement as extraordinary obsolescence, covered purposes in the case of tax-exempt or- by the Board’s determination; and ganizations shall be determined on the (2) After the end of the emergency pe- basis described in paragraph (e) imme- riod, shall be computed by distributing diately above. the remaining undepreciated portion of

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the cost of the emergency facility over shall govern its application, except as the balance of its useful life provided provided in subparagraphs (1), (2), and the remaining undepreciated portion of (3) below. such cost shall not include any amount (1) Rental costs under a sale and of unrecovered true depreciation. leaseback arrangement shall be allow- (j) No depreciation, rental, or use able up to the amount that would have charge shall be allowed on property ac- been allowed had the contractor required at no cost from the Government tained title to the property. by the contractor or by any division, (2) Capital leases, as defined in FAS– subsidiary, or affiliate of the contrac- 13, for all real and personal property, tor under common control. between any related parties are subject (k) The depreciation on any item to the requirements of this subpara- which meets the criteria for allowance graph 31.205–11(m). If it is determined at a price under 31.205–26(e) may be that the terms of the lease have been based on that price, provided the same significantly affected by the fact that policies and procedures are used for the lessee and lessor are related, depre- costing all business of the using divi- ciation charges shall not be allowed in sion, subsidiary, or organization under excess of those which would have oc- common control. curred if the lease contained terms (l) No depreciation or rental shall be consistent with those found in a lease allowed on property fully depreciated between unrelated parties. by the contractor or by any division, (3) Assets acquired under leases that subsidiary, or affiliate of the contrac- the contractor must capitalize under tor under common control. However, a FAS–13 shall not be treated as pur- reasonable charge for using fully depre- chased assets for contract purposes if ciated property may be agreed upon the leases are covered by 31.205–36(b)(4). and allowed (but see 31.109(h)(2)). In de- (n) Whether or not the contract is termining the charge, consideration otherwise subject to CAS, the require- shall be given to cost, total estimated ments of 31.205–52, which limit the al- useful life at the time of negotiations, lowability of depreciation, shall be ob- effect of any increased maintenance served. charges or decreased efficiency due to (o) In the event of a write-down from age, and the amount of depreciation carrying value to fair value as a result previously charged to Government con- of impairments caused by events or tracts or subcontracts. changes in circumstances, depreciation (m) 48 CFR 9904.404, Capitalization of of the impaired assets shall not exceed Tangible Assets, applies to assets ac- the amounts established on deprecia- quired by a capital lease as defined in tion schedules in use prior to the write- Statement of Financial Accounting down (see 31.205–16(g)). Standard No. 13 (FAS–13), Accounting [48 FR 42301, Sept. 19, 1983, as amended at 55 for Leases, issued by the Financial Ac- FR 25530, June 21, 1990; 57 FR 39591, Aug. 31, counting Standards Board (FASB). 1992; 60 FR 64255, Dec. 14, 1995] Compliance with 48 CFR 9904.404 and FAS–13 requires that such leased assets 31.205–12 Economic planning costs. (capital leases) be treated as purchased (a) This category includes costs of assets; i.e., be capitalized and the cap- generalized long-range management italized value of such assets be distrib- planning that is concerned with the fu- uted over their useful lives as deprecia- ture overall development of the con- tion charges, or over the leased life as tractor’s business and that may take amortization charges as appropriate. into account the eventual possibility of Assets whose leases are classified as economic dislocations or fundamental capital leases under FAS–13 are subject alterations in those markets in which to the requirements of 31.205–11 while the contractor currently does business. assets acquired under leases classified Economic planning costs do not in- as operating leases are subject to the clude organization or reorganization requirements on rental costs in 31.205– costs covered by 31.205–27. 36. The standards of financial account- (b) Economic planning costs are al- ing and reporting prescribed by FAS–13 lowable as indirect costs to be properly are incorporated into this principle and allocated.

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(c) Research and development and en- provided or where cessation or reduc- gineering costs designed to lead to new tion of food or dormitory operations products for sale to the general public will not otherwise yield net cost sav- are not allowable under this principle. ings) such that even with efficient management, operating the services on 31.205–13 Employee morale, health, a break-even basis would require charg- welfare, food service, and dor- ing inordinately high prices, or prices mitory costs and credits. or rates higher than those charged by (a) Aggregate costs incurred on ac- commercial establishments offering tivities designed to improve working the same services in the same geo- conditions, employer-employee rela- graphical areas. Costs of food and dor- tions, employee morale, and employee mitory services shall include an alloca- performance (less income generated by ble share of indirect expenses pertain- these activities) are allowable, except ing to these activities. as limited by paragraphs (b), (c), and (e) When the contractor has an ar- (d) of this subsection. Some examples rangement authorizing an employee as- of allowable activities are house publi- sociation to provide or operate a serv- cations, health clinics, wellness/fitness ice, such as vending machines in the centers, employee counseling services, contractor’s plant, and retain the prof- and food and dormitory services, which its, such profits shall be treated in the include operating or furnishing facili- same manner as if the contractor were ties for cafeterias, dining rooms, can- providing the service (but see para- teens, lunch wagons, vending ma- graph (f) of this subsection). chines, living accommodations, or (f) Contributions by the contractor to similar types of services for the con- an employee organization, including tractor’s employees at or near the con- funds from vending machine receipts or tractor’s facilities. similar sources, may be included as (b) Costs of gifts are unallowable. costs incurred under paragraph (a) of (Gifts do not include awards for per- this subsection only to the extent that formance made pursuant to 31.205–6(f) the contractor demonstrates that an or awards made in recognition of em- equivalent amount of the costs in- ployee achievements pursuant to an es- curred by the employee organization tablished contractor plan or policy.) would be allowable if directly incurred (c) Costs of recreation are unallow- by the contractor. able, except for the costs of employees’ [60 FR 42662, Aug. 16, 1995] participation in company sponsored sports teams or employee organiza- 31.205–14 Entertainment costs. tions designed to improve company loyalty, team work, or physical fitness. Costs of amusement, diversions, social activities, and any directly associ- (d) Losses from operating food and ated costs such as tickets to shows or dormitory services may be included as sports events, meals, lodging, rentals, costs only if the contractor’s objective transportation, and gratuities are un- is to operate such services on a break- allowable. Costs made specifically un- even basis. Losses sustained because allowable under this cost principle are food services or lodging accommoda- not allowable under any other cost tions are furnished without charge or principle. Costs of membership in so- at prices or rates which obviously cial, dining, or country clubs or other would not be conducive to the accom- organizations having the same pur- plishment of the above objective are poses are also unallowable, regardless not allowable. A loss may be allowed, of whether the cost is reported as tax- however, to the extent that the con- able income to the employees. tractor can demonstrate that unusual circumstances exist (e.g., where the [60 FR 42663, Aug. 16, 1995] contractor must provide food or dormitory services at remote locations 31.205–15 Fines, penalties, and where adequate commercial facilities mischarging costs. are not reasonably available; or where (a) Costs of fines and penalties result- charged but unproductive labor costs ing from violations of, or failure of the would be excessive but for the services contractor to comply with, Federal,

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State, local, or foreign laws and regula- when a contractor’s property is de- tions, are unallowable except when in- stroyed by events over which the owner curred as a result of compliance with has no control, such as fire, windstorm, specific terms and conditions of the flood, accident, theft, etc., and an in- contract or written instructions from surance award is recovered. The follow- the contracting officer. ing govern involuntary conversions: (b) Costs incurred in connection with, (1) When there is a cash award and or related to, the mischarging of costs the converted asset is not replaced, on Government contracts are unallow- gain or loss shall be recognized in the able when the costs are caused by, or period of disposition. The gain recog- result from, alteration or destruction nized for contract costing purposes of records, or other false or improper shall be limited to the difference be- charging or recording of costs. Such tween the acquisition cost of the asset costs include those incurred to meas- and its undepreciated balance. ure or otherwise determine the mag- (2) When the converted asset is re- nitude of the improper charging, and placed, the contractor shall either— costs incurred to remedy or correct the (i) Adjust the depreciable basis of the mischarging, such as costs to rescreen new asset by the amount of the total and reconstruct records. realized gain or loss; or [51 FR 12301, Apr. 9, 1986, as amended at 54 (ii) Recognize the gain or loss in the FR 13024, Mar. 29, 1989; 55 FR 52793, Dec. 21, period of disposition, in which case the 1990] Government shall participate to the same extent as outlined in subpara- 31.205–16 Gains and losses on disposition or impairment of depreciable graph (c)(1) above. property or other capital assets. (d) Gains and losses on the disposition of depreciable property shall not (a) Gains and losses from the sale, re- be recognized as a separate charge or tirement, or other disposition (but see credit when— 31.205–19) of depreciable property shall be included in the year in which they (1) Gains and losses are processed occur as credits or charges to the cost through the depreciation reserve ac- grouping(s) in which the depreciation count and reflected in the depreciation or amortization applicable to those as- allowable under 31.205–11; or sets was included (but see paragraph (2) The property is exchanged as part (d) of this subsection). However, no of the purchase price of a similar item, gain or loss shall be recognized as a re- and the gain or loss is taken into consult of the transfer of assets in a busi- sideration in the depreciation cost ness combination (see 31.205–52). basis of the new item. (b) Gains and losses on disposition of (e) Gains and losses arising from tangible capital assets, including those mass or extraordinary sales, retire- acquired under capital leases (see ments, or other disposition other than 31.205–11(m), shall be considered as ad- through business combinations shall be justments of depreciation costs pre- considered on a case-by-case basis. viously recognized. The gain or loss for (f) Gains and losses of any nature each asset disposed of is the difference arising from the sale or exchange of between the net amount realized, in- capital assets other than depreciable cluding insurance proceeds from invol- property shall be excluded in comput- untary conversions, and its ing contract costs. undepreciated balance. The gain recog- (g) With respect to long-lived tan- nized for contract costing purposes gible and identifiable intangible assets shall be limited to the difference be- held for use, no loss shall be recognized tween the acquisition cost (or for as- for a write-down from carrying value sets acquired under a capital lease, the to fair value as a result of impairments value at which the leased asset is cap- caused by events or changes in cir- italized) of the asset and its cumstances (e.g., environmental dam- undepreciated balance (except see sub- age, idle facilities arising from a de- divisions (c)(2)(i) or (ii) below). clining business base, etc.). Deprecia- (c) Special considerations apply to an tion or amortization on pre-write-down involuntary conversion which occurs carrying value of impaired assets not

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yet disposed of shall continue to be re- use, lease, or dispose of the idle facili- coverable under established deprecia- ties (but see 31.205–42)). tion or amortization schedules to the (c) Costs of idle capacity are costs of extent it is not otherwise unallowable doing business and are a factor in the under other provisions of the FAR. normal fluctuations of usage or over- [48 FR 42301, Sept. 19, 1983, as amended at 55 head rates from period to period. Such FR 25530, June 21, 1990; 60 FR 64255, Dec. 14, costs are allowable provided the capac- 1995] ity is necessary or was originally reasonable and is not subject to reduction 31.205–17 Idle facilities and idle capac- or elimination by subletting, renting, ity costs. or sale, in accordance with sound busi- (a) Costs of idle facilities or idle capac- ness, economics, or security practices. ity, as used in this subsection, means Widespread idle capacity throughout costs such as maintenance, repair, an entire plant or among a group of as- housing, rent, and other related costs; sets having substantially the same e.g., property taxes, insurance, and de- function may be idle facilities. preciation. (d) Any costs to be paid directly by Facilities, as used in this subsection, the Government for idle facilities or means plant or any portion thereof (in- idle capacity reserved for defense mobi- cluding land integral to the operation), lization production shall be the subject equipment, individually or collec- of a separate agreement. tively, or any other tangible capital asset, wherever located, and whether 31.205–18 Independent research and owned or leased by the contractor. development and bid and proposal Idle capacity, as used in this sub- costs. section, means the unused capacity of (a) Definitions. Applied research, as partially used facilities. It is the dif- used in this subsection, means that ef- ference between that which a facility fort which (1) normally follows basic could achieve under 100 percent operat- research, but may not be severable ing time on a one-shift basis, less oper- from the related basic research, (2) at- ating interruptions resulting from time tempts to determine and exploit the lost for repairs, setups, unsatisfactory potential of scientific discoveries or materials, and other normal delays, improvements in technology, mate- and the extent to which the facility rials, processes, methods, devices, or was actually used to meet demands techniques, and (3) attempts to ad- during the accounting period. A multiple-shift basis may be used in the cal- vance the state of the art. Applied re- culation instead of a one-shift basis if search does not include efforts whose it can be shown that this amount of principal aim is design, development, usage could normally be expected for or test of specific items or services to the type of facility involved. be considered for sale; these efforts are Idle facilities, as used in this sub- within the definition of the term devel- section, means completely unused fa- opment, defined in this subsection. cilities that are excess to the contrac- Basic research, as used in this sub- tor’s current needs. section, means that research which is (b) The costs of idle facilities are un- directed toward increase of knowledge allowable unless the facilities— in science. The primary aim of basic (1) Are necessary to meet fluctua- research is a fuller knowledge or under- tions in workload; or standing of the subject under study, (2) Were necessary when acquired and rather than any practical application are now idle because of changes in re- thereof. quirements, production economies, re- Bid and proposal (B&P) costs, as used organization, termination, or other in this subsection, means the costs in- causes which could not have been rea- curred in preparing, submitting, and sonably foreseen. (Costs of idle facili- supporting bids and proposals (whether ties are allowable for a reasonable pe- or not solicited) on potential Govern- riod, ordinarily not to exceed 1 year, ment or non-Government contracts. depending upon the initiative taken to The term does not include the costs of

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effort sponsored by a grant or coopera- means a contractor’s IR&D cost that tive agreement, or required in the per- consists of projects falling within the formance of a contract. four following areas: (1) Basis research, Company, as used in this subsection, (2) applied research, (3) development, means all divisions, subsidiaries, and and (4) systems and other concept for- affiliates of the contractor under com- mulation studies. The term does not mon control. include the costs of effort sponsored by Contractor, as used in paragraph (c)(2) a grant or required in the performance of this subsection, includes all divi- of a contract. IR&D effort shall not in- sions, subsidiaries, and affiliates under clude technical effort expended in de- common control. veloping and preparing technical data Covered contract, as used in paragraph specifically to support submitting a bid (c)(2) of this subsection, means a prime or proposal. contract entered into by a Government Major contractor, as used in paragraph agency for an amount more than (c)(2) of this subsection, means any $100,000, except for a fixed-price con- contractor whose covered segments al- tract without cost incentives. It also located to covered contracts a total of includes a subcontract for an amount more than $10,000,000 in IR&D/B&P more than $100,000, except for a fixed- costs in the preceding fiscal year. For price subcontract without cost incen- purposes of calculating the dollar tives under such a prime contract. threshold amounts to determine Covered segment, as used in paragraph whether a contractor meets the defini- (c)(2) of this subsection, means a prod- tion of ‘‘major contractor,’’ contractor uct division of the contractor that allo- segments allocating less than $1,000,000 cated more than $1,000,000 in IR&D/B&P of IR&D/B&P costs to covered con- costs to covered contracts during the tracts in the preceding year shall not preceding fiscal year. In the case of a be included. contractor that has no product divi- Systems and other concept formulation sions, such term means that contractor studies, as used in this subsection, as a whole. A product division of the means analyses and study efforts ei- contractor that allocated less than ther related to specific IR&D efforts or $1,000,000 in IR&D/B&P costs to covered directed toward identifying desirable contracts during the preceding fiscal new systems, equipment or compo- year shall not be subject to the limita- nents, or modifications and improve- tion for major contractors set forth in ments to existing systems, equipment, 31.205–18(c)(2)(i) and (c)(ii). or components. Development, as used in this sub- (b) Composition and allocation of costs. section, means the systematic use, The requirements of 48 CFR 9904.420, under whatever name, of scientific and Accounting for independent research technical knowledge in the design, de- and development costs and bid and pro- velopment, test, or evaluation of a po- posal costs, are incorporated in their tential new product or service (or of an entirety and shall apply as follows— improvement in an existing product or (1) Fully-CAS-covered contracts. Con- service) for the purpose of meeting spe- tracts that are fully-CAS-covered shall cific performance requirements or ob- be subject to all requirements of 48 jectives. Development includes the CFR 9904.420. functions of design engineering, (2) Modified CAS-covered and non-CAS- prototyping, and engineering testing. covered contracts. Contracts that are Development excludes: (1) Subcon- not CAS-covered or that contain terms tracted technical effort which is for the or conditions requiring modified CAS sole purpose of developing an addi- coverage shall be subject to all require- tional source for an existing product, ments of 48 CFR 9904.420 except 48 CFR or (2) development effort for manufac- 9904.420–50(e)(2) and 48 CFR 9904.420– turing or production materials, sys- 50(f)(2), which are not then applicable. tems, processes, methods, equipment, However, non-CAS-covered or modified tools, and techniques not intended for CAS-covered contracts awarded at a sale. time the contractor has CAS-covered Independent research and development contracts requiring compliance with 48 (IR&D), as used in this subsection, CFR 9904.420, shall be subject to all the

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requirements of 48 CFR 9904.420. When putation shall include full burdening the requirements of 48 CFR 9904.420– pursuant to 48 CFR 9904.420. 50(e)(2) and 48 CFR 9904.420–50(f)(2) are (B) When a company meets the cri- not applicable, the following apply: terion in (c)(1)(i)(A) of this subsection, (i) IR&D and B&P costs shall be allo- required advance agreements may be cated to final cost objectives on the negotiated at the corporate level and/ same basis of allocation used for the or with those profit centers that con- G&A expense grouping of the profit tract directly with the Government center (see 31.001) in which the costs and that in the preceding year allo- are incurred. However, when IR&D and cated recoverable IR&D and B&P costs B&P costs clearly benefit other profit exceeding $700,000, including burdening, centers or benefit the entire company, to contracts and subcontracts for those costs shall be allocated through which the submission and certification the G&A of the other profit centers or of cost or pricing data were required through the corporate G&A, as appro- (see also paragraph (b) of this sub- priate. section and 15.804). When ceilings are (ii) If allocations of IR&D or B&P negotiated for separate profit centers through the G&A base do not provide of the company, the allowability of equitable cost allocation, the contract- IR&D and B&P costs for any center ing officer may approve use of a dif- that in its previous fiscal year did not ferent base. reach the $700,000 threshold may be de- (c) Allowability. (1) This subparagraph termined in accordance with paragraph (c)(1) implements section 824 of the Na- (c)(1)(ii) of this subsection. tional Defense Authorization Act for (C) Ceilings are the maximum dollar Fiscal Year 1991 (Pub. L. 101–510). Ex- amounts of total IR&D and B&P costs cept as provided in paragraphs (c)(2), that will be allowable for allocation (d), and (e) of this subsection, or as pro- over the appropriate base for that part vided in agency regulations, costs for of the company’s operation covered by IR&D and B&P are allowable only in an advance agreement. accordance with the following: (D) No IR&D and B&P cost shall be (i) Companies required to negotiate ad- allowable if a company fails to initiate vance agreements. (A) Any company negotiation of a required advance that received payments for IR&D and agreement before the end of the fiscal B&P costs in a fiscal year, either as a year for which the agreement is re- prime contractor or subcontractor, ex- quired. ceeding $7,000,000 from Government (E) When negotiations are held with agencies, is required to negotiate with a company meeting the $7,000,000 cri- the Government an advance agreement terion or with separate profit centers which establishes a ceiling for allow- (when negotiations are held at that ability of IR&D and B&P costs for the level under (c)(1)(i)(B) of this sub- following fiscal year. This agreement is section), and if no advance agreement binding on all Government agencies, is reached, payment for IR&D and B&P unless prohibited by statute. The re- costs shall be reduced below that which quirements of section 203 of Public Law the company or profit center would 91–441 necessitate that the Department have otherwise received. The amount of Defense (DOD) be the lead negotiat- of such reduced payment shall not ex- ing agency when the contractor has re- ceed 75 percent of the amount which, in ceived more than $7,000,000 in payments the opinion of the contracting officer, for IR&D and B&P from DOD. Com- the company or profit center would be putation of IR&D and B&P costs to de- entitled to receive under an advance termine whether the threshold cri- agreement. Written notification of the terion was reached shall include only contracting officer’s determination of recoverable IR&D and B&P costs allo- a reduced amount shall be provided the cated during the company’s previous contractor. In the event that an ad- fiscal year to prime contracts and sub- vance agreement is not reached before contracts for which the submission and the end of the contractor’s fiscal year certification of cost or pricing data for which the agreement is to apply, were required. (See also paragraph (b) negotiations shall immediately be ter- of this subsection and 15.804.) The com- minated, and the contracting officer

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shall furnish a determination of the re- Evaluation (RDT&E) account, Total duced amount. Obligation Authority (TOA) which is (F) Contractors may appeal decisions published annually (normally in Janu- of the contracting officer to reduce ary) by the Department of Defense payment. The appeal shall be filed with Comptroller and used in preparation of the contracting officer within 30 days the annual submission of the Defense of receipt of the contracting officer’s budget. This rate will be published in determination. (See also subpart 42.10.) the FEDERAL REGISTER on an annual (ii) Companies not required to negotiate basis. advance agreements. Costs for IR&D and (ii) Major contractors shall submit, B&P are allowable as indirect expenses in accordance with agency guidance, fi- on contracts to the extent that those nancial and technical information to costs are allocable and reasonable. support their IR&D/B&P costs. (2) This subparagraph (c)(2) imple- (iii) A waiver may be granted, in ac- ments section 802 of the National De- cordance with agency procedures, to fense Authorization Act for Fiscal increase the amount prescribed in Years 1992 and 1993 (Pub. L. 102–190) and (c)(2)(i) of this subsection for the fol- is effective for IR&D and B&P costs in- lowing special circumstances: curred by a contractor during fiscal (A) To ensure that the contractor’s years of that contractor that begin on allowable IR&D/B&P costs are at least or after October 1, 1992. Except as pro- the same amount that would have been vided in paragraph (d) of this sub- allowed under this subpart which was section, or as provided in agency regu- in effect on December 4, 1991; or lations, costs for IR&D and B&P are al- (B) When it is in the best interest of lowable as indirect expenses on con- the Government. tracts to the extent that those costs (d) Deferred IR&D and B&P costs. (1) are allocable and reasonable. The fol- IR&D costs that were incurred in pre- lowing limitations apply to major con- vious accounting periods are unallow- tractors— able, except when a contractor has de- (i) For the first three contractor fis- veloped a specific product at its own cal years beginning on or after October risk in anticipation of recovering the 1, 1992, the total maximum allowable development costs in the sale price of amount of IR&D/B&P costs shall not the product provided that— exceed the sum of: (i) The total amount of IR&D costs (A) The total amount of allowable applicable to the product can be identi- IR&D/B&P costs in the preceding fiscal fied; year (i.e., the lower of the previous (ii) The proration of such costs to year’s ceiling or actual costs incurred); sales of the product is reasonable; plus (iii) The contractor had no Govern- (B) Five percent of the amount in ment business during the time that the (c)(2)(i)(A) of this subsection; plus costs were incurred or did not allocate (C) If the total amount of IR&D/B&P IR&D costs to Government contracts costs for a fiscal year is greater than except to prorate the cost of developing the total amount of IR&D/B&P costs a specific product to the sales of that for the preceding fiscal year, the product; and amount that is determined by mul- (iv) No costs of current IR&D pro- tiplying the amount in (c)(2)(i)(A) of grams are allocated to Government this subsection by the lesser of— work except to prorate the costs of de- (1) The percentage by which the total veloping a specific product to the sales amount of IR&D/B&P costs for a fiscal of that product. year exceeds the total amount of such (2) When deferred costs are recog- costs for the preceding fiscal year; or nized, the contract (except firm-fixed- (2) The percentage rate of inflation price and fixed-price with economic from the end of the preceding fiscal price adjustment) will include a spe- year to the end of the fiscal year for cific provision setting forth the which the amount of the limitation is amount of deferred IR&D costs that are being computed. The rate of inflation allocable to the contract. The negotia- shall be the price escalation index for tion memorandum will state the cir- the Research, Development, Test & cumstances pertaining to the case and

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the reason for accepting the deferred (1) Costs of insurance required or ap- costs. proved, and maintained by the contrac- (e) Cooperative arrangements. IR&D ef- tor pursuant to the contract, are allow- fort may be performed by contractors able. working jointly with one or more non- (2) Costs of insurance maintained by Federal entities pursuant to a coopera- the contractor in connection with the tive arrangement (for example, joint general conduct of its business are al- ventures, limited partnerships, lowable, subject to the following limi- teaming arrangements, and collabora- tations: tion and consortium arrangements). IR&D effort may also be performed by (i) Types and extent of coverage shall contractors pursuant to cooperative re- follow sound business practice, and the search and development agreements, or rates and premiums must be reason- similar arrangements, entered into able. under (1) section 12 of the Stevenson- (ii) Costs allowed for business inter- Wydler Technology Transfer Act of 1980 ruption or other similar insurance (15 U.S.C. 3710(a)); (2) sections 203(c) (5) must be limited to exclude coverage of and (6)) of the National Aeronautics profit. and Space Act of 1958, as amended (42 (iii) The cost of property insurance U.S.C. 2473(c) (5) and (6)), when there is premiums for insurance coverage in ex- no transfer of Federal appropriated cess of the acquisition cost of the in- funds; (3) 10 U.S.C. 2371 for the Defense sured assets is allowable only when the Advanced Research Projects Agency; or contractor has a formal written policy (4) other equivalent authority. IR&D assuring that in the event the insured costs incurred by a contractor pursu- property is involuntarily converted, ant to these types of cooperative ar- the new asset shall be valued at the rangements should be considered as allowable IR&D costs if the work per- book value of the replaced asset plus or formed would have been allowed as minus adjustments for differences be- contractor IR&D had there been no co- tween insurance proceeds and actual operative arrangement. replacement cost. If the contractor does not have such a formal written [57 FR 44265, Sept. 24, 1992, as amended at 59 policy, the cost of premiums for insur- FR 11379, Mar. 10, 1994] ance coverage in excess of the acquisi- 31.205–19 Insurance and indemnification cost of the insured asset is unal- tion. lowable. (a) Insurance by purchase or by self- (iv) Costs of insurance for the risk of insuring includes coverage the contrac- loss of or damage to Government prop- tor is required to carry, or to have ap- erty are allowable only to the extent proved, under the terms of the contract that the contractor is liable for such and any other coverage the contractor loss or damage and such insurance does maintains in connection with the gen- not cover loss or damage that results eral conduct of its business. Any con- from willful misconduct or lack of good tractor desiring to establish a program faith on the part of any of the contrac- of self-insurance applicable to con- tor’s directors or officers or other tracts that are not subject to 48 CFR equivalent representatives. 9904.416, Accounting for Insurance (v) Contractors operating under a Costs, shall comply with the self-insur- program of self-insurance must obtain ance requirements of that standard as approval of the program when required well as with part 28 of this Regulation. by 28.308(a). However, approval of a contractor’s in- (vi) Costs of insurance on the lives of surance program in accordance with officers, partners, or proprietors are al- part 28 does not constitute a deter- lowable only to the extent that the in- mination as to the allowability of the program’s cost. The amount of insur- surance represents additional com- ance costs which may be allowed is pensation (see 31.205–6). subject to the cost limitations and ex- (3) Actual losses are unallowable un- clusions in the following subpara- less expressly provided for in the con- graphs. tract, except—

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(i) Losses incurred under the nominal (c) Insurance provided by captive in- deductible provisions of purchased insurers (insurers owned by or under the surance, in keeping with sound busi- control of the contractor) is considered ness practice, are allowable for con- self-insurance, and charges for it must tracts not subject to 48 CFR 9904.416 comply with the self-insurance provi- and when the contractor did not estab- sions of 48 CFR 9904.416. However, if the lish a self-insurance program. Such captive insurer also sells insurance to contracts are not subject to the self-in- the general public in substantial quan- surance requirements of 48 CFR tities and it can be demonstrated that 9904.416. For contracts subject to 48 the charge to the contractor is based CFR 9904.416, and for those made sub- on competitive market forces, the in- ject to the self-insurance requirements surance will be considered purchased of that Standard as a result of the con- insurance. tractor’s having established a self-in- (d) The allowability of premiums for surance program (see paragraph (a) insurance purchased from fronting in- above), actual losses may be used as a surance companies (insurance compa- basis for charges under a self-insurance nies not related to the contractor but program when the actual amount of who reinsure with a captive insurer of losses will not differ significantly from the contractor) shall not exceed the the projected average losses for the accounting period (see 48 CFR 9904.416– amount (plus reasonable fronting com- 50(a)(2)(ii)). In those instances where an pany charges for services rendered) actual loss has occurred and the which the contractor would have been present value of the liability is deter- allowed had it insured directly with mined under the provisions of 48 CFR the captive insurer. 9904.416–50(a)(3)(ii), the allowable cost (e) Self-insurance charges for risks of shall be limited to an amount com- catastrophic losses are not allowable puted using as a discount rate the in- (see 28.308(e)). terest rate determined by the Sec- (f) The Government is obligated to retary of the Treasury pursuant to 50 indemnify the contractor only to the U.S.C. App. 1215(b)(2) in effect at the extent authorized by law, as expressly time the loss is recognized. However, provided for in the contract, except as the full amount of a lump-sum settle- provided in paragraph (a)(3) above. ment to be paid within a year of the (g) Late premium payment charges date of settlement is allowable. related to employee deferred com- (ii) Minor losses, such as spoilage, pensation plan insurance incurred pur- breakage, and disappearance of small suant to section 4007 (29 U.S.C. 1307) or hand tools that occur in the ordinary section 4023 (29 U.S.C. 1323) of the Em- course of doing business and that are ployee Retirement Income Security not covered by insurance are allowable. Act of 1974 are unallowable. (4) The cost of insurance to protect the contractor against the costs of cor- [48 FR 42301, Sept. 19, 1983, as amended at 50 recting its own defects in materials or FR 23607, June 4, 1985; 51 FR 31426, Sept. 3, workmanship is unallowable. However, 1986; 57 FR 39591, Aug. 31, 1992] insurance costs to cover fortuitous or 31.205–20 Interest and other financial casualty losses resulting from defects costs. in materials or workmanship are allowable as a normal business expense. Interest on borrowings (however rep- (5) Premiums for retroactive or resented), bond discounts, costs of fi- backdated insurance written to cover nancing and refinancing capital (net occurred and known losses are unallow- worth plus long-term liabilities), legal able. and professional fees paid in connec- (b) If purchased insurance is avail- tion with preparing prospectuses, costs able, the charge for any self-insurance of preparing and issuing stock rights, coverage plus insurance administration and directly associated costs are unal- expenses shall not exceed the cost of lowable except for interest assessed by comparable purchased insurance plus State or local taxing authorities under associated insurance administration the conditions specified in 31.205–41 expenses. (but see 31.205–28).

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31.205–21 Labor relations costs. (6) Costs incurred in attempting to Costs incurred in maintaining satis- improperly influence (see 3.401), either factory relations between the contrac- directly or indirectly, an employee or tor and its employees, including costs officer of the Executive branch of the of shop stewards, labor management Federal Government to give consider- committees, employee publications, ation to or act regarding a regulatory and other related activities, are allow- or contract matter. able. (b) The following activities are excepted from the coverage of (a) above: 31.205–22 Lobbying and political activ- (1) Providing a technical and factual ity costs. presentation of information on a topic (a) Costs associated with the follow- directly related to the performance of ing activities are unallowable: a contract through hearing testimony, (1) Attempts to influence the out- statements or letters to the Congress comes of any Federal, State, or local or a state legislature, or subdivision, election, referendum, initiative, or member, or cognizant staff member similar procedure, through in kind or thereof, in response to a documented cash contributions, endorsements, pub- request (including a Congressional licity, or similar activities; Record notice requesting testimony or (2) Establishing, administering, con- statements for the record at a regu- tributing to, or paying the expenses of larly scheduled hearing) made by the a political party, campaign, political recipient member, legislative body or action committee, or other organiza- subdivision, or a cognizant staff mem- tion established for the purpose of in- ber thereof; provided such information fluencing the outcomes of elections; is readily obtainable and can be readily (3) Any attempt to influence (i) the put in deliverable form; and further introduction of Federal, state, or local provided that costs under this section legislation, or (ii) the enactment or for transportation, lodging or meals modification of any pending Federal, are unallowable unless incurred for the state, or local legislation through com- purpose of offering testimony at a reg- munication with any member or em- ularly scheduled Congressional hearing ployee of the Congress or state legisla- pursuant to a written request for such ture (including efforts to influence presentation made by the Chairman or state or local officials to engage in Ranking Minority Member of the Com- similar lobbying activity), or with any mittee or Subcommittee conducting government official or employee in such hearing. connection with a decision to sign or veto enrolled legislation; (2) Any lobbying made unallowable (4) Any attempt to influence (i) the by (a)(3) above to influence state legis- introduction of Federal, state, or local lation in order to directly reduce con- legislation, or (ii) the enactment or tract cost, or to avoid material impair- modification of any pending Federal, ment of the contractor’s authority to state, or local legislation by preparing, perform the contract. distributing or using publicity or prop- (3) Any activity specifically author- aganda, or by urging members of the ized by statute to be undertaken with general public or any segment thereof funds from the contract. to contribute to or participate in any (c) When a contractor seeks reim- mass demonstration, march, rally, fund bursement for indirect costs, total lob- raising drive, lobbying campaign or bying costs shall be separately identi- letter writing or telephone campaign; fied in the indirect cost rate proposal, (5) Legislative liaison activities, in- and thereafter treated as other unal- cluding attendance at legislative ses- lowable activity costs. sions or committee hearings, gathering (d) Contractors shall submit as part information regarding legislation, and of their annual indirect cost rate pro- analyzing the effect of legislation, posals a certification that the require- when such activities are carried on in ments and standards of this subsection support of or in knowing preparation have been complied with. for an effort to engage in unallowable (e) Contractors shall maintain ade- activities; or quate records to demonstrate that the

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certification of costs as being allow- techniques that are or are expected to able or unallowable pursuant to this be used in producing products or serv- subsection complies with the require- ices; ments of this subsection. (2) Developing and deploying pilot (f) Existing procedures should be uti- production lines; lized to resolve in advance any signifi- (3) Improving current production cant questions or disagreements con- functions, such as plant layout, pro- cerning the interpretation or applica- duction scheduling and control, meth- tion of this subsection. ods and job analysis, equipment capa- [49 FR 18278, Apr. 27, 1984, as amended at 51 bilities and capacities, inspection tech- FR 12301, Apr. 9, 1986; 52 FR 19804, May 27, niques, and tooling analysis (including 1987; 60 FR 42660, Aug. 16, 1995; 61 FR 31657, tooling design and application im- June 20, 1996] provements); and 31.205–23 Losses on other contracts. (4) Material and manufacturing An excess of costs over income under producibility analysis for production any other contract (including the con- suitability and to optimize manufac- tractor’s contributed portion under turing processes, methods, and tech- cost-sharing contracts) is unallowable. niques. (b) This cost principle does not cover: 31.205–24 Maintenance and repair (1) Basic and applied research effort costs. (as defined in 31.205–18(a)) related to (a) Costs necessary for the upkeep of new technology, materials, systems, property (including Government prop- processes, methods, equipment, tools erty, unless otherwise provided for) and techniques. Such technical effort is that neither add to the permanent governed by 31.205–18, Independent re- value of the property nor appreciably search and development costs and bid prolong its intended life, but keep it in and proposal costs; and an efficient operating condition, are to (2) Development effort for manufac- be treated as follows (but see 31.205–11): turing or production materials, sys- (1) Normal maintenance and repair tems, processes, methods, equipment, costs are allowable. tools and techniques that are intended (2) Extraordinary maintenance and for sale is also governed by 31.205–18. repair costs are allowable, provided (c) Where manufacturing or produc- those costs are allocated to the appli- tion development costs are capitalized cable periods for purposes of determin- or required to be capitalized under the ing contract costs (but see 31.109). (b) Expenditures for plant and equip- contractor’s capitalization policies, al- ment, including rehabilitation which lowable cost will be determined in ac- should be capitalized and subject to de- cordance with the requirements of preciation, according to generally ac- 31.205–11, Depreciation. cepted accounting principles as applied 31.205–26 Material costs. under the contractor’s established policy or, when applicable, according to 48 (a) Material costs include the costs of CFR 9904.404, Capitalization of Tan- such items as raw materials, parts, gible Assets, are allowable only on a sub-assemblies, components, and man- depreciation basis. ufacturing supplies, whether purchased or manufactured by the contractor, [48 FR 42301, Sept. 19, 1983, as amended at 57 FR 39591, Aug. 31, 1992] and may include such collateral items as inbound transportation and 31.205–25 Manufacturing and produc- intransit insurance. In computing mation engineering costs. terial costs, consideration shall be (a) The costs of manufacturing and given to reasonable overruns, spoilage, production engineering effort as de- or defective work (unless otherwise scribed in (1) through (4) below are all provided in any contract provision re- allowable: lating to inspecting and correcting de- (1) Developing and deploying new or fective work). These costs are allow- improved materials, systems, proc- able, subject to the requirements of esses, methods, equipment, tools and paragraphs (b) through (e) below.

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(b) Costs of material shall be ad- any modifications necessary because of justed for income and other credits, in- contract requirements. cluding available trade discounts, re- [48 FR 42301, Sept. 19, 1983, as amended at 60 funds, rebates, allowances, and cash FR 48218, Sept. 18, 1995] discounts, and credits for scrap, sal- vage, and material returned to vendors. 31.205–27 Organization costs. Such income and other credits shall either be credited directly to the cost of (a) Except as provided in paragraph the material or be allocated as a credit (b) of this section, expenditures in con- to indirect costs. When the contractor nection with (1) planning or executing can demonstrate that failure to take the organization or reorganization of cash discounts was reasonable, lost dis- the corporate structure of a business, counts need not be credited. including mergers and acquisitions, (2) (c) Reasonable adjustments arising resisting or planning to resist the reor- from differences between periodic phys- ganization of the corporate structure ical inventories and book inventories of a business or a change in the con- may be included in arriving at costs; trolling interest in the ownership of a provided, such adjustments relate to business, and (3) raising capital (net the period of contract performance. worth plus long-term liabilities), are (d) When materials are purchased unallowable. Such expenditures include specifically for and are identifiable but are not limited to incorporation solely with performance under a con- fees and costs of attorneys, account- tract, the actual purchase cost of those ants, brokers, promoters and organiz- materials should be charged to the con- ers, management consultants and in- tract. If material is issued from stores, vestment counselors, whether or not any generally recognized method of employees of the contractor. Unallow- pricing such material is acceptable if able reorganization costs include the that method is consistently applied cost of any change in the contractor’s and the results are equitable. When es- financial structure, excluding adminis- timates of future material costs are re- trative costs of short-term borrowings quired, current market price or antici- for working capital, resulting in alter- pated acquisition cost may be used, but ations in the rights and interests of se- the basis of pricing must be disclosed. curity holders, whether or not addi- (e) Allowance for all materials, sup- tional capital is raised. plies, and services that are sold or (b) The cost of activities primarily transferred between any divisions, sub- intended to provide compensation will divisions, subsidiaries, or affiliates of not be considered organizational costs the contractor under a common control subject to this subsection, but will be shall be on the basis of cost incurred in governed by 31.205–6. These activities accordance with this subpart. However, include acquiring stock for (1) execu- allowance may be at price when it is tive bonuses, (2) employee savings the established practice of the transfer- plans, and (3) employee stock owner- ring organization to price inter- ship plans. organizational transfers at other than cost for commercial work of the con- [48 FR 42301, Sept. 19, 1983, as amended at 53 FR 10830, Apr. 1, 1988] tractor or any division, subsidiary, or affiliate of the contractor under a com- 31.205–28 Other business expenses. mon control, and when the item being transferred qualifies for an exception The following types of recurring under 15.804–1 and the contracting offi- costs are allowable when allocated on cer has not determined the price to be an equitable basis: unreasonable. (a) Registry and transfer charges re- (f) When a catalog or market price sulting from changes in ownership of exception under 15.804–1(a)(1)(ii) applies securities issued by the contractor. under paragraph (e) of this subsection, (b) Cost of shareholders’ meetings. the price should be adjusted to reflect (c) Normal proxy solicitations. the quantities being acquired and may (d) Preparing and publishing reports be adjusted to reflect the actual cost of to shareholders.

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(e) Preparing and submitting re- contingencies, additional profit or fee, quired reports and forms to taxing and or in other contracts. other regulatory bodies. (f) Incidental costs of directors’ and 31.205–32 Precontract costs. committee meetings. Precontract costs are those incurred (g) Other similar costs. before the effective date of the contract directly pursuant to the negotia- 31.205–29 Plant protection costs. tion and in anticipation of the contract Costs of items such as (a) wages, uni- award when such incurrence is nec- forms, and equipment of personnel en- essary to comply with the proposed gaged in plant protection, (b) deprecia- contract delivery schedule. Such costs tion on plant protection capital assets, are allowable to the extent that they and (c) necessary expenses to comply would have been allowable if incurred with military requirements, are allow- after the date of the contract (see able. 31.109).

31.205–30 Patent costs. 31.205–33 Professional and consultant service costs. (a) The following patent costs are al- (a) Definition. Professional and con- lowable to the extent that they are in- sultant services, as used in this sub- curred as requirements of a Govern- part, are those services rendered by ment contract (but see 31.205–33): persons who are members of a particu- (1) Costs of preparing invention dis- lar profession or possess a special skill closures, reports, and other documents. and who are not officers or employees (2) Costs for searching the art to the of the contractor. Examples include extent necessary to make the inven- those services acquired by contractors tion disclosures. or subcontractors in order to enhance (3) Other costs in connection with the their legal, economic, financial, or filing and prosecution of a United technical positions. Professional and States patent application where title consultant services are generally ac- or royalty-free license is to be con- quired to obtain information, advice, veyed to the Government. opinions, alternatives, conclusions, (b) General counseling services relat- recommendations, training, or direct ing to patent matters, such as advice assistance, such as studies, analyses, on patent laws, regulations, clauses, evaluations, liaison with Government and employee agreements, are allow- officials, or other forms of representa- able (but see 31.205–33). tion. (c) Other than those for general coun- (b) Costs of professional and consult- seling services, patent costs not re- ant services are allowable subject to quired by the contract are unallowable. this paragraph and paragraphs (c) (See also 31.205–37.) through (f) of this subsection when reasonable in relation to the services ren- 31.205–31 Plant reconversion costs. dered and when not contingent upon Plant reconversion costs are those recovery of the costs from the Govern- incurred in restoring or rehabilitating ment (but see 31.205–30 and 31.205–47). the contractor’s facilities to approxi- (c) Costs of professional and consult- mately the same condition existing im- ant services performed under any of mediately before the start of the Gov- the following circumstances are unal- ernment contract, fair wear and tear lowable: excepted. Reconversion costs are unal- (1) Services to improperly obtain, lowable except for the cost of removing distribute, or use information or data Government property and the restora- protected by law or regulation (e.g., tion or rehabilitation costs caused by 52.215–12, Restriction on Disclosure and such removal. However, in special cir- Use of Data). cumstances where equity so dictates, (2) Services that are intended to im- additional costs may be allowed to the properly influence the contents of so- extent agreed upon before costs are in- licitations, the evaluation of proposals curred. Care should be exercised to or quotations, or the selection of avoid duplication through allowance as sources for contract award, whether

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award is by the Government, or by a (3) The retainer fee is reasonable in prime contractor or subcontractor. comparison with maintaining an in- (3) Any other services obtained, per- house capability to perform the cov- formed, or otherwise resulting in viola- ered services, when factors such as cost tion of any statute or regulation pro- and level of expertise are considered; hibiting improper business practices or and conflicts of interest. (4) The actual services performed are (4) Services performed which are not documented in accordance with para- consistent with the purpose and scope graph (f) of this subsection. of the services contracted for or other- (f) Fees for services rendered shall be wise agreed to. allowable only when supported by evi- (d) In determining the allowability of dence of the nature and scope of the costs (including retainer fees) in a par- service furnished. (See also 31.205–38(f).) ticular case, no single factor or any However, retainer agreements gen- special combination of factors is nec- erally are not based on specific state- essarily determinative. However, the ments of work. Evidence necessary to contracting officer shall consider the determine that work performed is prop- following factors, among others: er and does not violate law or regula- (1) The nature and scope of the serv- tion shall include— ice rendered in relation to the service (1) Details of all agreements (e.g., required. work requirements, rate of compensa- (2) The necessity of contracting for tion, and nature and amount of other the service, considering the contrac- expenses, if any) with the individuals tor’s capability in the particular area. or organizations providing the services (3) The past pattern of acquiring such and details of actual services per- services and their costs, particularly in formed; the years prior to the award of Govern- (2) Invoices or billings submitted by ment contracts. consultants, including sufficient detail (4) The impact of Government con- as to the time expended and nature of tracts on the contractor’s business. the actual services provided; and (5) Whether the proportion of Govern- (3) Consultants’ work products and ment work to the contractor’s total related documents, such as trip reports business is such as to influence the indicating persons visited and subjects contractor in favor of incurring the discussed, minutes of meetings, and cost, particularly when the services collateral memoranda and reports. rendered are not of a continuing nature [55 FR 52793, Dec. 21, 1990; 57 FR 60610, Dec. and have little relationship to work 21, 1992] under Government contracts. (6) Whether the service can be per- 31.205–34 Recruitment costs. formed more economically by employ- (a) Subject to paragraphs (b) and (c) ment rather than by contracting. below, and provided that the size of the (7) The qualifications of the individ- staff recruited and maintained is in ual or concern rendering the service keeping with workload requirements, and the customary fee charged, espe- the following costs are allowable: cially on non-Government contracts. (1) Costs of help-wanted advertising. (8) Adequacy of the contractual (2) Costs of operating an employment agreement for the service (e.g., descrip- office needed to secure and maintain tion of the service, estimate of time re- an adequate labor force. quired, rate of compensation, termi- (3) Costs of operating an aptitude and nation provisions). educational testing program. (e) Retainer fees, to be allowable, (4) Travel costs of employees engaged must be supported by evidence that— in recuiting personnel. (1) The services covered by the re- (5) Travel costs of applicants for tainer agreement are necessary and interviews. customary; (6) Costs for employment agencies, (2) The level of past services justifies not in excess of standard commercial the amount of the retainer fees (if no rates. services were rendered, fees are not (b) Help-wanted advertising costs are automatically unallowable); unallowable if the advertising—

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(1) Is for personnel other than those (a)(4) below shall not exceed 14 percent required to perform obligations under a of the sales price of the property sold. Government contract; (4) Continuing costs of ownership of (2) Does not describe specific posi- the vacant former actual residence tions or classes of positions; being sold, such as maintenance of (3) Is excessive relative to the num- building and grounds (exclusive of fix- ber and importance of the positions or ing up expenses), utilities, taxes, prop- to the industry practices; erty insurance, mortgage interest, (4) Includes material that is not rel- after settlement date or lease date of evant for recruitment purposes, such as new permanent residence, except that extensive illustrations or descriptions these costs when added to the costs de- of the company’s products or capabili- scribed in subparagraph (a)(3) above, ties; shall not exceed 14 percent of the sales (5) Is designed to pirate personnel price of the property sold. from another Government contractor; (5) Other necessary and reasonable or expenses normally incident to reloca- (6) Includes color (in publications). tion, such as disconnecting and con- necting household appliances; auto- (c) Excessive compensation costs of- mobile registration; driver’s license fered to prospective employees to pirate and use taxes; cutting and fitting rugs, them from another Government con- draperies, and curtains; forfeited util- tractor are unallowable. Such exces- ity fees and deposits; and purchase of sive costs may include salaries, fringe insurance against damage to or loss of benefits, or special emoluments which personal property while in transit. are in excess of standard industry prac- (6) Costs incident to acquiring a tices or the contractor’s customary home in a new location, except that (i) compensation practices. these costs will not be allowable for ex- 31.205–35 Relocation costs. isting employees or newly recruited employees who, before the relocation, (a) Relocation costs are costs inci- were not homeowners and (ii) the total dent to the permanent change of duty costs shall not exceed 5 percent of the of assignment (for an indefinite or stat- purchase price of the new home. ed period, but in either event for not (7) Mortgage interest differential less than 12 months) of an existing em- payments, except that these costs are ployee or upon recruitment of a new not allowable for existing or newly re- employee. The following types of relo- cruited employees who, before the relocation costs are allowable as noted, cation, were not homeowners and the subject to paragraphs (b) through (f) total payments are limited to an below: amount determined as follows: (1) Cost of travel of the employee and (i) The difference between the mort- members of the immediate family (see gage interest rates of the old and new 31.205–46) and transportation of the residences times the current balance of household and personal effects to the the old mortgage times 3 years. new location. (ii) When mortgage differential pay- (2) Cost of finding a new home, such ments are made on a lump sum basis as advance trips by employees and and the employee leaves or is trans- spouses to locate living quarters, and ferred again in less than 3 years, the temporary lodging during the transi- amount initially recognized shall be tion periods not exceeding separate cu- proportionately adjusted to reflect mulative totals of 60 days for employ- payments only for the actual time of ees and 45 days for spouses and depend- the relocation. ents, including advance trip time. (8) Rental differential payments cov- (3) Closing costs (i.e., brokerage fees, ering situations where relocated em- legal fees, appraisal fees, points, fi- ployees retain ownership of a vacated nance charges, etc.) incident to the dis- home in the old location and rent at position of actual residence owned by the new location. The rented quarters the employee when notified of transfer, at the new location must be com- except that these costs when added to parable to those vacated, and the al- the costs described in subparagraph lowable differential payments may not

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exceed the actual rental costs for the (d) If relocation costs for an em- new home, less the fair market rent for ployee have been allowed either as an the vacated home times 3 years. allocable indirect or direct cost, and (9) Cost of canceling an unexpired the employee resigns within 12 months lease. for reasons within the employee’s con- (b) The costs described in paragraph trol, the contractor shall refund or (a) above must also meet the following credit the relocation costs to the Gov- criteria to be considered allowable: ernment. (1) The move must be for the benefit (e) Subject to the requirements of of the employer. paragraphs (a) through (d) above, the (2) Reimbursement must be in ac- costs of family movements and of per- cordance with an established policy or sonnel movements of a special or mass practice that is consistently followed nature are allowable. The cost, how- by the employer and is designed to mo- ever, should be assigned on the basis of tivate employees to relocate promptly work (contracts) or time period bene- and economically. fited. (3) The costs must not otherwise be (f) Relocation costs (both outgoing unallowable under subpart 31.2. and return) of employees who are hired (4) Amounts to be reimbursed shall for performance on specific contracts not exceed the employee’s actual ex- or long-term field projects are allow- penses, except that for miscellaneous able if— costs of the type discussed in subpara- (1) The term of employment is not graph (a)(5) above, a flat amount, not less than 12 months; to exceed $1,000, may be allowed in lieu (2) The employment agreement spe- of actual costs. cifically limits the duration of employ- (c) The following types of costs are ment to the time spent on the contract not allowable: or field project for which the employee (1) Loss on sale of a home. is hired; (2) Costs incident to acquiring a (3) The employment agreement pro- home in a new location as follows: vides for return relocation to the em- (i) Real estate brokers fees and com- ployee’s permanent and principal home missions. immediately prior to the outgoing re- (ii) Cost of litigation. location, or other location of equal or (iii) Real and personal property in- lesser cost; and surance against damage or loss of prop- (4) The relocation costs are deter- erty. mined under the rules of paragraphs (a) (iv) Mortgage life insurance. through (d) above. However, the costs (v) Owner’s title policy insurance to return employees, who are released when such insurance was not pre- from employment upon completion of viously carried by the employee on the field assignments pursuant to their em- old residence (however, cost of a mort- ployment agreements, are not subject gage title policy is allowable). to the refund or credit requirement of (vi) Property taxes and operating or paragraph (d). maintenance costs. [48 FR 42301, Sept. 19, 1983, as amended at 52 (3) Continuing mortgage principal FR 9038, Mar. 20, 1987] payments on residence being sold. (4) Payments for employee income or 31.205–36 Rental costs. FICA (social security) taxes incident to (a) This subsection is applicable to reimbursed relocation costs. the cost of renting or leasing real or (5) Payments for job counseling and personal property, except ADPE (see placement assistance to employee 31.205–2), acquired under operating leases spouses and dependents who were not as defined in Statement of Financial employees of the contractor at the old Accounting Standards No. 13 (FAS–13), location. Accounting for Leases. Compliance (6) Costs incident to furnishing eq- with 31.205–11(m) requires that assets uity or nonequity loans to employees acquired by means of capital leases, as or making arrangements with lenders defined in FAS–13, shall be treated as for employees to obtain lower-than- purchased assets; i.e., be capitalized market rate mortgage loans. and the capitalized value of such assets

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be distributed over their useful lives as 31.205–37 Royalties and other costs for depreciation charges, or over the lease use of patents. term as amortization charges, as ap- (a) Royalties on a patent or amorti- propriate (but see subparagraph (b)(4) zation of the cost of purchasing a pat- below). ent or patent rights necessary for the (b) The following costs are allowable: proper performance of the contract and (1) Rental costs under operating applicable to contract products or leases, to the extent that the rates are processes are allowable unless— reasonable at the time of the lease de- (1) The Government has a license or cision, after consideration of (i) rental the right to a free use of the patent; costs of comparable property, if any; (2) The patent has been adjudicated (ii) market conditions in the area; (iii) to be invalid, or has been administra- the type, life expectancy, condition, tively determined to be invalid; and value of the property leased; (iv) (3) The patent is considered to be un- alternatives available; and (v) other enforceable; or provisions of the agreement. (4) The patent is expired. (2) Rental costs under a sale and (b) Care should be exercised in deter- leaseback arrangement only up to the mining reasonableness when the royal- amount the contractor would be alties may have been arrived at as a re- lowed if the contractor retained title. sult of less-than-arm’s-length bargaining; e.g., royalties— (3) Charges in the nature of rent for (1) Paid to persons, including cor- property between any divisions, sub- porations, affiliated with the contrac- sidiaries, or organization under com- tor; mon control, to the extent that they do (2) Paid to unaffiliated parties, in- not exceed the normal costs of owner- cluding corporations, under an agree- ship, such as depreciation, taxes, insur- ment entered into in contemplation ance, facilities capital cost of money, that a Government contract would be and maintenance (excluding interest or awarded; or other unallowable costs pursuant to (3) Paid under an agreement entered part 31), provided that no part of such into after the contract award. costs shall duplicate any other allowed (c) In any case involving a patent for- cost. Rental cost of personal property merly owned by the contractor, the leased from any division, subsidiary, or royalty amount allowed should not ex- affiliate of the contractor under com- ceed the cost which would have been mon control, that has an established allowed had the contractor retained practice of leasing the same or similar title. property to unaffiliated lessees shall be (d) See 31.109 regarding advance allowed in accordance with subpara- agreements. graph (b)(1) above. (4) Rental costs under leases entered 31.205–38 Selling costs. into before March 1, 1970 for the re- (a) Selling is a generic term encom- maining term of the lease (excluding passing all efforts to market the con- options not exercised before March 1, tractor’s products or services, some of 1970) to the extent they would have which are covered specifically in other been allowable under Defense Acquisi- subsections of 31.205. Selling activity tion Regulation (Formerly ASPR) 15– includes the following broad cat- 205.34 or Federal Procurement Regula- egories: tions section 1–15.205–34 in effect Janu- (1) Advertising. ary 1, 1969. (2) Corporate image enhancement including broadly-targeted sales efforts, (c) The allowability of rental costs other than advertising. under unexpired leases in connection (3) Bid and proposal costs. with terminations is treated in 31.205– (4) Market planning. 42(e). (5) Direct selling. [48 FR 42301, Sept. 19, 1983, as amended at 51 (b) Advertising costs are defined at FR 2665, Jan. 17, 1986] 31.205–1(b) and are subject to the allowability provisions of 31.205–1 (d) and (f).

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Corporate image enhancement activi- (ii) That, with respect to a business ties are included within the definitions segment which allocates to U.S. Gov- of public relations at 31.205–1(a) and en- ernment contracts $2,500,000 or more of tertainment at 31.205–14 and are subject such costs in a given fiscal year of such to the allowability provisions at 31.205– business segment, a ceiling on allow- 1 (e) and (f) and 31.205–14, respectively. able costs shall apply. The ceiling on Bid and proposal costs are defined at the amount of allowable costs to be al- 31.205–18 and have their allowability located over the appropriate base shall controlled by that subsection. Market be 110 percent of foreign selling costs planning involves market research and incurred by the business segment in analysis and generalized management the previous year; and planning concerned with development (iii) That, in order to comply with of the contractor’s business. The allow- Public Law 100–456, the substance of ability of long-range market planning this subparagraph (c)(2) shall also costs is controlled by the provisions of apply to all contracts and subcontracts 31.205–12. Other market planning costs of the contractor with the Department are allowable to the extent that they of Defense being performed by the con- are reasonable and not in excess of the tractor on the first day of the contrac- limitations of subparagraph (c)(2) of tor’s first full fiscal year that begins this subsection. Costs of activities on or after December 15, 1988, whether which are correctly classified and dis- or not a contract or subcontract con- allowed under cost principles ref- tains this subparagraph (c)(2). erenced in this paragraph (b) are not to (d) The costs of any selling efforts be reconsidered for reimbursement other than those addressed in para- under any other provision of this sub- graphs (b) or (c) of this subsection are section. unallowable. (c)(1) Direct selling efforts are those (e) Costs of the type identified in acts or actions to induce particular paragraphs (b), (c), and (d) of this sub- customers to purchase particular prod- section are often commingled on the ucts or services of the contractor. Di- contractor’s books in the selling ex- rect selling is characterized by person- pense account because these activities to-person contact and includes such ac- are performed by the sales depart- tivities as familiarizing a potential ments. However, identification and seg- customer with the contractor’s prod- regation of unallowable costs is re- ucts or services, conditions of sale, quired under the provisions of 31.201–6 service capabilities, etc. It also in- and 48 CFR 9904.405, and such costs are cludes negotiation, liaison between not allowable merely because they are customer and contractor personnel, incurred in connection with allowable technical and consulting activities, in- selling activities. dividual demonstrations, and any other (f) Notwithstanding any other provi- activities having as their purpose the sion of this subsection, sellers’ or application or adaptation of the con- agents’ compensation, fees, commis- tractor’s products or services for a par- sions, percentages, retainer or broker- ticular customer’s use. The cost of di- age fees, whether or not contingent rect selling efforts is allowable if rea- upon the award of contracts, are allow- sonable in amount. able only when paid to bona fide em- (2) The costs of broadly targeted and ployees or established commercial or direct selling efforts and market plan- selling agencies maintained by the con- ning other than long-range, which are tractor for the purpose of securing incurred in connection with a signifi- business. cant effort to promote export sales of [51 FR 12301, Apr. 9, 1986, as amended at 52 products normally sold to the U.S. FR 19805, May 27, 1987; 55 FR 38517, Sept. 18, Government, including the costs of ex- 1990; 56 FR 15153, Apr. 15, 1991; 57 FR 39591, hibiting and demonstrating such prod- Aug. 31, 1992; 59 FR 11387, Mar. 10, 1994; 61 FR ucts, are allowable on contracts with 39189, July 26, 1996] the U.S Government provided— (i) The costs are allocable, reason- 31.205–39 Service and warranty costs. able, and otherwise allowable under Service and warranty costs include this subpart 31.2; those arising from fulfillment of any

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contractual obligation of a contractor (i) Promptly requests instructions to provide services such as installation, from the contracting officer concern- training, correcting defects in the ing such taxes; and products, replacing defective parts, and (ii) Takes all action directed by the making refunds in the case of inad- contracting officer arising out of sub- equate performance. When not incon- paragraph (2)(i) above or an independ- sistent with the terms of the contract, ent decision of the Government as to such service and warranty costs are al- the existence of a claim of illegality or lowable. However, care should be exer- erroneous assessment, to (A) determine cised to avoid duplication of the allow- the legality of the assessment or (B) se- ance as an element of both estimated cure a refund of such taxes. product cost and risk. (3) Pursuant to subparagraph (a)(2) above, the reasonable costs of any ac- 31.205–40 Special tooling and special test equipment costs. tion taken by the contractor at the direction or with the concurrence of the (a) The terms special tooling and spe- contracting officer. Interest or pen- cial test equipment are defined in 45.101. alties incurred by the contractor for (b) The cost of special tooling and non-payment of any tax at the direc- special test equipment used in perform- tion of the contracting officer or by ing one or more Government contracts reason of the failure of the contracting is allowable and shall be allocated to officer to ensure timely direction after the specific Government contract or a prompt request. contracts for which acquired, except (4) The Environmental Tax found at that the cost of (1) items acquired by section 59A of the Internal Revenue the contractor before the effective date of the contract (or replacement of such Code, also called the ‘‘Superfund Tax.’’ items), whether or not altered or (b) The following types of costs are adapted for use in performing the con- not allowable: tract, and (2) items which the contract (1) Federal income and excess profits schedule specifically excludes, shall be taxes. allowable only as depreciation or am- (2) Taxes in connection with financ- ortization. ing, refinancing, refunding operations, (c) When items are disqualified as or reorganizations (see 31.205–20 and special tooling or special test equip- 31.205–27). ment because with relatively minor ex- (3) Taxes from which exemptions are pense they can be made suitable for available to the contractor directly, or general purpose use and have a value as available to the contractor based on an such commensurate with their value as exemption afforded the Government, special tooling or special test equip- except when the contracting officer de- ment, the cost of adapting the items termines that the administrative bur- for use under the contract and the cost den incident to obtaining the exemp- of returning them to their prior con- tion outweighs the corresponding bene- figuration are allowable. fits accruing to the Government. When partial exemption from a tax is attrib- 31.205–41 Taxes. utable to Government contract activ- (a) The following types of costs are ity, taxes charged to such work in ex- allowable: cess of that amount resulting from ap- (1) Federal, State, and local taxes plication of the preferential treatment (see part 29), except as otherwise pro- are unallowable. These provisions in- vided in paragraph (b) below that are tend that tax preference attributable required to be and are paid or accrued to Government contract activity be rein accordance with generally accepted alized by the Government. The term ex- accounting principles. Fines and pen- emption means freedom from taxation alties are not considered taxes. in whole or in part and includes a tax (2) Taxes otherwise allowable under abatement or reduction resulting from subparagraph (a)(1) above, but upon mode of assessment, method of calcula- which a claim of illegality or erroneous tion, or otherwise. assessment exists; provided the con- (4) Special assessments on land that tractor, before paying such taxes— represent capital improvements.

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(5) Taxes (including excises) on real terest, or penalty shall be paid or cred- or personal property, or on the value, ited to the Government only to the ex- use, possession or sale thereof, which is tent that such interest accrued over used solely in connection with work the period during which the contractor other than on Government contracts had been reimbursed by the Govern- (see paragraph (c) below). ment for the taxes, interest, or pen- (6) Any excise tax in subtitle D, chap- alties. ter 43 of the Internal Revenue Code of [48 FR 42301, Sept. 19, 1983, as amended at 55 1986, as amended. That chapter in- FR 3884, Feb. 5, 1990; 55 FR 52794, Dec. 21, cludes excise taxes imposed in connec- 1990; 61 FR 2641, Jan. 26, 1996] tion with qualified pension plans, welfare plans, deferred compensation 31.205–42 Termination costs. plans, or other similar types of plans. Contract terminations generally give (7) Income tax accruals designed to rise to the incurrence of costs or the account for the tax effects of dif- need for special treatment of costs that ferences between taxable income and would not have arisen had the contract pretax income as reflected by the not been terminated. The following books of account and financial state- cost principles peculiar to terminktion ments. situations are to be used in conjunc- (c) Taxes on property (see subpara- tion with the other cost principles in graph (b)(5) above) used solely in con- subpart 31.2: nection with either non-Government or (a) Common items. The costs of items Government work should be considered reasonably usable on the contractor’s directly applicable to the respective other work shall not be allowable un- category of work unless the amounts less the contractor submits evidence involved are insignificant or com- that the items could not be retained at parable results would otherwise be ob- cost without sustaining a loss. The tained; e.g., taxes on contractor-owned contracting officer should consider the work-in-process which is used solely in contractor’s plans and orders for cur- connection with non-Government work rent and planned production when de- should be allocated to such work; taxes termining if items can reasonably be on contractor-owned work-in-process used on other work of the contractor. inventory (and Government-owned Contemporaneous purchases of com- work-in-process inventory when taxed) mon items by the contractor shall be used solely in connection with Govern- regarded as evidence that such items ment work should be charged to such are reasonably usable on the contrac- work. The cost of taxes incurred on tor’s other work. Any acceptance of property used in both Government and common items as allocable to the ter- non-Government work shall be appor- minated portion of the contract should tioned to all such work based upon the be limited to the extent that the quan- use of such property on the respective tities of such items on hand, in transit, final cost objectives. and on order are in excess of the rea- (d) Any taxes, interest, or penalties sonable quantitative requirements of that were allowed as contract costs and other work. are refunded to the contractor shall be (b) Costs continuing after termination. credited or paid to the Government in Despite all reasonable efforts by the the manner it directs. If a contractor contractor, costs which cannot be dis- or subcontractor obtains a foreign tax continued immediately after the effec- credit that reduces its U.S. Federal in- tive date of termination are generally come tax return because of the pay- allowable. However, any costs continu- ment of any tax or duty allowed as ing after the effective date of the ter- contract costs, and if those costs were mination due to the negligent or will- reimbursed by a foreign government, ful failure of the contractor to dis- the amount of the reduction shall be continue the costs shall be unallow- paid to the Treasurer of the United able. States at the time the Federal income (c) Initial costs. Initial costs (see tax return is filed. However, any inter- 15.804–6(f)), including starting load and est actually paid or credited to a con- preparatory costs, are allowable as fol- tractor incident to a refund of tax, in- lows:

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(1) Starting load costs not fully ab- (3) The loss of useful value for any sorbed because of termination are non- one terminated contract is limited to recurring labor, material, and related that portion of the acquisition cost overhead costs incurred in the early which bears the same ratio to the total part of production and result from fac- acquisition cost as the terminated por- tors such as— tion of the contract bears to the entire (i) Excessive spoilage due to inexperi- terminated contract and other Govern- enced labor; ment contracts for which the special (ii) Idle time and subnormal produc- tooling, or special machinery and tion due to testing and changing pro- equipment was acquired. duction methods; (e) Rental under unexpired leases. (iii) Training; and Rental costs under unexpired leases, (iv) Lack of familiarity or experience less the residual value of such leases, with the product, materials, or manu- are generally allowable when shown to facturing processes. have been reasonably necessary for the (2) Preparatory costs incurred in pre- performance of the terminated con- paring to perform the terminated contract, if— tract include such costs as those in- (1) The amount of rental claimed curred for initial plant rearrangement does not exceed the reasonable use and alterations, management and per- value of the property leased for the pe- sonnel organization, and production riod of the contract and such further planning. They do not include special period as may be reasonable; and machinery and equipment and starting (2) The contractor makes all reason- load costs. able efforts to terminate, assign, set- (3) When initial costs are included in tle, or otherwise reduce the cost of the settlement proposal as a direct such lease. charge, such costs shall not also be in- (f) Alterations of leased property. The cluded in overhead. Initial costs attrib- cost of alterations and reasonable res- utable to only one contract shall not torations required by the lease may be be allocated to other contracts. allowed when the alterations were nec- (4) If initial costs are claimed and essary for performing the contract. have not been segregated on the con- (g) Settlement expenses. (1) Settlement tractor’s books, they shall be seg- expenses, including the following, are regated for settlement purposes from generally allowable: cost reports and schedules reflecting (i) Accounting, legal, clerical, and that high unit cost incurred during the early stages of the contract. similar costs reasonably necessary for— (5) If the settlement proposal is on the inventory basis, initial costs (A) The preparation and presen- should normally be allocated on the tation, including supporting data, of basis of total end items called for by settlement claims to the contracting the contract immediately before termi- officer; and nation; however, if the contract in- (B) The termination and settlement cludes end items of a diverse nature, of subcontracts. some other equitable basis may be (ii) Reasonable costs for the storage, used, such as machine or labor hours. transportation, protection, and disposi- (d) Loss of useful value. Loss of useful tion of property acquired or produced value of special tooling, and special for the contract. machinery and equipment is generally (iii) Indirect costs related to salary allowable, provided— and wages incurred as settlement ex- (1) The special tooling, or special ma- penses in (i) and (ii); normally, such in- chinery and equipment is not reason- direct costs shall be limited to payroll ably capable of use in the other work of taxes, fringe benefits, occupancy costs, the contractor; and immediate supervision costs. (2) The Government’s interest is pro- (2) If settlement expenses are signifi- tected by transfer of title or by other cant, a cost account or work order means deemed appropriate by the con- shall be established to separately iden- tracting officer; and tify and accumulate them.

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(h) Subcontractor claims. Subcontrac- 31.205–44 Training and education tor claims, including the allocable por- costs. tion of the claims common to the con- (a) Allowable costs. Training and edu- tract and to other work of the contrac- cation costs are allowable to the extent tor, are generally allowable. An appro- indicated below. priate share of the contractor’s indi- (b) Vocational training. Costs of pre- rect expense may be allocated to the paring and maintaining a noncollege amount of settlements with sub- level program of instruction, including contractors; provided, that the amount but not limited to on-the-job, class- allocated is reasonably proportionate room, and apprenticeship training, de- to the relative benefits received and is signed to increase the vocational effec- otherwise consistent with 31.201–4 and tiveness of employees, are allowable. 31.203(c). The indirect expense so allo- These costs include (1) salaries or cated shall exclude the same and simi- wages of trainees (excluding overtime compensation), (2) salaries of the direc- lar costs claimed directly or indirectly tor of training and staff when the as settlement expenses. training program is conducted by the contractor, (3) tuition and fees when 31.205–43 Trade, business, technical and professional activity costs. the training is in an institution not operated by the contractor, and/or (4) The following types of costs are al- training materials and textbooks. lowable: (c) Part-time college level education. Al- (a) Memberships in trade, business, lowable costs of part-time college edu- technical, and professional organiza- cation at an undergraduate or post- tions. graduate level, including that provided (b) Subscriptions to trade, business, at the contractor’s own facilities, are professional, or other technical peri- limited to— odicals. (1) Fees and tuition charged by the (c) When the principal purpose of a educational institution, or, instead of meeting, convention, conference, sym- tuition, instructors’ salaries and the posium, or seminar is the dissemina- related share of indirect cost of the tion of trade, business, technical or educational institution, to the extent that the sum thereof is not in excess of professional information or the stimu- the tuition that would have been paid lation of production or improved pro- to the participating educational insti- ductivity: tution; (1) Costs of organizing, setting up, (2) Salaries and related costs of in- and sponsoring the meetings, conven- structors who are employees of the tions, symposia, etc., including rental contractor; and of meeting facilities, transportation, (3) Training materials and textbooks; subsistence, and incidental costs; and (2) Costs of attendance by contractor (4) Straight-time compensation of employees, including travel costs (see each employee for time spent attend- 31.205–46); and ing classes during working hours not in (3) Costs of attendance by individuals excess of 156 hours per year where cir- who are not employees of the contrac- cumstances do not permit the oper- tor, provided; ation of classes or attendance at class- (i) Such costs are not also reimbursed es after regular working hours. In un- to the individual by the employing usual cases, the period may be ex- company or organization, and tended (see paragraph (h) below). (d) Full-time education. Costs of tui- (ii) The individual’s attendance is es- tion, fees, training materials and text- sential to achieve the purpose of the books (but not subsistence, salary, or conference, meeting, convention, sym- any other emoluments) in connection posium, etc. with full-time education, including [48 FR 42301, Sept. 19, 1983, as amended at 53 that provided at the contractor’s own FR 27467, July 20, 1988; 60 FR 42660, Aug. 16, facilities, at a postgraduate but not un- 1995] dergraduate college level, are allowable only when the course or degree pursued

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is related to the field in which the em- (iii) Whether employees are in formal ployee is working or may reasonably be development programs; and expected to work and are limited to a (iv) The total number of participat- total period not to exceed 2 school ing employees. years or the length of the degree pro- (2) Any advance agreement must in- gram, whichever is less, for each em- clude a provision requiring the con- ployee so trained. tractor to refund to the Government (e) Specialized programs. Costs of at- training and education costs for em- tendance of up to 16 weeks per employees who resign within 12 months of ployee per year at specialized programs completion of such training or edu- specifically designed to enhance the ef- cation for reasons within an employ- fectiveness of managers or to prepare ee’s control. employees for such positions are allow- (i) Training or education costs for other able. Such costs include enrollment than bona—fide employees. Costs of tui- fees and related charges and employ- tion, fees, textbooks, and similar or re- ees’ salaries, subsistence, training ma- lated benefits provided for other than bona—fide employees are unallowable, terials, textbooks, and travel. Costs al- except that the costs incurred for edu- lowable under this paragraph do not in- cating employee dependents (primary clude costs for courses that are part of and secondary level studies) when the a degree-oriented curriculum, which employee is working in a foreign coun- are only allowable pursuant to para- try where public education is not avail- graphs (c) and (d) of this subsection. able and where suitable private edu- (f) Other expenses. Maintenance ex- cation is inordinately expensive may pense and normal depreciation or fair be included in overseas differential. rental on facilities owned or leased by (j) Employee dependent education the contractor for training purposes plans. Costs of college plans for em- are allowable in accordance with ployee dependents are unallowable. 31.205–17, 31.205–24, and 31.205–36. (g) Grants. Grants to educational or [48 FR 42301, Sept. 19, 1983, as amended at 52 FR 9038, Mar. 20, 1987; 52 FR 27806, July 24, training institutions, including the do- 1987; 52 FR 30077, Aug. 12, 1987] nation of facilities or other properties, scholarships, and fellowships are con- 31.205–45 Transportation costs. sidered contributions and are unallow- Allowable transportation costs in- able. clude freight, express, cartage, and (h) Advance agreements. (1) Training postage charges relating to goods pur- and education costs in excess of those chased, in process, or delivered. When otherwise allowable under (c) and (d) of these costs can be identified with the this subsection, including subsistence, items involved, they may be directly salaries, or any other emoluments, costed as transportation costs or added may be allowed to the extent set forth to the cost of such items. When identi- in an advance agreement negotiated fication with the materials received under 31.109. To be considered for an cannot be made, inbound transpor- advance agreement, the contractor tation costs may be charged to the ap- must demonstrate that the costs are propriate indirect cost accounts if the consistently incurred under an estab- contractor follows a consistent and eq- lished managerial, engineering, or sci- uitable procedure. Outbound freight, if entific training and education pro- reimbursable under the terms of the gram, and that the course or degree contract, shall be treated as a direct pursued is related to the field in which cost. employees are now working or may reasonably be expected to work. Before 31.205–46 Travel costs. entering into the advance agreement, (a) Costs for transportation, lodging, the contracting officer shall give con- meals, and incidental expenses. (1) Costs sideration to such factors as— incurred by contractor personnel on of- (i) The length of employees’ service ficial company business are allowable, with the contractor; subject to the limitations contained in (ii) Employees’ past performance and this subsection. Costs for transpor- potential; tation may be based on mileage rates,

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actual costs incurred, or on a combina- (i) One of the conditions warranting tion thereof, provided the method used approval of the actual expense method, results in a reasonable charge. Costs as set forth in the regulations referred for lodging, meals, and incidental ex- in (a)(2) (i), (ii), or (iii) of this section, penses may be based on per diem, ac- must exist. tual expenses, or a combination there- (ii) A written justification for use of of, provided the method used results in the higher amounts must be approved a reasonable charge. by an officer of the contractor’s organi- (2) Except as provided in paragraph zation or designee to ensure that the (a)(3) of this section, costs incurred for authority is properly administered and lodging, meals, and incidental expenses controlled to prevent abuse. (as defined in the regulations cited in (iii) If it becomes necessary to exer- (a)(2) (i) through (iii) of this paragraph) cise the authority to use the higher ac- shall be considered to be reasonable tual expense method repetitively or on and allowable only to the extent that a continuing basis in a particular area, they do not exceed on a daily basis the the contractor must obtain advance ap- maximum per diem rates in effect at proval from the contracting officer. the time of travel as set forth in the— (iv) Documentation to support actual (i) Federal Travel Regulation, pre- costs incurred shall be in accordance scribed by the General Services Admin- with the contractor’s established prac- istration, for travel in the tices, subject to paragraph (a)(7) of this conterminous 48 United States, avail- subsection, and provided that a receipt able on a subscription basis from the is required for each expenditure in ex- Superintendent of Documents, U.S. cess of $25.00. The approved justifica- Government Printing Office, Washing- tion required by (a)(3)(ii) and, if appli- ton, DC 20402, Stock No. 022–001–81003–7; cable, (a)(3)(iii) of this paragraph must (ii) Joint Travel Regulations, Volume be retained. 2, DoD Civilian Personnel, Appendix A, prescribed by the Department of De- (4) Subparagraphs (a)(2) and (a)(3) of fense, for travel in Alaska, Hawaii, The this subsection do not incorporate the Commonwealth of Puerto Rico, and regulations cited in subdivisions territories and possessions of the Unit- (a)(2)(i), (ii), and (iii) of this subsection ed States, available on a subscription in their entirety. Only the maximum basis from the Superintendent of Docu- per diem rates, the definitions of lodg- ments, U.S. Government Printing Of- ing, meals, and incidental expenses, fice, Washington, DC 20402, Stock No. and the regulatory coverage dealing 908–010–00000–1; or with special or unusual situations are (iii) Standarized Regulations (Gov- incorporated herein. ernment Civilians, Foreign Areas), sec- (5) An advance agreement (see 31.109) tion 925, Maximum Travel Per Diem Al- with respect to compliance with para- lowances of Foreign Areas, prescribed by graphs (a)(2) and (a)(3) of this section the Department of State, for travel in may be useful and desirable. areas not covered in (a)(2) (i) and (ii) of (6) The maximum per diem rates ref- this paragraph, available on a subscrip- erenced in subparagraph (a)(2) of this tion basis from the Superintendent of subsection generally would not con- Documents, U.S. Government Printing stitute a reasonable daily charge— Office, Washington, DC 20402, Stock No. (i) When no lodging costs are in- 744–088–00000–0. curred; and/or (3) In special or unusual situations, (ii) On partial travel days (e.g.), day actual costs in excess of the above-ref- of departure and return). erenced maximum per diem rates are Appropriate downward adjustments allowable provided that such amounts from the maximum per diem rates do not exceed the higher amounts au- would normally be required under thorized for Federal civilian employees these circumstances. While these ad- as permitted in the regulations ref- justments need not be calculated in ac- erenced in (a)(2) (i), (ii), or (iii) or this cordance with the Federal Travel Reg- section. For such higher amounts to be ulation or Joint Travel Regulations, allowable, all of the following condi- they must result in a reasonable tions must be met: charge.

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(7) Costs shall be allowable only if cuted. In all cases, travel by contrac- the following information is docu- tor-owned, -leased, or -chartered mented: aircraft must be fully documented and (i) Date and place (city, town, or justified. For each contractor-owned, other similar designation) of the ex- -leased, or -chartered aircraft used for penses; any business purpose which is charged (ii) Purpose of the trip; and or allocated, directly or indirectly, to a (iii) Name of person on trip and that Government contract, the contractor person’s title or relationship to the must maintain and make available contractor. manifest/logs for all flights on such (b) Travel costs incurred in the nor- company aircraft. As a minimum, the mal course of overall administration of manifest/log shall indicate— the business are allowable and shall be (i) Date, time, and points of depar- treated as indirect costs. ture; (c) Travel costs directly attributable (ii) Destination, date, and time of ar- to specific contract performance are al- rival; lowable and may be charged to the con- (iii) Name of each passenger and rela- tract under 31.202. tionship to the contractor; (d) Airfare costs in excess of the low- (iv) Authorization for trip; and est customary standard, coach, or (v) Purpose of trip. equivalent airfare offered during nor- (3) Where an advance agreement is mal business hours are unallowable ex- proposed (see 31.109), consideration cept when such accommodations re- may be given to the following: quire circuitous routing, require travel during unreasonable hours, excessively (i) Whether scheduled commercial prolong travel, result in increased cost airlines or other suitable, less costly, that would offset transportation sav- travel facilities are available at rea- ings, are not reasonably adequate for sonable times, with reasonable fre- the physical or medical needs of the quency, and serve the required destina- traveler, or are not reasonably avail- tions conveniently. able to meet mission requirements. (ii) Whether increased flexibility in However, in order for airfare costs in scheduling results in time savings and excess of the above standard airfare to more effective use of personnel that be allowable, the applicable condi- would outweigh additional travel costs. tion(s) set forth in this paragraph must (f) Costs of contractor-owned or be documented and justified. leased automobiles, as used in this (e)(1) Cost of travel by contractor- paragraph, include the costs of lease, owned, -leased, or -chartered aircraft, as operation (including personnel), main- used in this subparagraph, includes the tenance, depreciation, insurance, etc. cost of lease, charter, operation (in- These costs are allowable, if reason- cluding personnel), maintenance, de- able, to the extent that the auto- preciation, insurance, and other relat- mobiles are used for company business. ed costs. That portion of the cost of company- (2) The costs of travel by contractor- furnished automobiles that relates to owned, -leased, or -chartered aircraft personal use by employees (including are limited to the standard airfare de- transportation to and from work) is scribed in paragraph (d) of this sub- compensation for personal services and section for the flight destination unless is unallowable as stated in 31.205– travel by such aircraft is specifically 6(m)(2). required by contract specification, [48 FR 42301, Sept. 19, 1983, as amended at 51 term, or condition, or a higher amount FR 12301, Apr. 9, 1986; 51 FR 27489, July 31, is approved by the contracting officer. 1986; 51 FR 36972, Oct. 16, 1986; 56 FR 41739, A higher amount may be agreed to Aug. 22, 1991; 57 FR 20377, May 12, 1992; 61 FR when one or more of the circumstances 31657, June 20, 1996] for justifying higher than standard airfare listed in paragraph (d) of this sub- 31.205–47 Costs related to legal and section are applicable, or when an ad- other proceedings. vance agreement under subparagraph (a) Definitions.Conviction, as used in (e)(3) of this subsection has been exe- this subsection, is defined in 9.403.

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Costs include, but are not limited to, where the underlying alleged contrac- administrative and clerical expenses; tor misconduct was the same as that the costs of legal services, whether per- which led to a different proceeding formed by in-house or private counsel; whose costs are unallowable by reason the costs of the services of account- of subparagraphs (b) (1) through (4) of ants, consultants, or others retained by this subsection. the contractor to assist it; costs of em- (c) To the extent they are not other- ployees, officers, and directors; and any wise unallowable, costs incurred in similar costs incurred before, during, connection with any proceeding under and after commencement of a judicial paragraph (b) of this subsection com- or administrative proceeding which menced by the United States that is re- bears a direct relationship to the pro- solved by consent or compromise pur- ceedings. suant to an agreement entered into be- Fraud, as used in this subsection, tween the contractor and the United means (1) acts of fraud or corruption or States, and which are unallowable sole- attempts to defraud the Government or ly because of paragraph (b) of this sub- to corrupt its agents, (2) acts which section, may be allowed to the extent constitute a cause for debarment or specifically provided in such agree- suspension under 9.406–2(a) and 9.407– ment. 2(a) and (3) acts which violate the False (d) To the extent that they are not Claims Act, 31 U.S.C., sections 3729– otherwise unallowable, costs incurred 3731, or the Anti-Kickback Act, 41 in connection with any proceeding U.S.C., sections 51 and 54. under paragraph (b) of this subsection Penalty, does not include restitution, commenced by a State, local, or for- reimbursement, or compensatory dam- eign government may be allowable ages. when the contracting officer (or other Proceeding, includes an investigation. official specified in agency procedures) (b) Costs incurred in connection with determines, that the costs were in- any proceeding brought by a Federal, curred either: State, local or foreign government for (1) As a direct result of a specific violation of, or a failure to comply term or condition of a Federal con- with, law or regulation by the contrac- tract; or tor (including its agents or employees) (2) As a result of compliance with are unallowable if the result is— specific written direction of the cog- (1) In a criminal proceeding, a con- nizant contracting officer. viction; (e) Costs incurred in connection with (2) In a civil or administrative pro- proceedings described in paragraph (b) ceeding, either a finding of contractor of this subsection, but which are not liability where the proceeding involves made unallowable by that paragraph, an allegation of fraud or similar mis- may be allowable to the extent that: conduct or imposition of a monetary (1) The costs are reasonable in rela- penalty where the proceeding does not tion to the activities required to deal involve an allegation of fraud or simi- with the proceeding and the underlying lar misconduct. cause of action; (3) A final decision by an appropriate (2) The costs are not otherwise recov- official of an executive agency to: ered from the Federal Government or a (i) Debar or suspend the contractor; third party, either directly as a result (ii) Rescind or void a contract; or of the proceeding or otherwise; and (iii) Terminate a contract for default (3) The percentage of costs allowed by reason of a violation or failure to does not exceed the percentage deter- comply with a law or regulation; mined to be appropriate considering (4) Disposition of the matter by con- the complexity of procurement litiga- sent or compromise if the proceeding tion, generally accepted principles gov- could have led to any of the outcomes erning the award of legal fees in civil listed in subparagraphs (b) (1) through actions involving the United States as (3) of this subsection (but see para- a party, and such other factors as may graphs (c) and (d) of this subsection); or be appropriate. Such percentage shall (5) Not covered by subparagraphs (b) not exceed 80 percent. However, if an (1) through (4) of this subsection, but agreement reached under paragraph (c)

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of this subsection has explicitly consid- accounted for by the contractor sepa- ered this 80 percent rule, then the full rately. During the pendency of any pro- amount of costs resulting from that ceeding covered by paragraph (b) and agreement shall be allowable. subparagraphs (f)(4) and (f)(7) of this (f) Costs not covered elsewhere in subsection, the contracting officer this subsection are unallowable if in- shall generally withhold payment of curred in connection with— such costs. However, if in the best in- (1) Defense against Federal Govern- terests of the Government, the con- ment claims or appeals or the prosecu- tracting officer may provide for condition of claims or appeals against the tional payment upon provision of ade- Federal Government (see 33.201). quate security, or other adequate as- (2) Organization, reorganization, (insurance, and agreement by the contrac- cluding mergers and acquisitions) or tor to repay all unallowable costs, plus resisting mergers and acquisitions (see also 31.205–27). interest, if the costs are subsequently (3) Defense of antitrust suits. determined to be unallowable. (4) Defense of suits brought by em- [48 FR 42301, Sept. 19, 1983, as amended at 51 ployees or ex-employees of the contrac- FR 12302, Apr. 9, 1986; 54 FR 13024, Mar. 29, tor under section 2 of the Major Fraud 1989; 55 FR 52794, Dec. 21, 1990; 61 FR 41477, Act of 1988 where the contractor was Aug. 8, 1996] found liable or settled. EFFECTIVE DATE NOTE: At 61 FR 41477, Aug. (5) Costs of legal, accounting, and 8, 1996, section 31.205–47 was amended by add- consultant services and directly associ- ing paragraph (f)(8), effective Oct. 7, 1996. ated costs incurred in connection with the defense or prosecution of lawsuits 31.205–48 Deferred research and de- or appeals between contractors arising velopment costs. from either (1) an agreement or con- Research and development, as used in tract concerning a teaming arrange- this subsection, means the type of ment, a joint venture, or similar ar- technical effort which is described in rangement of shared interest; or (2) dual sourcing, coproduction, or similar 31.205–18 but which is sponsored by, or programs, are unallowable, except required in performance of, a contract when (i) incurred as a result of compli- or grant. Research and development ance with specific terms and conditions costs (including amounts capitalized) of the contract or written instructions that were incurred before the award of from the contracting officer, or (ii) a particular contract are unallowable when agreed to in writing by the con- except when allowable as precontract tracting officer. costs. In addition, when costs are in- (6) Patent infringement litigation, curred in excess of either the price of a unless otherwise provided for in the contract or amount of a grant for re- contract. search and development effort, such ex- (7) Representation of, or assistance cess may not be allocated as a cost to to, individuals, groups, or legal entities any other Government contract. which the contractor is not legally bound to provide, arising from an ac- 31.205–49 Goodwill. tion where the participant was con- Goodwill, an unidentifiable intangi- victed of violation of a law or regula- ble asset, originates under the pur- tion or was found liable in a civil or ad- chase method of accounting for a busi- ministrative proceeding. ness combination when the price paid (8) Protests of Federal Government solicitations or contract awards, or the by the acquiring company exceeds the defense against protests of such solici- sum of the identifiable individual as- tations or contract awards, unless the sets acquired less liabilities assumed, costs of defending against a protest are based upon their fair values. The excess incurred pursuant to a written request is commonly referred to as goodwill. from the cognizant contracting officer. Goodwill may arise from the acquisi- (g) Costs which may be unallowable tion of a company as a whole or a por- under 31.205–47, including directly asso- tion thereof. Any costs for amortiza- ciated costs, shall be segregated and tion, expensing, write-off, or write-

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down of goodwill (however represented) Subparts 31.4—31.5 [Reserved] are unallowable. [49 FR 26743, June 29, 1984] Subpart 31.6—Contracts With State, Local, and Federally 31.205–50 [Reserved] Recognized Indian Tribal Gov- 31.205–51 Costs of alcoholic beverages. ernments Costs of alcoholic beverages are unal- 31.601 Purpose. lowable. This subpart provides the principles [51 FR 12302, Apr. 9, 1986] for determining allowable cost of contracts and subcontracts with State, 31.205–52 Asset valuations resulting local, and federally recognized Indian from business combinations. tribal governments. When the purchase method of ac- 31.602 General. counting for a business combination is used, allowable amortization, cost of Office of Management and Budget money, and depreciation shall be lim- (OMB) Circular No. A–87, Cost Prin- ited to the total of the amounts that ciples for State and Local Govern- would have been allowed had the comments, Revised, sets forth the prin- bination not taken place. ciples for determining the allowable costs of contracts and subcontracts [55 FR 25530, June 21, 1990] with State, local, and federally recognized Indian tribal governments. These Subpart 31.3—Contracts With principles are for cost determination Educational Institutions and are not intended to identify the circumstances or dictate the extent of 31.301 Purpose. Federal and State or local participation in financing a particular contract. This subpart provides the principles for determining the cost of research 31.603 Requirements. and development, training, and other work performed by educational institu- (a) Contracts that refer to this sub- tions under contracts with the Govern- part 31.6 for determining allowable ment. costs under contracts with State, local and Indian tribal governments shall be 31.302 General. deemed to refer to, and shall have the allowability of costs determined by the Office of Management and Budget contracting officer in accordance with, (OMB) Circular No. A–21, Cost Prin- the revision of OMB Circular A–87 ciples for Educational Institutions, re- which is in effect on the date of the vised, provides principles for determin- contract. ing the costs applicable to research and (b) Agencies are not expected to development, training, and other work place additional restrictions on indi- performed by educational institutions vidual items of cost. However, under 10 under contracts with the Government. U.S.C. 2324(e) and 41 U.S.C. 256(e), the following costs are unallowable: 31.303 Requirements. (1) Costs of entertainment, including (a) Contracts that refer to this sub- amusement, diversion, and social ac- part 31.3 for determining allowable tivities, and any costs directly associ- costs under contracts with educational ated with such costs (such as tickets to institutions shall be deemed to refer shows or sports events, meals, lodging, to, and shall have the allowability of rentals, transportation, and gratu- costs determined by the contracting of- ities). ficer in accordance with, the revision (2) Costs incurred to influence (di- of OMB Circular A–21 in effect on the rectly or indirectly) legislative action date of the contract. on any matter pending before Congress, (b) Agencies are not expected to a State legislature, or a legislative place additional restrictions on indi- body of a political subdivision of a vidual items of cost. State.

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(3) Costs incurred in defense of any the industry involved under the cus- civil or criminal fraud proceeding or tomary or prevailing practice for firms similar proceeding (including filing of in that industry providing similar serv- any false certification) brought by the ices in the United States, as deter- United States where the contractor is mined by regulations in the FAR or in found liable or has pleaded nolo an executive agency supplement to the contendere to a charge of fraud or simi- FAR. lar proceeding (including filing of a (14) Costs of severance pay paid by false certification). the contractor to a foreign national (4) Payments of fines and penalties employed by the contractor under a resulting from violations of, or failure service contract performed in a foreign to comply with, Federal, state, local, country if the termination of the em- or foreign laws and regulations, except ployment of the foreign national is the when incurred as a result of compli- result of the closing of, or curtailment ance with specific terms and conditions of activities at, a United States facility of the contract or specific written in- in that country at the request of the structions from the contracting officer government of that country. authorizing in advance such payments (15) Costs incurred by a contractor in in accordance with applicable regula- connection with any criminal, civil, or tions in the FAR or an executive agen- administrative proceedings commenced cy supplement to the FAR. by the United States or a State, to the (5) Costs of any membership in any extent provided in 10 U.S.C. 2324(k) or social, dining, or country club or orga- 41 U.S.C. 256(k). nization. (6) Costs of alcoholic beverages. [48 FR 42301, Sept. 19, 1983, as amended at (7) Contributions or donations, re- 42660, Aug. 16, 1995] gardless of the recipient. (8) Costs of advertising designed to Subpart 31.7—Contracts With promote the contractor or its products. Nonprofit Organizations (9) Costs of promotional items and memorabilia, including models, gifts, 31.701 Purpose. and souvenirs. This subpart provides the principles (10) Costs for travel by commercial aircraft which exceed the amount of for determining the cost applicable to the standard commercial fare. work performed by nonprofit organiza- (11) Costs incurred in making any tions under contracts with the Govern- payment (commonly known as a ‘‘gold- ment. A nonprofit organization, for en parachute payment’’) which is— purpose of identification, is defined as (i) In an amount in excess of the nor- a business entity organized and oper- mal severance pay paid by the contrac- ated exclusively for charitable, sci- tor to an employee upon termination of entific, or educational purposes, of employment; and which no part of the net earnings inure (ii) Is paid to the employee contin- to the benefit of any private share- gent upon, and following, a change in holder or individual, of which no sub- management control over, or owner- stantial part of the activities is carry- ship of, the contractor or a substantial ing on propaganda or otherwise at- portion of the contractor’s assets. tempting to influence legislation or (12) Costs of commercial insurance participating in any political campaign that protects against the costs of the on behalf of any candidate for public contractor for correction of the con- office, and which are exempt from fed- tractor’s own defects in materials or eral income taxation under section 501 workmanship. of the Internal Revenue Code. (13) Costs of severance pay paid by the contractor to foreign nationals em- 31.702 General. ployed by the contractor under a serv- Office of Management and Budget ice contract performed outside the (OMB) Circular No. A–122, Cost Prin- United States, to the extent that the ciples for Nonprofit Organizations, sets amount of the severance pay paid in forth principles for determining the any case exceeds the amount paid in costs applicable to work performed by

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nonprofit organizations under con- 32.112–2 Subcontractor requests for informa- tracts (also applies to grants and other tion. agreements) with the Government. 32.113 Customary contract financing. 32.114 Unusual contract financing. 31.703 Requirements. Subpart 32.2—Commercial Item Purchase (a) Contracts which refer to this sub- Financing part 31.7 for determining allowable costs shall be deemed to refer to, and 32.200 Scope of subpart. shall have the allowability of costs de- 32.201 Statutory authority. termined by the contracting officer in 32.202 General. accordance with, the revision of OMB 32.202–1 Policy. Circular A–122 in effect on the date of 32.202–2 Types of payments for commercial item purchases. the contract. 32.202–3 Conducting market research about (b) Agencies are not expected to financing terms. place additional restrictions on indi- 32.202–4 Security for Government financing. vidual items of cost. However, under 10 32.203 Determining contract financing U.S.C. 2324(e) and 41 U.S.C. 256(e), the terms. costs cited in 31.603(b) are unallowable. 32.204 Procedures for contracting officer- specified commercial contract financing. [48 FR 42301, Sept. 19, 1983, as amended at 60 32.205 Procedures for offeror-proposed com- FR 42661, Aug. 16, 1995] mercial contract financing. 32.206 Solicitation provisions and contract PART 32—CONTRACT FINANCING clauses. 32.207 Administration and payment of com- Sec. mercial financing payments. 32.000 Scope of part. 32.001 Definitions. Subpart 32.3—Loan Guarantees for 32.002 Applicability of subparts. Defense Production 32.003 Simplified acquisition procedures fi- 32.300 Scope of subpart. nancing. 32.301 Definitions. 32.004 Contract performance in foreign countries. 32.302 Authority. 32.005 Consideration for contract financing. 32.303 General. 32.006 Reduction or suspension of contract 32.304 Procedures. payments upon finding of fraud. 32.304–1 Application for guarantee. 32.006–1 General. 32.304–2 Certificate of eligibility. 32.006–2 Definitions. 32.304–3 Asset formula. 32.006–3 Responsibilities. 32.304–4 Guarantee amount and maturity. 32.006–4 Procedures. 32.304–5 Assignment of claims under con- 32.006–5 Reporting. tracts. 32.304–6 Other collateral security. Subpart 32.1—Non-Commercial Item 32.304–7 Contract surety bonds and loan Purchase Financing guarantees. 32.304–8 Other borrowing. 32.100 Scope of subpart. 32.305 Loan guarantees for terminated con- 32.101 Authority. tracts. 32.102 Description of contract financing 32.306 Loan guarantees for subcontracts. methods. 32.103 Progress payments under construc- Subpart 32.4—Advance Payments for Non- tion contracts. Commercial Items 32.104 Providing contract financing. 32.105 Uses of contract financing. 32.400 Scope of subpart. 32.106 Order of preference. 32.401 Statutory authority. 32.107 Need for contract financing not a de- 32.402 General. terrent. 32.403 Applicability. 32.108 Financial consultation. 32.404 Exclusions. 32.109 Termination financing. 32.405 Applying Pub. L. 85–804 to advance 32.110 [Reserved] payments under sealed bid contracts. 32.111 Contract clauses for noncommercial 32.406 Letters of credit. purchases. 32.407 Interest. 32.112 Payment of subcontractors under 32.408 Application for advance payments. contracts for non–commercial items. 32.409 Contracting officer action. 32.112–1 Subcontractor assertions of non- 32.409–1 Recommendation for approval. payment. 32.409–2 Recommendation for disapproval.

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32.409–3 Security, supervision, and cov- 32.610 Demand for payment of contract enants. debt. 32.410 Findings, determination, and author- 32.611 Routine setoff. ization. 32.612 Withholding and setoff. 32.411 Agreement for special bank account. 32.613 Deferment of collection. 32.412 Contract clause. 32.614 Interest. 32.614–1 Interest charges. Subpart 32.5—Progress Payments Based on 32.614–2 Interest credits. Costs 32.615 Delays in receipt of notices or demands. 32.500 Scope of subpart. 32.616 Compromise actions. 32.501 General. 32.617 Contract clause. 32.501–1 Customary progress payment rates. 32.501–2 Unusual progress payments. Subpart 32.7—Contract Funding 32.501–3 Contract price. 32.501–4 [Reserved] 32.700 Scope of subpart. 32.501–5 Other protective terms. 32.701 [Reserved] 32.502 Preaward matters. 32.702 Policy. 32.502–1 Use of customary progress pay- 32.703 Contract funding requirements. ments. 32.703–1 General. 32.502–2 Contract finance office clearance. 32.703–2 Contracts conditioned upon avail- 32.502–3 Solicitation provisions. ability of funds. 32.502–4 Contract clauses. 32.703–3 Contracts crossing fiscal years. 32.503 Postaward matters. 32.704 Limitation of cost or funds. 32.503–1 Contractor requests. 32.705 Contract clauses. 32.503–2 Supervision of progress payments. 32.705–1 Clauses for contracting in advance 32.503–3 Initiation of progress payments and of funds. review of accounting system. 32.705–2 Clauses for limitation of cost or 32.503–4 Approval of progress payment refunds. quests. 32.503–5 Administration of progress pay- Subpart 32.8—Assignment of Claims ments. 32.800 Scope of subpart. 32.503–6 Suspension or reduction of pay- 32.801 Definitions. ments. 32.802 Conditions. 32.503–7 Limitation on general and adminis- 32.803 Policies. trative expenses (G&A) for progress pay- 32.804 Extent of assignee’s protection. ments. 32.805 Procedure. 32.503–8 Liquidation rates—ordinary meth- 32.806 Contract clauses. od. 32.503–9 Liquidation rates—alternate meth- Subpart 32.9—Prompt Payment od. 32.503–10 Establishing alternate liquidation 32.900 Scope of subpart. rates. 32.901 Applicability. 32.503–11 Adjustments for price reduction. 32.902 Definitions. 32.503–12 Maximum unliquidated amount. 32.903 Policy. 32.503–13 Quarterly statements for price re- 32.904 Responsibilities. vision contracts. 32.905 Invoice payments. 32.503–14 Protection of Government title. 32.906 Contract financing payments. 32.503–15 Application of Government title 32.907 Interest penalties. terms. 32.907–1 Late invoice payment. 32.503–16 Risk of loss. 32.907–2 Late contract financing payment. 32.504 Subcontracts. 32.908 Contract clauses. 32.909 Contractor inquiries. Subpart 32.6—Contract Debts Subpart 32.10—Performance-Based 32.600 Scope of subpart. Payments 32.601 Definition. 32.602 General. 32.1000 Scope of subpart. 32.603 Applicability. 32.1001 Policy. 32.604 Exclusions. 32.1002 Bases for performance-based pay- 32.605 Responsibilities and cooperation ments. among Government officials. 32.1003 Criteria for use. 32.606 Debt determination and collection. 32.1004 Procedure. 32.607 Tax credit. 32.1005 Contract clauses. 32.608 Negotiation of contract debts. 32.1006 Agency approvals. 32.609 Memorandum of pricing agreement 32.1007 Administration and payment of per- with refund. formance-based payments.

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32.1008 Suspension or reduction of perform- tracting officers. Most customary con- ance-based payments. tract financing arrangements should be 32.1009 Title. usable by contracting officers without 32.1010 Risk of loss. specific reviews or approvals by higher Subpart 32.11—Electronic Funds Transfer management. Unusual contract financing means any 32.1100 Scope of subpart. financing not deemed customary con- 32.1101 Policy. tract financing by the agency. Unusual 32.1102 Assignment of claims. contract financing is financing that is 32.1103 Contract clauses. legal and proper under applicable laws, AUTHORITY: 40 U.S.C. 486(c); 10 U.S.C. Chap- but that the agency has not authorized ter 137; and 42 U.S.C. 2473(c). contracting officers to use without spe- SOURCE: 48 FR 42328, Sept. 19, 1983, unless cific reviews or approvals by higher otherwise noted. management. 32.000 Scope of part. [52 FR 30077, Aug. 12, 1987, as amended at 60 This part prescribes policies and pro- FR 49710, Sept. 26, 1995] cedures for contract financing and 32.002 Applicability of subparts. other payment matters. This includes— (a) The following sections and sub- (a) Payment methods, including par- parts of this part are applicable to all tial payments and progress payments purchases subject to part 32: based on percentage or stage of com- (1) Sections 32.000 through 32.005. pletion; (2) Subpart 32.3, Loan Guarantees for (b) Loan guarantees, advance pay- Defense Production. ments, and progress payments based on (3) Subpart 32.6, Contract Debts. costs; (4) Subpart 32.7, Contract Funding. (c) Administration of debts to the (5) Subpart 32.8, Assignment of Government arising out of contracts; Claims. (d) Contract funding, including the (6) Subpart 32.9, Prompt Payment. use of contract clauses limiting costs (7) Subpart 32.11, Electronic Funds or funds; Transfer. (e) Assignment of claims to aid in (b) Subpart 32.2, Commercial Item private financing; Purchase Financing, is applicable only (f) Selected payment clauses; to purchases of commercial items (g) Financing of purchases of com- under authority of part 12. mercial items; (c) The following subparts of this (h) Performance-based payments; and part are applicable to all purchases (i) Electronic funds transfer pay- made under any authority other than ments. part 12: [48 FR 42328, Sept. 19, 1983, as amended at 60 (1) Subpart 32.1, Non-Commercial FR 49710, Sept. 26, 1995; 61 FR 45772, Aug. 29, Item Purchase Financing. 1996] (2) Subpart 32.4, Advance Payments For Non-Commercial Items. 32.001 Definitions. (3) Subpart 32.5, Progress Payments Contract action, as used in this part, Based on Costs. means an action resulting in a con- (4) Subpart 32.10, Performance-Based tract, as defined in FAR subpart 2.1, in- Payments. cluding contract modifications for additional supplies or services, but not [60 FR 49710, Sept. 26, 1995, as amended at 61 FR 45772, Aug. 29, 1996] including contract modifications that are within the scope and under the 32.003 Simplified acquisition proce- terms of the contract, such as contract dures financing. modifications issued pursuant to the Unless agency regulations otherwise Changes clause, or funding and other permit, contract financing shall not be administrative changes. provided for purchases made under the Customary contract financing means authority of part 13. that financing deemed by an agency to be available for routine use by con- [60 FR 49710, Sept. 26, 1995]

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32.004 Contract performance in for- (c) Interest. Except as provided in sub- eign countries. part 32.4, Advance Payments for Non- The enforceability of contract provi- Commercial Items, the contract shall sions for security of Government fi- not provide for any other type of spe- nancing in a foreign jurisdiction is de- cific charges, such as interest, for con- pendent upon local law and procedure. tract financing. Prior to providing contract financing [60 FR 49710, Sept. 26, 1995] where foreign jurisdictions may become involved, the contracting officer 32.006 Reduction or suspension of con- shall ensure the Government’s security tract payments upon finding of is enforceable. This may require the fraud. provision of additional or different security than that normally provided for 32.006–1 General. in the standard contract clauses. (a) Under Title 10 of the United [60 FR 49710, Sept. 26, 1995] States Code, the statutory authority implemented by this section is avail- 32.005 Consideration for contract fi- able only to the Department of De- nancing. fense; this statutory authority is not (a) Requirement. When a contract fi- available to the National Aeronautics nancing clause is included at the incep- and Space Administration or the Unit- tion of a contract, there shall be no ed States Coast Guard. Under the Fed- separate consideration for the contract eral Property and Administrative Serv- financing clause. The value of the con- ices Act (41 U.S.C. 255), this statutory tract financing to the contractor is ex- authority is available to all agencies pected to be reflected in either subject to that Act. (1) A bid or negotiated price that will (b) 10 U.S.C. 2307(h)(2) and 41 U.S.C. be lower than such price would have 255, as amended by the Federal Acquisi- been in the absence of the contract fi- tion Streamlining Act of 1994, Public nancing, or Law 103–355, provide for a reduction or (2) Contract terms and conditions, other than price, that are more bene- suspension of further payments to a ficial to the Government than they contractor when the agency head de- would have been in the absence of the termines there is substantial evidence contract financing. Adequate new con- that the contractor’s request for ad- sideration is required for changes to, or vance, partial, or progress payments is the addition of, contract financing based on fraud. This authority does not after award. apply to commercial interim payments (b) Amount of new consideration. The under subpart 32.2, or performance- contractor may provide new consider- based payments under subpart 32.10. ation by monetary or nonmonetary (c) The agency head may not delegate means, provided the value is adequate. his or her responsibilities under these The fair and reasonable consideration statutes below Level IV of the Execu- should approximate the amount by tive Schedule. which the price would have been less (d) Authority to reduce or suspend had the contract financing terms been payments under these statutes is in ad- contained in the initial contract. In dition to other Government rights, the absence of definite information on remedies, and procedures. this point, the contracting officer (e) In accordance with these statutes, should apply the following criteria in agency head determinations and deci- evaluating whether the proposed new sions under this section may be made consideration is adequate: (1) The value to the contractor of the for an individual contract or any group anticipated amount and duration of the of contracts affected by the fraud. contract financing at the imputed fi- [60 FR 49728, Sept. 26, 1995] nancial costs of the equivalent working capital. 32.006–2 Definitions. (2) The estimated profit rate to be As used in this section— earned through contract performance.

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Remedy coordination official means the minimum, the agency head shall con- person or entity in the agency who co- sider— ordinates within that agency the ad- (1) A recommendation from inves- ministration of criminal, civil, admin- tigating officers that disclosure of the istrative, and contractual remedies re- allegations of fraud to the contractor sulting from investigations of fraud or may compromise an ongoing investiga- corruption related to procurement action; tivities. (See 10 U.S.C. 2307(h)(10) and 41 (2) The anticipated loss to the Gov- U.S.C. 255(g)(9).) ernment as a result of the fraud; Substantial evidence means informa- (3) The contractor’s overall financial tion sufficient to support the reason- condition and ability to continue per- able belief that a particular act or formance if payments are reduced or omission has occurred. suspended; (4) The contractor’s essentiality to [60 FR 49729, Sept. 26, 1995] the national defense, or to the execu- 32.006–3 Responsibilities. tion of the agency’s official business; and (a) Agencies shall establish appro- (5) Assessment of all documentation priate procedures to implement the concerning the alleged fraud, including policies and procedures of this section. documentation submitted by the con- (b) Government personnel shall re- tractor in its response to the notice report suspected fraud related to ad- quired by paragraph (e) of this sub- vance, partial, or progress payments in section. accordance with agency regulations. (e) Before making a decision to re- [60 FR 49729, Sept. 26, 1995] duce or suspend further payments, the agency head shall, in accordance with 32.006–4 Procedures. agency procedures— (a) In any case in which an agency’s (1) Notify the contractor in writing remedy coordination official finds sub- of the action proposed by the remedy stantial evidence that a contractor’s coordination official and the reasons request for advance, partial, or therefor (such notice must be suffi- progress payments under a contract ciently specific to permit the contrac- awarded by that agency is based on tor to collect and present evidence ad- fraud, the remedy coordination official dressing the aforesaid reasons); and shall recommend that the agency head (2) Provide the contractor an oppor- reduce or suspend further payments to tunity to submit information within a the contractor. The remedy coordina- reasonable time, in response to the action official shall submit to the agency tion proposed by the remedy coordina- head a written report setting forth the tion official. remedy coordination official’s findings (f) When more than one agency has that support each recommendation. contracts affected by the fraud, the (b) Upon receiving a recommendation agencies shall consider designating one from the remedy coordination official agency as the lead agency for making under paragraph (a) of this subsection, the determination and decision. the agency head shall determine (g) The agency shall retain in its files whether substantial evidence exists the written justification for each— that the request for payment under a (1) Decision of the agency head contract is based on fraud. whether to reduce or suspend further (c) If the agency head determines payments; and that substantial evidence exists, the (2) Recommendation received by an agency head may reduce or suspend agency head in connection with such further payments to the contractor decision. under the affected contract(s). Such re- (h) Not later than 180 calendar days duction or suspension shall be reason- after the date of the reduction or sus- ably commensurate with the antici- pension action, the remedy coordina- pated loss to the Government resulting tion official shall— from the fraud. (1) Review the agency head’s deter- (d) In determining whether to reduce mination on which the reduction or or suspend further payment(s), as a suspension decision is based; and

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(2) Transmit a recommendation to performance under one or more con- the agency head as to whether the re- tracts. They are expected to be liq- duction or suspension should continue. uidated from payments due to the contractor incident to performance of the [60 FR 49729, Sept. 26, 1995] contracts. Since they are not measured 32.006–5 Reporting. by performance, they differ from partial, progress, or other payments based (a) In accordance with 41 U.S.C. 255, on the performance or partial perform- the head of an agency, other than the ance of a contract. Advance payments Department of Defense, shall prepare a may be made to prime contractors for report for each fiscal year in which a the purpose of making advances to sub- recommendation has been received pur- contractors. suant to 32.006–4(a). Reports within the (b) Progress payments based on costs Department of Defense shall be pre- are made on the basis of costs incurred pared in accordance with 10 U.S.C. 2307. by the contractor as work progresses (b) In accordance with 41 U.S.C. 255 under the contract. This form of con- and 10 U.S.C. 2307, each report shall tract financing does not include— contain— (1) Each recommendation made by (1) Payments based on the percentage the remedy coordination official; or stage of completion accomplished; (2) The actions taken on the rec- (2) Payments for partial deliveries ommendation(s), with reasons for such accepted by the Government; actions; and (3) Partial payments for a contract (3) An assessment of the effects of termination proposal; or each action on the Government. (4) Performance-based payments. (c) Loan guarantees are made by Fed- [60 FR 49729, Sept. 26, 1995] eral Reserve banks, on behalf of designated guaranteeing agencies, to en- Subpart 32.1—Non-Commercial able contractors to obtain financing Item Purchase Financing from private sources under contracts for the acquisition of supplies or serv- 32.100 Scope of subpart. ices for the national defense. This subpart provides policies and (d) Partial payments for accepted procedures applicable to contract fi- supplies and services that are only a nancing and payment for any pur- part of the contract requirements are chases other than purchases of com- authorized under section 305 of the mercial items in accordance with part Federal Property and Administrative 12. Services Act (41 U.S.C. 255) and 10 U.S.C. 2307. Although partial payments [60 FR 49710, Sept. 26, 1995] are generally treated as a method of 32.101 Authority. payment and not as a method of contract financing, using partial payments The basic authority for the contract can assist contractors to participate in financing described in this part is con- Government contracts without, or with tained in section 305 of the Federal minimal, contract financing. When ap- Property and Administrative Services propriate, agencies shall use this pay- Act of 1949 (41 U.S.C. 255), section 2307 ment method. of the Armed Services Procurement (e)(1) Progress payments based on a Act (10 U.S.C. 2307), and Title III of the percentage or stage of completion are Defense Production Act of 1950 (50 authorized by the statutes cited in U.S.C. App. 2091), as amended. 32.101. [48 FR 42328, Sept. 19, 1983, as amended at 60 (2) This type of progress payment FR 49710, Sept. 26, 1995] may be used as a payment method under agency procedures. Agency pro- 32.102 Description of contract financ- cedures must ensure that payments are ing methods. commensurate with work accom- (a) Advance payments are advances plished, which meets the quality stand- of money by the Government to a ards established under the contract. prime contractor before, in anticipa- Furthermore, progress payments may tion of, and for the purpose of complete not exceed 80 percent of the eligible

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costs of work accomplished on contracting officer shall avoid any undefinitized contract actions. undue risk of monetary loss to the (f) Performance-based payments are Government through the financing. contract financing payments made on The contractor’s use of the contract fi- the basis of— nancing provided and the contractor’s (1) Performance measured by objec- financial status shall be monitored. tive, quantifiable methods; (b) If the contractor is a small busi- (2) Accomplishment of defined ness concern, the contracting officer events; or shall give special attention to meeting (3) Other quantifiable measures of results. the contractor’s contract financing need. However, a contractor’s receipt [48 FR 42328, Sept. 19, 1987, as amended at 52 of a certificate of competency from the FR 30077, Aug. 12, 1987; 60 FR 49711, Sept. 26, Small Business Administration has no 1995] bearing on the contractor’s need for or 32.103 Progress payments under con- entitlement to contract financing. struction contracts. (c) Subject to specific agency regula- When satisfactory progress has not tions, the contracting officer may pro- been achieved by a contractor during vide customary contract financing in any period for which a progress pay- accordance with 32.113. Unusual con- ment is to be made, a percentage of the tract financing shall not be provided progress payment may be retained. except as authorized in 32.114. Retainage should not be used as a sub- (d) Unless otherwise authorized by stitute for good contract management, agency regulation, contract financing and the contracting officer should not may be provided for contracts with— withhold funds without cause. Deter- (1) Small business concerns, when the minations to retain and the specific contract price will be greater than the amount to be withheld shall be made simplified acquisition threshold; or by the contracting officer on a case-by- (2) Other than small business con- case basis. Such decisions will be based on the contracting officer’s assessment cerns, when the contract price will be of past performance and the likelihood $1 million or more, or for a group of that such performance will continue. contracts, whose prices are greater The amount of retainage withheld shall than the simplified acquisition thresh- not exceed 10 percent of the approved old, that total $1 million or more. estimated amount in accordance with [48 FR 42328, Sept. 19, 1983, as amended at 60 the terms of the contract and may be FR 49711, Sept. 26, 1995] adjusted as the contract approaches completion to recognize better than ex- 32.105 Uses of contract financing. pected performance, the ability to rely on alternative safeguards, and other (a) Contract financing methods cov- factors. Upon completion of all con- ered in this part are intended to be tract requirements, retained amounts self-liquidating through contract per- shall be paid promptly. formance. Consequently, agencies shall only use the methods for financing of [51 FR 19716, May 30, 1986, as amended at 60 contractor working capital, not for the FR 49711, Sept. 26, 1995] expansion of contractor-owned facili- 32.104 Providing contract financing. ties or the acquisition of fixed assets. However, under loan guarantees, excep- (a) Prudent contract financing can be a useful working tool in Government tions may be made for— acquisition by expediting the perform- (1) Facilities expansion of a minor or ance of essential contracts. Govern- incidental nature, if a relatively small ment financing shall be provided only part of the guaranteed loan is used for to the extent actually needed for the expansion and the contractor’s re- prompt and efficient performance, con- payment would not be delayed or im- sidering the availability of private fi- paired; or nancing. Contract financing shall be (2) Other instances of facilities ex- administered so as to aid, not impede, pansion for which contract financing is the acquisition. At the same time, the appropriate under agency procedures.

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(b) The limitations in this section do 32.109 Termination financing. not apply to contracts under which fa- To encourage contractors to invest cilities are being acquired for Govern- their own funds in performance despite ment ownership. the susceptibility of the contract to termination for the convenience of the 32.106 Order of preference. Government, the contract financing The contracting officer shall consider procedures under this part may be ap- the following order of preference when plied to the financing of terminations a contractor requests contract financ- either in connection with or independ- ing, unless an exception would be in ently of financing for contract per- the Government’s best interest in a formance (see 49.112–1). specific case: (a) Private financing without Gov- 32.110 [Reserved] ernment guarantee. It is not intended, 32.111 Contract clauses for non- however, that the contractor be re- commercial purchases. quired to obtain private financing (1) at unreasonable terms, or (2) from (a) The contracting officer shall in- other agencies. sert the following clauses, appropriately modified with respect to pay- (b) Customary contract financing ment due dates, in accordance with (see 32.113). agency regulations— (c) Loan guarantees. (1) The clause at 52.232–1, Payments, (d) Unusual contract financing (see in solicitations and contracts when a 32.114). fixed-price supply contract, a fixed- (e) Advance payments (see exceptions price service contract, or a contract for in 32.402(b)). nonregulated communication services [48 FR 42328, Sept. 19, 1983, as amended at 60 is contemplated; FR 49711, Sept. 26, 1995] (2) The clause at 52.232–2, Payment under Fixed-Price Research and Devel- 32.107 Need for contract financing not opment Contracts, in solicitations and a deterrent. contracts when a fixed-price research (a) If the contractor or offeror meets and development contract is contemplated; the standards prescribed for respon- (3) The clause at 52.232–3, Payments sible prospective contractors at 9.104, under Personal Services Contracts, in the contracting officer shall not treat solicitations and contracts for personal the contractor’s need for contract fi- services; nancing as a handicap for a contract (4) The clause at 52.232–4, Payments award; e.g., as a responsibility factor under Transportation Contracts and or evaluation criterion. Transportation-Related Services Con- (b) The contractor should not be dis- tracts, in solicitations and contracts qualified from contract financing sole- for transportation or transportation- ly because the contractor failed to in- related services; dicate a need for contract financing be- (5) The clause at 52.232–5, Payments fore the contract was awarded. under Fixed-Price Construction Con- tracts, in solicitations and contracts 32.108 Financial consultation. for construction when a fixed-price Each contracting office should have contract is contemplated; and available and use the services of con- (6) The clause at 52.232–6, Payments tract financing personnel competent to under Communication Service Con- evaluate credit and financial problems. tracts with Common Carriers, in solici- In resolving any questions concerning tations and contracts for regulated (a) the financial capability of an communication services by common offeror or contractor to perform a con- carriers. tract or (b) what form of contract fi- (b) The contracting officer shall in- nancing is appropriate in a given case, sert the clause at 52.232–7, Payments the contracting officer should consult under Time-and-Materials and Labor- the appropriate contract financing of- Hour Contracts, appropriately modified fice. with respect to payment due dates in

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accordance with agency regulations, in 32.112 Payment of subcontractors solicitations and contracts when a under contracts for non-commercial time-and-materials or labor-hour con- items. tract is contemplated. If (i) the nature of the work to be performed requires 32.112–1 Subcontractor assertions of the contractor to furnish material that nonpayment. is regularly sold to the general public (a) In accordance with Section in the normal course of business by the 806(a)(4) of Pub. L. 102–190, as amended contractor and (ii) the price is under by Sections 2091 and 8105 of Pub. L. 103– the limitations prescribed in 355, upon the assertion by a sub- 16.601(b)(3), the contracting officer contractor or supplier of a Federal con- shall use the clause with its Alternate tractor that the subcontractor or sup- I. If a labor-hour contract is con- plier has not been paid in accordance templated, and if no specific reim- with the payment terms of the sub- bursement for materials furnished is contract, purchase order, or other intended, the contracting officer may agreement with the prime contractor, use the clause with its Alternate II. the contracting officer may deter- (c) The contracting officer shall in- mine— sert the following clauses, appro- (1) For a construction contract, priately modified with respect to pay- whether the contractor has made— ment due dates in accordance with (i) Progress payments to the sub- agency regulations: contractor or supplier in compliance (1) The clause at 52.232–8, Discounts with Chapter 39 of Title 31, United for Prompt Payment, in solicitations States Code (Prompt Payment Act); or and contracts when a fixed-price supply (ii) Final payment to the subcontrac- contract or fixed-price service contract tor or supplier in compliance with the is contemplated. terms of the subcontract, purchase (2) A clause, substantially the same order, or other agreement with the as the clause at 52.232–9, Limitation on prime contractor; Withholding of Payments, in solicita- (2) For a contract other than con- tions and contracts when a supply construction, whether the contractor has tract, research and development con- made progress payments, final pay- tract, service contract, time-and-mate- ments, or other payments to the sub- rials contract, or labor-hour contract contractor or supplier in compliance with the terms of the subcontract, pur- is contemplated that includes two or chase order, or other agreement with more terms authorizing the temporary the prime contractor; or withholding of amounts otherwise pay- (3) For any contract, whether the able to the contractor for supplies de- contractor’s certification of payment livered or services performed. of a subcontractor or supplier accom- (d) The contracting officer shall in- panying its payment request to the sert the following clauses, appro- Government is accurate. priately modified with respect to pay- (b) If, in making the determination ments due dates in accordance with in paragraphs (a)(1) and (2) of this sec- agency regulations: tion, the contracting officer finds the (1) The clause at 52.232–10, Payments prime contractor is not in compliance, under Fixed-Price Architect-Engineer the contracting officer may— Contracts, in fixed-price architect-en- (1) Encourage the contractor to make gineer contracts. timely payment to the subcontractor (2) The clause at 52.232–11, Extras, in or supplier; or solicitations and contracts when a (2) If authorized by the applicable fixed-price supply contract, fixed-price payment clauses, reduce or suspend service contract, or a transportation progress payments to the contractor. contract is contemplated. (c) If the contracting officer deter- [48 FR 42328, Sept. 19, 1983, as amended at 51 mines that a certification referred to FR 2665, Jan. 17, 1986; 60 FR 49711, Sept. 26, in paragraph (a)(3) of this section is in- 1995] accurate in any material respect, the

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contracting officer shall initiate ad- and using the procedures of part 15, ministrative or other remedial action. through either progress payments based on costs in accordance with sub- [60 FR 48274, Sept. 18, 1995] part 32.5, or performance-based pay- 32.112–2 Subcontractor requests for ments in accordance with subpart 32.10 information. (but not both). Performance-based pay- (a) In accordance with Section ments are the preferred method when 806(a)(1) of Pub. L. 102–190, as amended the contracting officer finds them by Sections 2091 and 8105 of Pub. L. 103– practical, and the contractor agrees to 355, upon the request of a subcontrac- their use; tor or supplier under a Federal con- (e) Financing of contracts for sup- tract for a non-commercial item, the plies or services through advance pay- contracting officer shall promptly ad- ments in accordance with subpart 32.4; vise the subcontractor or supplier as (f) Financing of contracts for supplies to— or services through guaranteed loans in (1) Whether the prime contractor has accordance with subpart 32.3; or submitted requests for progress pay- (g) Financing of contracts for sup- ments or other payments to the Fed- plies or services through any appro- eral Government under the contract; priate combination of advance pay- and ments, guaranteed loans, and either (2) Whether final payment under the performance-based payments or contract has been made by the Federal progress payments (but not both) in ac- Government to the prime contractor. cordance with their respective sub- (b) In accordance with 5 U.S.C. parts. 552(b)(1), this subsection does not apply to matters that are— [60 FR 49711, Sept. 26, 1995] (1) Specifically authorized under cri- 32.114 Unusual contract financing. teria established by an Executive order to be kept classified in the interest of Any contract financing arrangement national defense or foreign policy; and that deviates from this part is unusual (2) Properly classified pursuant to contract financing. Unusual contract such Executive order. financing shall be authorized only after approval by the head of the agency or [60 FR 48274, Sept. 18, 1995] as provided for in agency regulations. 32.113 Customary contract financing. [60 FR 49711, Sept. 26, 1995] The following contract financing arrangements are customary contract fi- Subpart 32.2—Commercial Item nancing when provided in accordance Purchase Financing with this part and agency regulations: (a) Financing of shipbuilding, or ship conversion, alteration, or repair, when SOURCE: 60 FR 49711, Sept. 26, 1995, unless otherwise noted. agency regulations provide for progress payments based on a percentage or 32.200 Scope of subpart. stage of completion; (b) Financing of construction or ar- This subpart provides policies and chitect-engineer services purchased procedures for commercial financing under the authority of part 36; arrangements under commercial pur- (c) Financing of contracts for sup- chases pursuant to Part 12. plies or services awarded under the sealed bid method of procurement in 32.201 Statutory authority. accordance with part 14, or under the 10 U.S.C. 2307(f) and 41 U.S.C. 255(f) competitive negotiation method of pro- provide that payment for commercial curement in accordance with part 15, items may be made under such terms through progress payments based on and conditions as the head of the agen- costs in accordance with subpart 32.5; cy determines are appropriate or cus- (d) Financing of contracts for sup- tomary in the commercial marketplace plies or services awarded under a sole- and are in the best interest of the Unit- source acquisition as defined in part 6 ed States.

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32.202 General. expected to be different from that used for non-commercial purchases under 32.202–1 Policy. subpart 32.1 and its related subparts. (a) Use of financing in contracts. It is While the contracting officer may the responsibility of the contractor to adapt techniques and procedures from provide all resources needed for per- the non-commercial subparts for use in formance of the contract. Thus, for implementing commercial contract fi- purchases of commercial items, financ- nancing arrangements, the contracting ing of the contract is normally the con- officer must have a full understanding tractor’s responsibility. However, in of effects of the differing contract envi- some markets the provision of financ- ronments and of what is needed to pro- ing by the buyer is a commercial prac- tect the interests of the Government in tice. In these circumstances, the con- commercial contract financing. tracting officer may include appro- (d) Unusual contract financing. Any priate financing terms in contracts for contract financing arrangement not in commercial purchases when doing so accord with the requirements of agency will be in the best interest of the Gov- regulations or this part is unusual con- ernment. tract financing and requires advance (b) Authorization. Commercial in- approval in accordance with agency terim payments and commercial ad- procedures. If not otherwise specified, vance payments may be made under such unusual contract financing shall the following circumstances— be approved by the head of the con- (1) The contract item financed is a tracting activity. commercial supply or service; (e) Best interest of the Government. The (2) The contract price exceeds the statutes cited in 32.201 do not allow simplified acquisition threshold; contract financing by the Government (3) The contracting officer deter- unless it is in the best interest of the mines that it is appropriate or cus- United States. Agencies may establish tomary in the commercial marketplace standards to determine whether con- to make financing payments for the tract financing is in the best interest item; of the Government. These standards (4) Authorizing this form of contract may be for certain types of procure- financing is in the best interest of the ments, certain types of items, or cer- Government (see paragraph (e) of this tain dollar levels of procurements. subsection); (5) Adequate security is obtained (see [60 FR 49711, Sept. 26, 1995, as amended at 61 32.202–4); FR 39190, July 26, 1996] (6) Prior to any performance of work 32.202–2 Types of payments for com- under the contract, the aggregate of mercial item purchases. commercial advance payments shall not exceed 15 percent of the contract These definitions incorporate the re- price; quirements of the statutory commer- (7) The contract is awarded on the cial financing authority and the imple- basis of competitive procedures or, if mentation of the Prompt Payment Act. only one offer is solicited, adequate Commercial advance payment means a consideration is obtained (based on the payment made before any performance time value of the additional financing of work under the contract. The aggre- to be provided) if the financing is ex- gate of these payments shall not expected to be substantially more advan- ceed 15 percent of the contract price. tageous to the offeror than the These payments are contract financing offeror’s normal method of customer fi- payments for prompt payment pur- nancing; and poses (i.e., not subject to the interest (8) The contracting officer obtains penalty provisions of the Prompt Pay- concurrence from the payment office ment Act in accordance with subpart concerning liquidation provisions when 32.9). These payments are not subject required by 32.206(e). to subpart 32.4, Advance Payments for (c) Difference from non-commercial fi- Non-Commercial Items. nancing. Government financing of com- Commercial interim payment means mercial purchases under this subpart is any payment that is not a commercial

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advance payment or a delivery pay- the resulting contract shall specify the ment. These payments are contract fi- security (see 32.206(b)(1)(iv)). nancing payments for prompt payment (2) Subject to agency regulations, the purposes (i.e., not subject to the inter- contracting officer may determine the est penalty provisions of the Prompt offeror’s financial condition to be ade- Payment Act in accordance with sub- quate security, provided the offeror part 32.9). A commercial interim pay- agrees to provide additional security ment is given to the contractor after should that financial condition become some work has been done, whereas a inadequate as security (see paragraph commercial advance payment is given (c) of the clause at 52.232–29, Terms for to the contractor when no work has Financing of Purchases of Commercial been done. Items). Assessment of the contractor’s Delivery payment means a payment financial condition shall consider both for accepted supplies or services, in- net worth and liquidity. If the con- cluding payments for accepted partial tracting officer finds the offeror’s fi- deliveries. Commercial financing pay- nancial condition is not adequate secu- ments are liquidated by deduction from rity, the contracting officer shall re- these payments. Delivery payments are quire other adequate security. Para- invoice payments for prompt payment graphs (b), (c), and (d) of this sub- purposes. section list other (but not all) forms of security that the contracting officer 32.202–3 Conducting market research may find acceptable. about financing terms. (3) The value of the security must be Contract financing may be a subject at least equal to the maximum unliqui- included in the market research con- dated amount of contract financing ducted in accordance with part 10. If payments to be made to the contrac- market research for contract financing tor. The value of security may be ad- is conducted, the contracting officer justed periodically during contract per- should consider— formance, as long as it is always equal (a) The extent to which other buyers to or greater than the amount of unliq- provide contract financing for pur- uidated financing. chases in that market; (b) Paramount lien. (1) The statutes (b) The overall level of financing nor- cited in 32.201 provide that if the Gov- mally provided; ernment’s security is in the form of a (c) The amount or percentages of any lien, such lien is paramount to all payments equivalent to commercial other liens and is effective imme- advance payments (see 32.202–2); diately upon the first payment, with- (d) The basis for any payments equiv- out filing, notice, or other action by alent to commercial interim payments the United States. (see 32.202–2), as well as the frequency, (2) When the Government’s security and amounts or percentages; and is in the form of a lien, the contract (e) Methods of liquidation of contract shall specify what the lien is upon, e.g., financing payments and any special or the work in process, the contractor’s unusual payment terms applicable to plant, or the contractor’s inventory. delivery payments (see 32.202–2). Contracting officers may be flexible in the choice of assets. The contract must 32.202–4 Security for Government fi- also give the Government a right to nancing. verify the existence and value of the (a) Policy. (1) 10 U.S.C. 2307(f) and 41 assets. U.S.C. 255(f) require the Government to (3) Provision of Government financ- obtain adequate security for Govern- ing shall be conditioned upon a con- ment financing. The contracting offi- tractor certification that the assets cer shall specify in the solicitation the subject to the lien are free from any type of security the Government will prior encumbrances. Prior liens may accept. If the Government is willing to result from such things as capital accept more than one form of security, equipment loans, installment pur- the offeror shall be required to specify chases, working capital loans, various the form of security it will provide. If lines of credit, and revolving credit ar- acceptable to the contracting officer, rangements.

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(c) Other assets as security. Contract- alternative financing terms shall not ing officers may consider the guidance be accepted (but see 14.208 and 15.606 at 28.203–2, 28.203–3, and 28.204 in deter- concerning amendments of solicita- mining which types of assets may be tions). However, an offer stating that acceptable as security. For the purpose the contracting officer-specified con- of applying the guidance in part 28 to tract financing terms will not be used this subsection, the term ‘‘surety’’ and/ by the offeror does not alter the eval- or ‘‘individual surety’’ should be inter- uation of the offer, nor does it render preted to mean ‘‘offeror’’ and/or ‘‘con- the offer nonresponsive or otherwise tractor.’’ unacceptable. In the event of award to (d) Other forms of security. Other ac- an offeror who declined the proposed ceptable forms of security include— contract financing, the contract fi- (1) An irrevocable letter of credit nancing provisions shall not be in- from a federally insured financial insti- cluded in the resulting contract. Con- tution; tract financing shall not be a basis for (2) A bond from a surety, acceptable adjusting offerors’ proposed prices, be- in accordance with part 28 (note that cause the effect of contract financing the bond must guarantee repayment of is reflected in each offeror’s proposed the unliquidated contract financing); prices. (3) A guarantee of repayment from a person or corporation of demonstrated 32.205 Procedures for offeror-pro- liquid net worth, connected by signifi- posed commercial contract financ- cant ownership to the contractor; or ing. (4) Title to identified contractor as- (a) Under this procedure, each offeror sets of adequate worth. may propose financing terms. The con- (e) Management of risk and security. In tracting officer must then determine establishing contract financing terms, which offer is in the best interests of the contracting officer must be aware the United States. of certain risks. For example, very (b) Solicitations. The contracting offi- high amounts of financing early in the cer shall include in the solicitation the contract (front-end loading) may un- provision at 52.232–31, Invitation to duly increase the risk to the Govern- Propose Financing Terms. The con- ment. The security and the amounts tracting officer shall also— and timing of financing payments must (1) Specify the delivery payment (in- be analyzed as a whole to determine voice) dates that will be used in the whether the arrangement will be in the evaluation of financing proposals; and best interest of the Government. (2) Specify the interest rate to be used in the evaluation of financing pro- 32.203 Determining contract financing posals (see paragraph (c)(4) of this sec- terms. tion). When the criteria in 32.202–1(b) are (c) Evaluation of proposals. (1) When met, the contracting officer may either contract financing terms vary among specify the financing terms in the so- offerors, the contracting officer must licitation (see 32.204) or permit each adjust each proposed price for evalua- offeror to propose its own customary tion purposes to reflect the cost of pro- financing terms (see 32.205). When the viding the proposed financing in order contracting officer has sufficient infor- to determine the total cost to the Gov- mation on financing terms that are ernment of that particular combina- customary in the commercial market- tion of price and financing. place for the item, those terms may be (2) Contract financing results in the specified in the solicitation. Government making payments earlier than it otherwise would. In order to de- 32.204 Procedures for contracting offi- termine the cost to the Government of cer-specified commercial contract making payments earlier, the contract- financing. ing officer must compute the imputed The financing terms shall be included cost of those financing payments and in the solicitation. Contract financing add it to the proposed price to deter- shall not be a factor in the evaluation mine the evaluated price for each of resulting proposals, and proposals of offeror.

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(3) The imputed cost of a single fi- (iii) Liquidation of those financing nancing payment is the amount of the payments by delivery payments (see payment multiplied by the annual in- paragraph (e) of this section); terest rate, multiplied by the number (iv) Security the contractor will proof years, or fraction thereof, between vide for financing payments and any the date of the financing payment and terms or conditions specifically appli- the date the amount would have been cable thereto (see 32.202–4); and paid as a delivery payment. The im- (v) Frequency, form, and any addi- puted cost of financing is the sum of tional content of the contractor’s re- the imputed costs of each of the financ- quest for financing payment (in addi- ing payments. tion to the requirements of the clause (4) The time value of proposal-speci- at 52.232–29, Terms for Financing of fied contract financing arrangements Purchases of Commercial Items; and shall be calculated using as the inter- (2) Unless agency regulations author- est rate the Nominal Discount Rate ize alterations, the unaltered text of specified in Appendix C of OMB Cir- the clause at 52.232–29, Terms for Fi- cular A–94, ‘‘Benefit-Cost Analysis of nancing of Purchases of Commercial Federal Programs; Guidelines and Dis- Items. counts’’, appropriate to the period of (c) Computation of amounts, and con- contract financing. Where the period of tractor entitlement provisions. (1) Con- proposed financing does not match the tracts shall provide that delivery pay- periods in the OMB Circular, the inter- ments shall be made only for com- est rate for the period closest to the fi- pleted supplies and services accepted nance period shall be used. Appendix C by the Government in accordance with is updated yearly, and is available from the terms of the contract. Contracts the Office of Economic Policy in the may provide for commercial advance Office of Management and Budget and commercial interim payments (OMB). based upon a wide variety of bases, including (but not limited to) achieve- 32.206 Solicitation provisions and con- ment or occurrence of specified events, tract clauses. the passage of time, or specified times prior to the delivery date(s). The basis (a) The contract shall contain the for payment must be objectively deter- paragraph entitled ‘‘Payment’’ of the minable. The clause written by the clause at 52.212–4, Contract Terms and contracting officer shall specify, to the Conditions—Commercial Items. If the extent access is necessary, the infor- contract will provide for contract fi- mation and/or facilities to which the nancing, the contracting officer shall Government shall have access for the construct a solicitation provision and purpose of verifying the contractor’s contract clause. This solicitation pro- entitlement to payment of contract fi- vision shall be constructed in accord- nancing. ance with 32.204 or 32.205. If the proce- (2) If the contract is awarded using dure at 32.205 is used, the solicitation the offeror-proposed procedure at provision at 52.232–31, Invitation to 32.205, the clause constructed by the Propose Financing Terms, shall be in- contracting officer under paragraph cluded. The contract clause shall be (b)(1) of this section shall contain the constructed in accordance with the re- following: quirements of this subpart and any (i) A statement that the offeror’s pro- agency regulations. posed listing of earliest times and (b) Each contract financing clause greatest amounts of projected financ- shall include: ing payments submitted in accordance (1) A description of the— with paragraph (d)(2) of the provision (i) Computation of the financing pay- at 52.232–31, Invitation to Propose Fi- ment amounts (see paragraph (c) of nancing Terms, is incorporated into this section); the contract, and (ii) Specific conditions of contractor (ii) A statement that financing pay- entitlement to those financing payments shall be made in the lesser ments (see paragraph (c) of this sec- amount and on the later of the date tion); due in accordance with the financing

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terms of the contract, or in the amount ments for commercial purchases in the and on the date projected in the listing same manner they apply to non-com- of earliest times and greatest amounts mercial purchases. The contracting of- incorporated in the contract. ficer is responsible for including in the (3) If the security accepted by the contract all the information necessary contracting officer is the contractor’s to implement prompt payment. In par- financial condition, the contracting of- ticular, contracting officers must be ficer shall incorporate in the clause careful to clearly differentiate in the constructed under paragraph (b)(1) of contract between contract financing this section the following— and invoice payments and between (i) A statement that the contractor’s items having different prompt payment financial condition has been accepted times. as adequate security for commercial fi- (g) Installment payment financing for nancing payments; and commercial items. Contracting officers (ii) A statement that the contracting may insert the clause at 52.232–30, In- officer may exercise the Government’s stallment Payments for Commercial rights to require other security under Items, in solicitations and contracts in paragraph (c), Security for Government lieu of constructing a specific clause in Financing, of the clause at 52.232–29, accordance with paragraphs (b) Terms for Financing of Purchases of through (e) of this section, if the con- Commercial Items, in the event the tract action qualifies under the criteria contractor’s financial condition at 32.202–1(b) and installment payments changes and is found not to be ade- for the item are either customary or quate security. are authorized in accordance with (d) Instructions for multiple appropria- agency procedures. tions. If contract financing is to be (1) Description. Installment payment computed for the contract as a whole, financing is payment by the Govern- and if there is more than one appro- ment to a contractor of a fixed number priation account (or subaccount) fund- of equal interim financing payments ing payments under the contract, the prior to delivery and acceptance of a contracting officer shall include, in the contract item. The installment pay- contract, instructions for distribution ment arrangement is designed to re- of financing payments to the respective duce administrative costs. However, if funds accounts. Distribution instruc- a contract will have a large number of tions and contract liquidation instruc- deliveries, the administrative costs tions must be mutually consistent. may increase to the point where in- (e) Liquidation. Liquidation of con- stallment payments are not in the best tract financing payments shall be on interests of the Government. the same basis as the computation of (2) Authorized types of installment pay- contract financing payments; that is, ment financing and rates. Installment financing payments computed on a payments may be made using the whole contract basis shall be liquidated clause at 52.232–30, Installment Pay- on a whole contract basis; and a payments for Commercial Items, either at ment computed on a line item basis the 70 percent financing rate cited in shall be liquidated against that line the clause or at a lower rate in accord- item. If liquidation is on a whole con- ance with agency procedures. tract basis, the contracting officer (3) Calculating the amount of install- shall use a uniform liquidation per- ment financing payments. The contract- centage as the liquidation method, un- ing officer shall identify in the con- less the contracting officer obtains the tract schedule those items for which concurrence of the cognizant payment installment payment financing is au- office that the proposed liquidation thorized. Monthly installment pay- provisions can be executed by that of- ment amounts are to be calculated by fice, or unless agency regulations pro- the contractor pursuant to the instruc- vide alternative liquidation methods. tions in the contract clause only for (f) Prompt payment for commercial pur- items authorized to receive install- chase payments. The provisions of sub- ment payment financing. part 32.9, Prompt Payment, apply to (4) Liquidating installment payments. If contract financing and invoice pay- installment payments have been made

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for an item, the amount paid to the Guaranteed loan or V loan, as used in contractor upon acceptance of the item this subpart, means a loan, revolving by the Government shall be reduced by credit fund, or other financial arrange- the amount of installment payments ment made pursuant to Regulation V made for the item. The contractor’s re- of the Federal Reserve Board, under quest for final payment for each item which the guaranteeing agency is obli- is required to show this calculation. gated, on demand of the lender, to purchase a stated percentage of the loan 32.207 Administration and payment of and to share any losses in the amount commercial financing payments. of the guaranteed percentage. (a) Responsibility. The contracting of- Guaranteeing agency, as used in this ficer responsible for administration of subpart, means any agency that the the contract shall be responsible for re- President has authorized to guarantee view and approval of contract financ- loans, through Federal Reserve Banks, ing requests. for expediting national defense produc- (b) Approval of financing requests. Un- tion. less otherwise provided in agency regulations, or by agreement with the ap- 32.302 Authority. propriate payment official— Congress has authorized Federal Re- (1) The contracting officer shall be serve Banks to act, on behalf of guar- responsible for receiving, approving, anteeing agencies, as fiscal agents of and transmitting all contract financing the United States in the making of requests to the appropriate payment loan guarantees for defense production office; and (Section 301, Defense Production Act of (2) Each approval shall specify the 1950 (50 U.S.C. App. 2091)). By Executive amount to be paid, necessary contrac- Order 10480, August 14, 1953 (3 CFR 1949– tual information, and the account(s) 53), as amended, the President has des- (see 32.206(d)) to be charged for the pay- ignated the following agencies as guar- ment. anteeing agencies: (c) Management of security. After con- (a) Department of Defense. tract award, the contracting officer re- (b) Department of Energy. sponsible for approving requests for fi- (c) Department of Commerce. nancing payments shall be responsible (d) Department of the Interior. for determining that the security con- (e) Department of Agriculture. tinues to be adequate. If the contrac- (f) General Services Administration. tor’s financial condition is the Govern- (g) National Aeronautics and Space ment’s security, this contracting offi- Administration. cer is also responsible for monitoring the contractor’s financial condition. 32.303 General. (a) Section 301 of the Defense Produc- Subpart 32.3—Loan Guarantees tion Act authorizes loan guarantees for for Defense Production contract performance or other operations related to national defense, sub- 32.300 Scope of subpart. ject to amounts annually authorized by This subpart prescribes policies and Congress on the maximum obligation procedures for designated agencies’ of any guaranteeing agency under any guarantees of loans made by private fi- loan, discount, advance, or commit- nancial institutions to borrowers per- ment in connection therewith, entered forming contracts related to national into under section 301. (See 50 U.S.C. defense (see 30.102). App. 2091 for statutory limitations and exceptions concerning the authoriza- 32.301 Definitions. tion of loan guarantee amounts and the Borrower, as used in this subpart, use of loan guarantees for the preven- means a contractor, subcontractor (at tion of insolvency or bankruptcy.) any tier), or other supplier who re- (b) The guarantee shall be for less ceives a guaranteed loan. than 100 percent of the loan unless the Federal Reserve Board means the agency determines that— Board of Governors of the Federal Re- (1) The circumstances are excep- serve System. tional;

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(2) The operations of the contractor 32.304 Procedures. are vital to the national defense; and (3) No other suitable means of financ- 32.304–1 Application for guarantee. ing are available. (a) A contractor, subcontractor, or (c) Loan guarantees are not issued to supplier that needs operating funds to other agencies of the Government. perform a contract related to national (d) Guaranteed loans are essentially defense may apply to a financing insti- the same as conventional loans made tution for a loan. If the financing insti- by private financial institutions, ex- tution is willing to extend credit, but cept that the guaranteeing agency is considers a Government guarantee nec- obligated, on demand of the lender, to essary, the institution may apply to purchase a stated percentage of the the Federal Reserve Bank of its dis- loan and to share any losses in the trict for the guarantee. Application amount of the guaranteed percentage. forms and guidance are available at all It is the responsibility of the private fi- Federal Reserve Banks. nancial institution to disburse and col- (b) The Federal Reserve Bank will lect funds and to administer the loan. promptly send a copy of the applica- Under Regulation V of the Federal Re- tion, including a list of the relevant de- serve Board (12 CFR 245), any private fense contracts held by the contractor, financing institution may submit an to the Federal Reserve Board. The application to the Federal Reserve Board will transmit the application Bank of its district for guarantee of a and the list of contracts to the inter- loan or credit. ested guaranteeing agency, so that the (e) Federal Reserve Banks will make agency can determine the eligibility of the loan guarantee agreements on be- the contractor. half of the guaranteeing agencies. (c) To expedite the process, the Fed- (f) Under Section 302(c) of Executive eral Reserve Bank may, pursuant to in- Order 10480, August 14, 1953 (3 CFR 1949– structions of a guaranteeing agency, 53), as amended, all actions and oper- submit lists of the defense contracts to ations of Federal Reserve Banks, as fis- the interested contracting officers. cal agents, are subject to the super- (d) While eligibility is being deter- vision of the Federal Reserve Board. mined, the Federal Reserve Bank will The Federal Reserve Board is author- make any necessary credit investiga- ized to prescribe the following, after tions to supplement the information consultation with the heads of guaran- furnished by the applicant financing teeing agencies: institution in order to— (1) Regulations governing the actions (1) Expedite necessary defense financ- and operations of fiscal agents. ing; and (2) Rates of interest, guarantee and (2) Protect the Government against commitment fees, and other charges monetary loss. that may be made for loans, discounts, (e) The Federal Reserve Bank will advances, or commitments guaranteed send its report and recommendation to by the guaranteeing agencies through the Federal Reserve Board. The Board the Federal Reserve Banks. These pre- will transmit them to the interested scriptions may be in the form of spe- guaranteeing agency. cific rates or limits, or in other forms. (3) Uniform forms and procedures to 32.304–2 Certificate of eligibility. be used in connection with the guaran- (a) The contracting officer shall pre- tees. pare the certificate of eligibility for a (g) The guaranteeing agency is re- contract that the contracting officer sponsible for certifying eligibility for deems to be of material consequence, the guarantee and fixing the maximum when— dollar amount and maturity date of the (1) The contract financing office re- guaranteed loan to meet the contrac- quests it; tor’s requirement for financing per- (2) Another interested agency re- formance of the defense production quests it; or contract on hand at the time the guar- (3) The application for a loan guaran- antee application is submitted. tee relates to a contract or subcontract

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within the cognizance of the contract- (8) The disruption of established sub- ing officer. contracting arrangements. (b) The agency shall evaluate the rel- (9) Other pertinent factors. evant data, including the certificate of (f) The contracting officer shall at- eligibility, the accompanying data, and tach sufficient data to the certificate any other relevant information on the of eligibility to support the determina- contractor’s financial status and per- tions made. Available pertinent infor- formance, to determine whether au- mation shall be included on— thorization of a loan guarantee would (1) The contractor’s past perform- be in the Government’s interest. ance; (c) If the contractor has several (2) The relationship of the contrac- major national defense contracts, it is tor’s operations to performance sched- normally not necessary to evaluate the ules; and eligibility of relatively minor con- (3) Other factors listed in paragraph tracts. The determination of eligibility (e) above, if relevant to the case under should be processed, without delay, based on the preponderance of the consideration. amount of the contracts. (g) If the contracting officer deter- (d) The certificate of eligibility shall mines that a certificate of eligibility is include the following determinations: not justified, the facts and reasons sup- (1) The supplies or services to be ac- porting that conclusion shall be docu- quired are essential to the national de- mented and furnished to the agency fense. contract finance office. (2) The contractor has the facilities (h) The guaranteeing agency shall re- and the technical and management view the proposed guarantee terms and ability required for contract perform- conditions. If they are considered ap- ance. propriate, the guaranteeing agency (3) There is no practicable alternate shall complete a standard form of au- source for the acquisition without prej- thorization as prescribed by the Fed- udice to the national defense. (This eral Reserve Board. The agency shall statement shall not be included if the transmit the authorization through the contractor is a small business concern.) Federal Reserve Board to the Federal (e) The contracting officer shall con- Reserve Bank. The Bank is authorized sider the following factors in determin- to execute and deliver to the financing ing if a practicable alternate source ex- institution a standard form of guaran- ists: tee agreement, with the terms and con- (1) Prejudice to the national defense, ditions approved for the particular because reletting of a contract with an- case. The financing institution will other source would conflict with a then make the loan. major policy on defense acquisition; (i) Substantially the same procedure e.g., policies relating to the mobiliza- may be followed for the application of tion base. an offeror who is actively negotiating (2) The urgency of contract perform- or bidding for a defense contract, ex- ance schedules. cept that the guarantee shall not be (3) The technical ability and facili- authorized until the contract has been ties of other potential sources. executed. (4) The extent to which other sources (j) The contracting officer shall re- would need contract financing to per- port to the agency contract finance of- form. fice any information about the con- (5) The willingness of other sources tractor that would have a potentially to enter into contracts. adverse impact on a pending guarantee (6) The time and expense involved in application. The contracting officer is repurchasing for contracts or parts of not required, however, to initiate any contracts. This may include potential special investigation for this purpose. claims under a termination for conven- (k) With regard to existing contracts, ience or delays incident to default at a the agency shall not consider the per- later date. centage of guarantee requested by the (7) The comparative prices available financing institution in determining from other sources. the contractor’s eligibility.

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32.304–3 Asset formula. 32.304–5 Assignment of claims under contracts. (a) Under guaranteed loans made primarily for working capital purposes, (a) The agency shall generally re- the agency shall normally limit the quire a contractor that is provided a guarantee, by use of an asset formula, guaranteed loan to execute an assign- to an amount that does not exceed a ment of claims under defense production contracts (including any contracts specified percentage (90 percent or less) entered into during the term of the of the contractor’s investment (e.g., guaranteed loan that are eligible for fi- payrolls and inventories) in defense nancing under the loan); however, the production contracts. The asset for- agency need not require assignment if mula may include all items under de- any of the following conditions are fense contracts for which the contrac- present: tor would be entitled to payment on (1) The contractor’s financial condi- performance or termination. The for- tion is so strong that the protection to mula shall exclude— the Government provided by an assign- (1) Amounts for which the contractor ment of claims is unnecessary. has not done any work or made any ex- (2) In connection with the assign- penditure; ment of claims under a major contract, (2) Amounts that would become due the increased protection of the loan as the result of later performance that would be provided by the assign- under the contracts; and ments under additional, relatively smaller contracts is not considered (3) Cash collateral or bank deposit necessary by the agency. balances. (3) The assignment of claims would (b) Progress payments are deducted create an administrative burden dis- from the asset formula. proportionate to the protection re- (c) The agency may relax the asset quired; e.g., if the contractor has a formula to an appropriate extent for large number of contracts with individ- the time actually necessary for con- ually small dollar amounts. tract performance, if the contractor’s (b) The contractor shall also execute working capital and credit are inad- an assignment of claims if requested to equate. do so by the guarantor or the financing institution. 32.304–4 Guarantee amount and matu- (c) A subcontract or purchase order rity. issued to a subcontractor shall not be The agency may change the guaran- considered eligible for financing under tee amount or maturity date, within guaranteed loans when the issuer of the limitations at 32.304–3, as follows: the subcontract or purchase order re- (a) If the contractor enters into addi- serves (1) the privilege of making pay- tional defense production contracts ments directly to the assignor or to the assignor and assignee jointly, after no- after the application for, but before au- tice of the assignment, or (2) the right thorization of, a guarantee, the agency to reduce or set off assigned proceeds may adjust the loan guarantee amount under defense production contracts by or maturity date to meet any signifi- reason of claims against the borrower cant increase in financing need. arising after notice of assignment and (b) If the contractor enters into de- independently of defense production fense production contracts during the contracts under which the borrower is term of the guaranteed loan, the par- the seller. ties may adjust the existing guarantee agreement to provide for financing the 32.304–6 Other collateral security. new contracts. Pertinent information The following are examples of other and the Federal Reserve Bank reports forms of security that, although sel- will be submitted to the guaranteeing dom invoked under guaranteed loans, agency under the procedures for the may be required when considered nec- original guarantee application, de- essary for protection of the Govern- scribed in 32.304–1. Normally, a new ment interest: certificate of eligibility is required. (a) Mortgages on fixed assets.

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(b) Liens against inventories. (2) If guaranteed and unguaranteed (c) Endorsements. loans are made by the same financing (d) Guarantees. institution, a requirement that any (e) Subordinations or standbys of collateral security requested by the in- other indebtedness. stitution under the unguaranteed loan is also to be secondary collateral for 32.304–7 Contract surety bonds and the guaranteed loan. loan guarantees. (3) A requirement that the contractor (a) Contract surety bonds are incom- provide appropriate certificates to the patible with the Government’s inter- guaranteeing agency, at intervals not ests under guaranteed loans, unless the longer than 30 days, to disclose out- interests of the surety are subordi- standing unguaranteed borrowings. nated to the guaranteed loan. 32.305 Loan guarantees for terminated (b) If a substantial share of the con- contracts. tractor’s defense contracts are covered (a) The purpose of guaranteed loans; by surety bonds, or the amount of the i.e., to provide for financing based on bond is substantial in relation to the the borrower’s recoverable investment contractor’s net worth, the agency in defense production contracts, may shall not authorize the guarantee of a also apply to contracts that have been loan on a bonded contract unless the terminated (partially or totally) for surety enters into an agreement with the convenience of the Government. the financing institution to subordi- Guaranteed loans also may be made be- nate the surety’s rights and claims in fore such termination if it is known favor of the guaranteed loan. that termination of particular con- (c) The agency approval of a guaran- tracts for the convenience of the Gov- tee for a loan involving relatively sub- ernment is about to occur. These loans stantial subcontracts covered by sur- are expected to provide necessary fi- ety bonds shall also depend on the es- nancing pending termination settle- tablishment of a reasonable allocation ments and payments. They may also fi- agreement between the sureties and nance continuing performance of de- the financing institution. The agree- fense production contracts that are eli- ment should give the financing institu- gible for guaranteed loans. tion the benefit, with regard to pay- (b) The procedure for such guarantees ments to be made on the contract, of is substantially the same as that out- the portion of its loans fairly attrib- lined in 32.304, except that certificates utable to expenditures made under the of eligibility are not required for (1) bonded subcontracts before notice of contracts that have been totally termi- default. nated or (2) the terminated portion of contracts that have been partially ter- 32.304–8 Other borrowing. minated. The agency shall take pre- (a) Because of the limitations under cautions necessary to avoid Govern- guaranteed loans, some contractors ment losses and to ensure the loans seek to supplement the loan by other will be self-liquidating from the pro- borrowing (outside the guarantee) from ceeds of defense production contracts. the financing institution or other (c) Loan guarantees for contract ter- sources. It has been recognized in prac- mination financing shall not be pro- tice that, while prohibition of borrow- vided before specific contract termi- ings outside the guaranteed loan is nations are certain. preferable when practicable in a given V-loan case, such other borrowings 32.306 Loan guarantees for sub- should be permitted when necessary. contracts. (b) If the agency consents to the con- If the request for a loan guarantee tractor obtaining other borrowing dur- concerns a subcontractor that is finan- ing the guaranteed loan period, the cially weak in comparison with its con- agency shall apply the following re- tractor, the Government’s interests strictions: may be fostered by the contractor (1) A reasonable limit on the amount making progress payments to the sub- of other borrowing. contractor. If so, the agency shall try

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to arrange for the contractor to pro- and credit at excessive interest rates or vide the progress payments. As a re- other exorbitant charges, or loans from sult, the need for the loan guarantee other Government agencies, are not may be reduced or eliminated and the considered reasonably available financ- contractor would bear part or all of the ing. risk of loss arising from the selection (c) If statutory requirements and of the subcontractor. standards for advance payment determinations are met, the contracting of- Subpart 32.4—Advance Payments ficer shall generally recommend that for Non-Commercial Items the agency authorize advance payments. 32.400 Scope of subpart. (1) The statutory requirements are This subpart provides policies and that— procedures for advance payments on (i) The contractor gives adequate se- prime contracts and subcontracts. It curity; does not include policies and proce- (ii) The advance payments will not dures for advance payments for the exceed the unpaid contract price (see types of transactions listed in 32.404. 32.410(b), subparagraph (a)(2)); and This subpart does not apply to com- (iii) The agency head or designee de- mercial advance payments, which are termines, based on written findings, subject to subpart 32.2. that the advance payment— (A) Is in the public interest (under [48 FR 42328, Sept. 19, 1983, as amended at 60 FR 49714, Sept. 26, 1995] 32.401(a) or (b)); or (B) Facilitates the national defense 32.401 Statutory authority. (under 32.401(c)). The agency may authorize advance (2) The standards for advance pay- payments in negotiated and sealed bid ment determinations are that— contracts if the action is appropriate (i) The advance payments will not ex- under (a) section 305 of the Federal ceed the contractor’s interim cash Property and Administrative Services needs based on— Act of 1949 (41 U.S.C. 255), (b) the (A) Analysis of the cash flow required Armed Services Procurement Act (10 for contract performance; U.S.C. 2307), or (c) Pub. L. 85–804 (50 (B) Consideration of the reimburse- U.S.C. 1431–1435) and Executive Order ment or other payment cycle; and 10789, November 14, 1958 (3 CFR 1958 (C) To the extent possible, employ- Supp. pp. 72–74) (see part 50 of the Fed- ment of the contractor’s own working eral Acquisition Regulation (FAR) for capital; other applications of this statute). (ii) The advance payments are necessary to supplement other funds or [48 FR 42328, Sept. 19, 1983, as amended at 50 FR 1744, Jan. 11, 1985; 50 FR 52429, Dec. 23, credit available to a contractor; 1985] (iii) The recipient is otherwise qualified as a responsible contractor; 32.402 General. (iv) The Government will benefit (a) A limitation on authority to from performance prospects or there grant advance payments under Pub. L. are other practical advantages; and 85–804 (50 U.S.C. 1431–1435) is described (v) The case fits one or more of the at FAR 50.203(b)(4). categories described in 32.403. (b) Advance payments may be pro- (d) If necessary, the agency may au- vided on any type of contract; however, thorize advance payments in addition the agency shall authorize advance to progress or partial payments on the payments sparingly. Except for the same contract (see 32.501–1(c)). contracts described in 32.403(a) and (b), (e) Each agency that provides ad- advance payment is the least preferred vance payments shall— method of contract financing (see (1) Place the responsibility for mak- 32.106) and generally they should not be ing findings and determinations, and authorized if other types of financing for approval of contract terms concern- are reasonably available to the con- ing advance payments (see 32.410), at tractor in adequate amounts. Loans an organizational level high enough to

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ensure uniform application of this sub- (g) Contracts with small business part (see the limitation at 50.201(b) concerns, under which circumstances which also applies to advance pay- that make advance payments appro- ments authorized under Pub. L. 85–804 priate often occur (but see 32.104(b)). (50 U.S.C. 1431–1435)); and (h) Contracts under which excep- (2) Establish procedures for coordina- tional circumstances make advance tion, before advance payment author- payments the most advantageous con- ization, with the activity that provides tract financing method for both the contract financing support. Government and the contractor. (f) If the contract provides for advance payments under Pub. L. 85–804, 32.404 Exclusions. the contracting officer shall ensure (a) This subpart does not apply to ad- conformance with the requirements of vance payments authorized by law FAR 50.307. for— [48 FR 42328, Sept. 19, 1983, as amended at 59 (1) Rent; FR 67047, Dec. 28, 1994] (2) Tuition; (3) Insurance premiums; 32.403 Applicability. (4) Expenses of investigations in for- Advance payments may be considered eign countries; useful and appropriate for the follow- (5) Extension or connection of public ing: utilities for Government buildings or (a) Contracts for experimental, re- installations; search, or development work with non- (6) Subscriptions to publications; profit educational or research institu- (7) Purchases of supplies or services tions. in foreign countries, if— (b) Contracts solely for the manage- (i) The purchase price does not ex- ment and operation of Government- ceed $10,000 (or equivalent amount of owned plants. the applicable foreign currency); and (c) Contracts for acquisition at cost (ii) The advance payment is required of facilities for Government ownership. by the laws or government regulations (d) Contracts of such a highly classi- of the foreign country concerned; fied nature that the agency considers it (8) Enforcement of the customs or undesirable for national security to narcotics laws; or permit assignment of claims under the (9) Other types of transactions ex- contract. cluded by agency procedures under (e) Contracts entered into with finan- statutory authority. cially weak contractors whose tech- (b) Agencies may issue their own in- nical ability is considered essential to structions to deal with advance pay- the agency. In these cases, the agency ment items in paragraph (a) above au- shall closely monitor the contractor’s thorized under statutes relevant to performance and financial controls to their agencies. reduce the Government’s financial risk. 32.405 Applying Pub. L. 85–804 to ad- (f) Contracts for which a loan by a vance payments under sealed bid private financial institution is not contracts. practicable, whether or not a loan (a) Actions that designated agencies guarantee under this part is issued; for may take to facilitate the national de- example, if— fense without regard to other provi- (1) Financing institutions will not as- sions of law relating to contracts, as sume a reasonable portion of the risk explained in 50.101(a), also include under a guaranteed loan; making advance payments. These ad- (2) Loans with reasonable interest vance payments may be made at or rates or finance charges are not avail- after award of sealed bid contracts as able to the contractor; or well as negotiated contracts. (3) Contracts involve operations so (b) Bidders may request advance pay- remote from a financial institution ments before or after award, even if the that the institution could not be ex- invitation for bids does not contain an pected to suitably administer a guaran- advance payment provision. However, teed loan. the contracting officer shall reject any

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bid requiring that advance payments performance. Whenever feasible, the be provided as a basis for acceptance. agency shall, under the direction and (c) When advance payments are re- approval of the Department of the quested, the agency may— Treasury, use a letter of credit method (1) Enter into the contract and pro- that requires the contractor not to vide for advance payments conforming withdraw the Government funds until to this part 32; the contractor’s checks have been (1) (2) Enter into the contract without forwarded to the payees (delay of providing for advance payments if the drawdown technique), or (2) presented contractor does not actually need ad- to the contractor’s bank for payment vance payments; or (checks paid technique) (see 31 CFR (3) Deny award of the contract if the 205.3 and 205.4(d)). request for advance payments has been (e) The Treasury regulations provide disapproved under 32.409–2 and funds for terminating the advance financing adequate for performance are not oth- arrangement if the contractor is un- erwise available to the offeror. willing or unable to minimize the elapsed time between receipt of the ad- [48 FR 42328, Sept. 19, 1983, as amended at 50 FR 1744, Jan. 11, 1985; 50 FR 52429, Dec. 23, vance and disbursement of the funds. 1985] In such cases, if reversion to normal payment methods is not feasible, the 32.406 Letters of credit. Treasury regulation provides for use of (a) The Department of the Treasury a working capital method of advance; (Treasury) prescribes regulations and i.e., for limiting advances to (1) only instructions covering the use of letters the estimated disbursements for a of credit for advance payments under given initial period and (2) subse- contracts. See Treasury Department quently, for only actual cash disburse- Circular 1075 (31 CFR part 205), and the ments (31 CFR 205.3(k) and 205.7). implementing instructions in the [48 FR 42328, Sept. 19, 1983, as amended at 52 Treasury Financial Manual, available FR 19805, May 27, 1987] in offices providing financial advice and assistance. 32.407 Interest. (b) If agencies provide advance pay- (a) Except as provided in paragraph ments to contractors, use of the follow- (d) below, the contracting officer shall ing methods is required unless the charge interest on the daily unliqui- agency has obtained a waiver from the dated balance of all advance payments Treasury Department: at the higher of— (1) By letter of credit if the contract- (1) The published prime rate of the ing agency expects to have a continu- banking institution (depository) in ing relationship with the contractor which the special bank account (see for a year or more, with advances to- 32.409–3) is established; or taling at least $120,000 a year. (2) The rate established by the Sec- (2) By direct Treasury check if the retary of the Treasury under 50 U.S.C. circumstances do not meet the criteria App. 1215(b)(2). in subparagraph (1) above. (b) The interest rate for advance pay- (c) If the agency has entered into ments shall be adjusted for changes in multiple contracts (or a combination the prime rate of the depository and of contract(s) and assistance agree- the semiannual determination by the ment(s)) involving eligibility of a con- Secretary of the Treasury under 50 tractor for more than one letter of U.S.C. App. 1215(b)(2). The contracting credit, the agency shall follow arrange- officer shall obtain data from the de- ments made under Treasury procedures pository on changes in the interest for (1) consolidating funding to the rate during the month. Interest shall same contractor under one letter of be computed at the end of each month credit or (2) replacing multiple letters on the daily unliquidated balance of of credit with a single letter of credit. advance payments at the applicable (d) The letter of credit enables the daily interest rate. contractor to withdraw Government (c) Interest shall be required on con- funds in amounts needed to cover its tracts that are for acquisition, at cost, own disbursements of cash for contract of facilities for Government ownership,

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if the contracts are awarded in com- (2) A cash flow forecast showing esti- bination with, or in contemplation of, mated disbursements and receipts for supply contracts or subcontracts. the period of contract performance. If (d) The agency head or designee may the application pertains to a type of authorize advance payments without contract described in 32.403(a) or (b), interest under the following types of the contractor shall limit the forecast contracts, if in the Government’s inter- to the contract to be financed by ad- est: vance payments. (1) Contracts for experimental, re- (3) The proposed total amount of ad- search, or development work (including vance payments. studies, surveys, and demonstrations in (4) The name and address of the bank socio-economic areas) with nonprofit at which the contractor expects to es- education or research institutions. tablish a special account as depository (2) Contracts solely for the manage- for the advance payments. If advance ment and operation of Government- payments in the form of a letter of owned plants. credit are anticipated, the contractor (3) Cost-reimbursement contracts shall identify the specific account at with governments, including State or the bank to be used. This subparagraph local governments, or their instrumen- (4) is not applicable if an alternate talities. method is used under agency proce- (4) Other classes of contracts, or un- dures. usual cases, for which the exclusion of (5) A description of the contractor’s interest on advances is specifically au- efforts to obtain unguaranteed private thorized by agency procedures. financing or a V-loan (see 32.301) under (e) If a contract provides for interest- eligible contracts. This requirement is free advance payments, the contracting not applicable to the contract types de- officer may require the contractor to scribed in 32.403(a) or (b). charge interest on advances or (6) Other information appropriate to downpayments to subcontractors and an understanding of (i) the contractor’s credit the Government for the proceeds financial condition and need, (ii) the from the interest charges. Interest contractor’s ability to perform the con- rates shall be determined as described tract without loss to the Government, in paragraphs (a) and (b) above. The and (iii) financial safeguards needed to contracting officer need not require the protect the Government’s interest. Or- contractor to charge interest on an ad- dinarily, if the contract is a type de- vance to a subcontractor that is an in- scribed in 32.403(a) or (b), the contrac- stitution of the kind described in para- tor may limit the response to this sub- graph (d)(1). paragraph (6) to information on the (f) The contracting officer shall not contractor’s reliability, technical abil- allow interest charges, required by this ity, and accounting system and con- 32.407, as reimbursable costs under trols. cost-reimbursement contracts, whether the interest charge was incurred by the 32.409 Contracting officer action. prime contractor or a subcontractor. After analysis of the contractor’s application and any appropriate inves- 32.408 Application for advance pay- tigation, the contracting officer shall ments. recommend approval or disapproval (a) A contractor may apply for ad- and transmit the request and rec- vance payments before or after the ommendation to the approving author- award of a contract. ity designated under 32.402(e). (b) The contractor shall submit any advance payment request in writing to 32.409–1 Recommendation for ap- the contracting officer and provide the proval. following information: If recommending approval, the con- (1) A reference to the contract if the tracting officer shall transmit the fol- request concerns an existing contract, lowing, under agency procedures, to or a reference to the solicitation if the the approving authority: request concerns a proposed contract. (a) Contract data, including—

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(1) Identification and date of the cial bank accounts in which the ad- award; vance payments are deposited. (2) Citation of the appropriation; (c) In the terms of the agreement, the (3) Type and dollar amount of the contracting officer should provide for a contract; paramount lien in favor of the Govern- (4) Items to be supplied, schedule of ment. This lien may supplement or re- deliveries or performance, and status of place other security requirements. The any deliveries or performance; lien should cover— (5) The contract fee or profit con- (1) Supplies being acquired; templated; and (2) Any credit balance in the special (6) A copy of the contract, if avail- bank account in which advance payable. ments are deposited; and (b) The contractor’s request and sup- (3) All property that the contractor porting information. acquires for performing the contract, (c) A report on the contractor’s past except to the extent to which the Gov- performance, responsibility, technical ernment otherwise has valid title to ability, and plant capacity. the property. (d) Comments on (1) the contractor’s (d) Security requirements vary to fit need for advance payments and (2) po- the circumstances of different cases. tential Government benefits from the Minimum security requirements are contract performance. covered by the clauses prescribed in (e) Proposed advance payment con- the contract. The contracting officer tract terms, including proposed secu- may supplement these as necessary in rity requirements. each case for protection of the Govern- (f) The findings, determination, and ment’s interest. Examples of additional authorization (see 32.410). security terms are— (g) The recommendation for approval (1) Personal or corporate endorse- of the advance payment request. ments or guarantees; (h) Justification of any proposal for (2) Pledges of collateral; waiver of interest charges (see 32.407). (3) Subordination or standby of other indebtedness; 32.409–2 Recommendation for dis- (4) Controls or limitations on profit approval. distributions, salaries, bonuses or com- If recommending disapproval, the missions, rentals and royalties, capital contracting officer shall, under agency expenditures, creation of liens, retire- procedures, transmit— ment of stock or debt, and creation of (a) The items prescribed in 32.409– additional obligations; and 1(a), (b), and (c); and (5) Advance payment bonds (rarely (b) The recommendation for dis- required). approval and the reasons. (e) In an advance payment agreement with an instrumentality of the Govern- 32.409–3 Security, supervision, and ment, a State, a local government, or covenants. an agency or instrumentality of a (a) If advance payments are ap- State or local government, the con- proved, the contracting officer shall tracting officer may omit the require- enter into an agreement with the con- ment for deposit of the advances in a tractor covering bank accounts and special bank account, if the official ap- suitable covenants protecting the Gov- proving the advance determines that ernment’s interest (see 32.411). This re- other adequate security exists to pro- quirement generally applies under all tect the Government’s interest. statutory authorities, but modified re- (f) The requirements of this 32.409–3 quirements applicable to certain spe- do not apply when using letters of cred- cific cases are prescribed in paragraphs it if an agency’s procedures provide (e) through (g) below. for— (b) The agency shall (1) ensure that (1) The use under a cost-reimburse- the amount of advance payments does ment contract of Federal funds depos- not exceed the contractor’s financial ited in the contractor’s bank account needs, and (2) closely supervise the con- (without the contractor acquiring title tractor’s withdrawal of funds from spe- to the funds); and

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(2) The security of such deposit of agement system provides for effective con- public moneys in accordance with gov- trol over and accountability for all Federal erning regulations of the Treasury De- funds under governing regulations of the partment. Treasury Department.) (An advance payment bond is required.)] This security is consid- (g) If a separate special bank account ered adequate. is not required; e.g., advance payment (5) Advance payments are the only ade- by a letter of credit, an agency may re- quate means of financing available to the quire a special bank account for an in- Contractor, and the amount designated in (2) dividual case, or classes of cases, if the above is based, to the extent possible, on the circumstances warrant. use of the Contractor’s own working capital in performing the contract. 32.410 Findings, determination, and authorization. [Insert paragraph (6), (7), or (8), as applicable]. (a) Each determination concerning (6) The Contractor is a nonprofit (edu- advance payments shall be supported cational) (and) (research) institution, and the contract is for (experimental) (,) (re- by written findings (see search and development) work. 32.402(c)(1)(iii)). (7) The contract is solely for the manage- (b) The following is an example of the ment and operation of a Government-owned format and text of findings, determina- plant. tion, and authorization with alter- (8) The following unusual facts and cir- native words, phrases, and paragraphs cumstances favor making advance payments to be selected to conform to the cir- to the Contractor without interest: cumstances involved: [List the pertinent facts and circumstances.] FINDINGS, DETERMINATION, AND DETERMINATION AUTHORIZATION FOR ADVANCE PAYMENTS (b) Based on the findings in (a) above, the undersigned determined that the making of FINDINGS the proposed advance payments, (with interest at the rate of —[Insert the interest rate (a) The undersigned hereby finds that: computed in accordance with 32.407] percent on (1) The ———— [insert the name of the con- the daily unliquidated balance of the ad- tracting activity] and ———— [insert the name vance payments,) (without interest, except of the contractor] (have entered) (propose to as provided by the proposed advance pay- enter) into (negotiated) (sealed bid) Contract ment clause,) (is in the public interest) (will No. ——, dated ——— facilitate the national defense). [Summarize the specific facts and significant circumstances concerning the contract and the AUTHORIZATION contractor, that, together with the other findings, will clearly support the determination (c) The advance payments, of which (the below.] amount at any time outstanding) (the aggre- (2) Advance payments (in an amount not to gate amount, less the aggregate amounts re- exceed $——— at any time outstanding) (in paid, or withdrawn by the Government), an aggregate amount not exceeding $———, shall not exceed $——, are hereby authorized less the aggregate amounts repaid, or with- under (section 305 of the Federal Property drawn by the Government) are required by and Administrative Services Act of 1949 (41 the Contractor to perform under the con- U.S.C. 255)) (the Armed Services Procure- tract. The amount does not exceed the un- ment Act (10 U.S.C. 2307)) (the Extraordinary paid contract price or the estimated interim Contracting Authority of Government Agen- cash needs arising during the reimbursement cies in Connection with National Defense cycle. Functions (50 U.S.C. 1431–1435) and Executive (3) The advance payments are necessary for Order No. 10789 of November 14, 1958 (3 CFR prompt, efficient contract performance that 1958 Supp. pp. 72–74)) [or, if other, cite appro- will benefit the Government. priate authority] on (terms substantially as (4) The proposed advance payment clause contained in the proposed advance payment provides for security for the protection of clause, a copy (an outline) of which is an- the Government. The clause requires that all nexed to this authorization) (the following payments will be desposited in a special terms:) [Insert the appropriate terms.] bank account and that the Government will (All prior authorizations for advance pay- have a paramount lien on (i) the credit bal- ments under Contract No. ——— are super- ance in the special bank account, (ii) any seded.) supplies contracted for, and (iii) any mate- ———————————————————————— rial or other property acquired for perform- (Signature) ance of the contract. [Insert the following, if ———————————————————————— applicable (The Contractor’s financial man- (Name typed)

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———————————————————————— (c) This Special Bank Account is des- (Title of authorized official) ignated ‘‘———— [Insert the contractor’s [Each Findings, Determination, and Author- name], ———— [Insert the name of the Govern- ization shall be individually prepared to fit the ment agency] Special Bank Account.’’ particular circumstances at hand. Subpara- graphs (a)(1), (2), (3) and (4) and paragraphs COVENANTS (b) and (c) shall be used in each case. If the In consideration of the foregoing, and for contract is (a) for experimental, developmental, other good and valuable considerations, the or research work and with a nonprofit edu- parties agree to the following conditions: cational or research institution, or (b) only for (a) The Government shall have a lien on management and operation of a Government- the credit balance in the account to secure owned plant, subparagraph (a)(5) should not be the repayment of all advance payments included. If the advance payment is to be made made to the Contractor. The lien is para- without interest to the contractor, include sub- mount to any lien or claim of the Bank re- paragraph (a)(6), (7), or (8). If any advance garding the account. payments have previously been authorized for (b) The Bank is bound by the terms of the the contract, include the final sentence of para- contract relating to the deposit and with- graph (c). The alternate parenthetical wording drawal of funds in the Special Bank Account, or other modifications may be used as appro- but is not responsible for the application of priate. The paragraphs actually used shall be funds withdrawn from the account. The renumbered sequentially]. Bank shall act on written directions from the Contracting Officer, the administering [48 FR 42328, Sept. 19, 1983, as amended at 50 office, or a duly authorized representative of FR 1744, Jan. 11, 1985; 50 FR 52429, Dec. 23, either. The Bank is not liable to any party 1985] to this agreement for any action that complies with the written directions. Any writ- 32.411 Agreement for special bank ac- ten directions received by the Bank through count. the Contracting Officer on ———— [Insert the name of the agency] stationery and purport- The contracting officer shall use sub- ing to be signed by, or by the direction of stantially the following form of agree- ———— or duly authorized representative, ment for a special bank account for ad- shall be, as far as the rights, duties, and li- vance payments: abilities of the Bank are concerned, considered as being properly issued and filed with AGREEMENT FOR SPECIAL BANK the Bank by the ———— [Insert the name of ACCOUNT the agency]. (c) The Government, or its authorized rep- This agreement is entered into this —— resentatives, shall have access to the books day of ———, 19—, between the United States and records maintained by the Bank regard- of America, (the Government), represented ing the Special Bank Account at all reason- by the Contracting Officer executing this able times and for all reasonable purposes, agreement, ——— [Insert the name of the con- including (but not limited to), the inspection tractor], a ——— [Insert the name of the State or copying of the books and records and any of incorporation] corporation (the Contrac- and all pertinent memoranda, checks, cor- tor), and ———, a banking corporation under respondence, or documents. The Bank shall the laws of ———, located at ——— (the preserve the books and records for a period Bank). of 6 years after the closing of this Special RECITALS Bank Account. (d) In the event of the service of any writ (a) Under date of ———, 19—, the Govern- of attachment, levy of execution, or comment and the Contractor entered into Con- mencement of garnishment proceedings re- tract No. ———, or a related supplemental garding the Special Bank Account, the Bank agreement, providing for advance payments will promptly notify ———— [Insert the name to the Contractor. A copy of the advance of the administering office]. payment terms was furnished to the Bank. (e) While this Special Bank Account exists, (b) The contract or supplemental agree- the Bank shall inform the Government each ment requires that amounts advanced to the month of the Bank’s published prime inter- Contractor be deposited separate from the est rate and changes to the rate during the Contractor’s general or other funds, in a Spe- month. The Bank shall give this information cial Bank Account at a member bank of the to the Contracting Officer on the last busi- Federal Reserve System or any ‘‘insured’’ ness day of the month. [This covenant will not bank within the meaning of the Act creating be included in Special Bank Account Agree- the Federal Deposit Insurance Corporation ments covering interest-free advance payments]. (12 U.S.C. 1811). The parties agree to deposit Each of the parties to this agreement has the amounts with the Bank, which meets the executed the agreement on ————, 19— requirement. ————————————————————————

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———————————————————————— ation, or repair, when the contracts [Signatures and official titles] provide for progress payments based on a percentage or stage of completion. 32.412 Contract clause. (a) The contracting officer shall in- 32.501 General. sert the clause at 52.232–12, Advance Progress payments may be cus- Payments, in solicitations and con- tomary or unusual. Customary tracts under which the Government progress payments are those made will provide advance payments, except under the general guidance in this sub- as provided in 32.412(b). part, using the customary progress (b) If the agency desires to waive the payment rate, the cost base, and fre- countersignature requirement because quency of payment established in the of the contractor’s financial strength, Progress Payments clause, and either good performance record, and favorable the ordinary liquidation method or the experience concerning cost disallow- alternate method as provided in sub- ances, the contracting officer shall use sections 32.503–8 and 32.503–9. Any other the clause with its Alternate I. progress payments are considered un- (c) If a cost-reimbursement contract usual, and may be used only in excep- is contemplated, the contracting offi- tional cases when authorized in accord- cer shall use the clause with its Alter- ance with subsection 32.501–2. nate II. (d) If the agency considers a more 32.501–1 Customary progress payment rapid liquidation appropriate, the con- rates. tracting officer shall use the clause (a) The customary progress payment with its Alternate III. rate is 80 percent, applicable to the (e) If the agency provides advance total costs of performing the contract. payments under the contract at no in- The customary rate for contracts with terest to the prime contractor, the con- small business concerns is 85 percent. tracting officer shall use the clause The Department of Defense (DOD) may with its Alternate IV. establish other customary rates for for- (f) If the requirement for a special eign military sales and for flexible bank account is eliminated in accord- progress payments. ance with 32.409–3 (e) or (g), the con- (b) Any rate higher than those per- tracting officer shall insert in the so- mitted in paragraph (a) above shall be licitation or contract the clause set considered an unusual progress pay- forth in Alternate V of 52.232–12, Ad- ment. The contracting officer shall not vance Payments, instead of the basic include a higher rate in a contract un- clause. less advance agency approval is ob- [48 FR 42328, Sept. 19, 1983, as amended at 55 tained as prescribed in 32.501–2. FR 25530, June 21, 1990] (c) When advance payments and progress payments are authorized Subpart 32.5—Progress Payments under the same contract, a progress Based on Costs payment rate higher than the customary rate shall not be authorized. 32.500 Scope of subpart. (d) In accordance with the Defense This subpart prescribes policies, pro- Procurement Improvement Act of 1986 cedures, forms, solicitation provisions, (Public Law 99–145), as amended, and and contract clauses for providing con- for civilian agencies, in accordance tract financing through progress pay- with 41 U.S.C. 255, as amended, progress ments based on costs. This subpart payments are limited to 80 percent on does not apply to— work accomplished under undefinitized (a) Payments under cost-reimburse- contract actions. A higher rate is not ment contracts, other than reimburse- authorized under unusual progress payment of the contractor’s progress payments or other customary progress ments to subcontractors and suppliers payments for the undefinitized actions. (see 32.504(f)); or [48 FR 42328, Sept. 19, 1987, as amended at 52 (b) Contracts for construction or for FR 30077, Aug. 12, 1987; 60 FR 49714, Sept. 26, shipbuilding or ship conversion, alter- 1995]

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32.501–2 Unusual progress payments. (6) Any portion of the contract specifically providing for reimbursement (a) The contracting officer may proof costs only shall be excluded from the vide unusual progress payments only contract price. if— (b) The contracting officer shall not (1) The contract necessitates make progress payments or increase predelivery expenditures that are large the contract price beyond the funds ob- in relation to contract price and in re- ligated under the contract, as amend- lation to the contractor’s working cap- ed. ital and credit; (2) The contractor fully documents 32.501–4 [Reserved] an actual need to supplement any private financing available, including 32.501–5 Other protective terms. guaranteed loans; and If the contracting officer considers it (3) The contractor’s request is ap- necessary for protection of the Govern- proved by the head of the contracting ment’s interest, protective terms such activity or a designee. In addition, see as the following may be used in addi- 32.502–2. tion to the Progress Payments clause (b) The excess of the unusual of the contract: progress payment rate approved over (a) Personal or corporate guarantees. the customary progress payment rate (b) Subordinations or standbys of in- should be the lowest amount possible debtedness. under the circumstances. (c) Special bank accounts. (c) Progress payments will not be (d) Protective covenants of the kinds considered unusual merely because in paragraph (p) of the clause at 52.232– they are on letter contracts or the de- 12, Advance Payments. finitive contracts that supersede letter (e) A provision, included in the solici- contracts. tation and resultant contract when first article testing is required (see 32.501–3 Contract price. subpart 9.3), limiting progress pay- (a) For the purpose of making ments on first article work by a stated progress payments and determining the amount or percentage. limitation on progress payments, the [48 FR 42328, Sept. 19, 1983, as amended at 55 contract price shall be as follows: FR 52794, Dec. 21, 1990] (1) Under firm-fixed-price contracts, the contract price is the current con- 32.502 Preaward matters. tract price plus any unpriced modifica- This section covers matters that gen- tions for which funds have been obli- erally are relevant only before contract gated. award. This does not preclude taking (2) If the contract is redeterminable actions discussed here after award, if or subject to economic price adjust- appropriate; e.g., postaward addition of ment, the contract price is the initial a Progress Payments clause for consid- price until modified. eration. (3) Under a fixed-price incentive contract, the contract price is the target 32.502–1 Use of customary progress price plus any unpriced modifications payments. for which funds have been obligated. The use of a Progress Payments However, if the contractor’s properly clause in solicitations and resulting incurred costs exceed the target price, contracts generally shall be based upon the contracting officer may provision- considerations of the criteria in this ally increase the price up to the ceiling subsection. Reasonable doubts should or maximum price. be resolved in favor of including the (4) Under a letter contract, the con- Progress Payments clause in the solici- tract price is the maximum amount ob- tation. Bids conditioned on progress ligated by the contract as modified. payments when the solicitation did not (5) Under an unpriced order issued provide for progress payments shall be against a basic ordering agreement, the rejected as nonresponsive. contract price is the maximum amount (a) Subject to paragraph (b) of this obligated by the order, as modified. subsection, the contracting officer may

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provide for customary progress pay- 32.502–2 Contract finance office clear- ments if the contractor (1) will not be ance. able to bill for the first delivery of The contracting officer shall obtain products, or other performance mile- the approval of the contract finance of- stones, for a substantial time after fice or other offices designated under work must begin (normally 4 months agency procedures before taking any of or more for small business concerns; 6 the following actions: months or more for others), and (2) will (a) Providing a progress payment make expenditures for contract per- rate higher than the customary rate formance during the predelivery period (see 32.501–1). that have a significant impact on the (b) Deviating from the progress pay- contractor’s working capital. Progress ments terms prescribed in this part. payments may also be authorized, par- (c) Providing progress payments to a ticularly for small suppliers, if the con- contractor— tractor demonstrates actual financial (1) Whose financial condition is in need or the unavailability of private fi- doubt; nancing (see 32.106(a)). (2) Who has had an advance payment (b) To reduce undue administrative request or loan guarantee denied for fi- effort and expense, unless otherwise nancial reasons (or approved but with- provided in agency regulations, the drawn or lapsed) within the previous 12 contracting officer shall not provide months; or for progress payments on contracts of (3) Who is named in the consolidated list of contractors indebted to the less than $1 million unless— United States (known commonly as the (1) The contractor is a small business Hold-up List). concern and the contract will be equal to or greater than the simplified acqui- 32.502–3 Solicitation provisions. sition threshold; or (a) The contracting officer shall in- (2) The contractor will perform a sert the provision at 52.232–13, Notice of group of small contracts at the same Progress Payments, in invitations for time and the total impact on working bids and requests for proposals that in- capital is equivalent to a single con- clude a Progress Payments clause. tract of $1,000,000 or more. (b)(1) Under the authority of the stat- (c)(1) In considering whether to pro- utes cited in 32.101, an invitation for vide for progress payments in cir- bids may restrict the availability of cumstances under which a series of or- progress payments to small business ders are awarded (e.g., indefinite deliv- concerns only. ery contracts or basic ordering agree- (2) The contracting officer shall in- ments contemplating requisitions, task sert the provision at 52.232–14, Notice of orders, etc., or their equivalent), the Availability of Progress Payments Ex- contracting officer shall apply the clusively for Small Business Concerns, standards in paragraphs (a) and (b) of in invitations for bids if it is antici- this subsection, based on— pated that (1) both small business con- (i) An estimate of the total work to cerns and others may submit bids in re- be done; and sponse to the same invitation and (2) (ii) The probable impact on working only the small business bidders would need progress payments. capital of the predelivery expenditures (c) The contracting officer shall in- and production lead times of the ma- sert the provision at 52.232–15, Progress jority of the individual orders. Payments Not Included, in invitations (2) In authorizing progress payments for bids if the solicitation will not con- under multiple-order contracts, the tain one of the provisions prescribed in contracting officer should establish a paragraphs (a) and (b) above. single liquidation rate applicable to all orders. 32.502–4 Contract clauses. [48 FR 42328, Sept. 19, 1983, as amended at 60 (a) The contracting officer shall in- FR 49715, Sept. 26, 1995] sert the clause at 52.232–16, Progress Payments, in solicitations and fixed-

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price contracts under which the Gov- formance record, reliability, quality of ernment will provide progress pay- management, and financial strength, ments based on costs. and with the adequacy of the contrac- (b) If the contractor is a small busi- tor’s accounting system and controls. ness concern, the contracting officer Supervision shall be of a kind and de- shall use the clause with its Alternate gree sufficient to provide timely I. knowledge of the need for, and timely (c) If the contract is a letter con- opportunity for, any actions necessary tract, the contracting officer shall use to protect Government interests. the clause with its Alternate II. (b) The administering office must (d) If the nature of the contract ne- keep itself informed of the contractor’s cessitates separate progress payment overall operations and financial condi- rates for portions of work that are tion, since difficulties encountered and clearly severable and accounting seg- losses suffered in operations outside regation would be maintained (e.g., an- the particular progress payment con- nual production requirements), the ap- tract may affect adversely the per- plication of separate progress payment formance of that contract and the liq- rates shall be fully described in a sup- uidation of the progress payments. plementary special provision within (c) For contracts with contractors (1) the contract. Separate progress pay- whose financial condition is doubtful ment requests and subsequent invoices or not strong in relation to progress shall be submitted by the contractor payments outstanding or to be out- for the severable portions of work in standing, (2) with management of order to maintain accounting integ- doubtful capacity, (3) whose accounting rity. controls are found by experience to be [48 FR 42328, Sept. 19, 1983, as amended 52 FR weak, or (4) experiencing substantial 30077, Aug. 12, 1987] difficulties in performance, full information on progress under the contract 32.503 Postaward matters. involved (including the status of sub- This section covers matters that are contracts) and on the contractor’s generally relevant only after award of other operations and overall financial a contract. This does not preclude tak- condition should be obtained and ana- ing actions discussed here before lyzed frequently, with a view to pro- award, if appropriate; e.g., preaward re- tecting the Government’s interests bet- view of accounting systems and con- ter and taking such action as may be trols. proper to make contract performance more certain. 32.503–1 Contractor requests. (d) So far as practicable, all cost Each contractor request for progress problems, particularly those involving payment shall— indirect costs, that are likely to create (a) Be submitted on Standard Form disagreements in future administration 1443, Contractor’s Request for Progress of the contract should be identified and Payment; resolved at the inception of the con- (b) Comply with the instructions ap- tract (see 31.109). propriate to the applicable form, and the contract terms; and 32.503–3 Initiation of progress pay- (c) Include any additional informa- ments and review of accounting tion reasonably requested by the con- system. tracting officer. (a) For contractors that the adminis- [48 FR 42328, Sept. 19, 1983, as amended at 60 trative contracting officer (ACO) has FR 34739, July 3, 1995] found by previous experience or recent audit review (within the last 12 32.503–2 Supervision of progress pay- months) to be (1) reliable, competent, ments. and capable of satisfactory perform- (a) The extent of progress payments ance, (2) possessed of an adequate ac- supervision, by prepayment review or counting system and controls, and (3) periodic review, should vary inversely in sound financial condition, progress with the contractor’s experience, per- payments in amounts requested by the

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contractor should be approved as a when considered necessary) shall be matter of course. made periodically, or when considered (b) For all other contractors, the desirable by the ACO to determine the ACO shall not approve progress pay- validity of progress payments already ments before determining (1) that (i) made and expected to be made. the contractor will be capable of liq- (b) These postpayment reviews or au- uidating any progress payments or (ii) dits shall, as a minimum, include a de- the Government is otherwise protected termination of whether or not— against loss by additional protective (1) The unliquidated progress pay- provisions, and (2) that the contrac- ments are fairly supported by the value tor’s accounting system and controls of the work accomplished on the unde- are adequate for proper administration livered portion of the contract; of progress payments. The services of (2) The applicable limitation on the cognizant independent audit agen- progress payments in the Progress cy or office should be used to the great- Payments clause has been exceeded; est extent practicable. However, if the (3)(i) The unpaid balance of the con- auditor so advises, a complete audit tract price will be adequate to cover may not be necessary. the anticipated cost of completion, or (ii) The contractor has adequate re- 32.503–4 Approval of progress pay- sources to complete the contract; and ment requests. (4) There is reason to doubt the ade- (a) When the reliability of the con- quacy and reliability of the contrac- tractor and the adequacy of the con- tor’s accounting system and controls tractor’s accounting system and con- and certification. trols have been established (see 32.503– (c)(1) Generally, the progress pay- 3 above) the ACO may, in approving ments made under multiple-order con- any particular progress payment re- tracts should be administered under quest (including initial requests on new each individual order as if the order contracts), rely upon that accounting constituted a separate contract. system and upon the contractor’s cer- (2) If the contractor requests it and tification, without requiring audit or the contracting officer approving indi- review of the request before payment. vidual progress payments agrees, the (b) The ACO should not routinely ask administration of progress payments for audits of progress payment re- may be based on the overall contract quests. However, when there is reason or agreement. Under this method, the to (1) question the reliability or accu- contractor shall include a supporting racy of the contractor’s certification or schedule with each request for a (2) believe that the contract will in- progress payment. The schedule should volve a loss, the ACO should ask for a identify the costs applicable to each review or audit of the request before order. payment is approved or the request is (3) The contracting officer may treat otherwise disposed of. a group of orders as a single unit for (c) When there is reason to doubt the administration of progress payments if amount of a progress payment request, each order in the group is (i) subject to only the doubtful amount should be a uniform liquidation rate, and (ii) withheld, subject to later adjustment under the jurisdiction of the same pay- after review or audit; any clearly prop- ment office. er and due amounts should be paid without awaiting resolution of the dif- 32.503–6 Suspension or reduction of ferences. payments. (a) General. The Progress Payments 32.503–5 Administration of progress clause provides a Government right to payments. reduce or suspend progress payments, (a) While the ACO may, in approving or to increase the liquidation rate, progress payment requests under under specified conditions. These con- 32.503–3 above, rely on the contractor’s ditions and actions are discussed in accounting system and certification paragraphs (b) through (g) below. without prepayment review, (1) The contracting officer shall take postpayment reviews (including audits these actions only in accordance with

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the contract terms and never contract without loss to the Govern- precipitately or arbitrarily. These ac- ment. tions should be taken only after— (2) If the contracting officer con- (i) Notifying the contractor of the includes that further progress payments tended action and providing an oppor- would increase the probable loss to the tunity for discussion; Government, the contracting officer (ii) Evaluating the effect of the ac- shall suspend progress payments and tion on the contractor’s operations, all other payments until the unliqui- based on the contractor’s financial con- dated balance of progress payments is dition, projected cash requirements, eliminated. and the existing or available credit ar- (d) Excessive inventory. If the inven- rangements; and tory allocated to the contract exceeds (iii) Considering the general equities reasonable requirements (including a of the particular situation. reasonable accumulation of inventory (2) The contracting officer shall take for continuity of operations), the con- immediate unilateral action only if tracting officer should, in addition to warranted by circumstances such as requiring the transfer of excessive in- overpayments or unsatisfactory con- ventory from the contract, take one or tract performance. more of the following actions, as nec- (3) In all cases, the contracting offi- essary, to avoid or correct overpay- cer shall (i) act fairly and reasonably, ment: (ii) base decisions on substantial evi- (1) Eliminate the costs of the exces- dence, and (iii) document the contract sive inventory from the costs eligible file. Findings made under paragraph (c) for progress payments, with appro- of the Progress Payments clause shall priate reduction in progress payments be in writing. outstanding. (b) Contractor noncompliance. (1) The (2) Apply additional deductions to contractor must comply with all mate- billings for deliveries (increase liquida- rial requirements of the contract. This tion). includes the requirement to maintain (e) Delinquency in payment of costs of an efficient and reliable accounting performance. (1) If the contractor is de- system and controls, adequate for the linquent in paying the costs of con- proper administration of progress pay- tract performance in the ordinary ments. If the system or controls are course of business, the contracting offi- deemed inadequate, progress payments cer shall evaluate whether the delin- shall be suspended (or the portion of quency is caused by an unsatisfactory progress payments associated with the financial condition and, if so, shall unacceptable portion of the contrac- apply the guidance in paragraph (c) tor’s accounting system shall be sus- above. If the contractor’s financial con- pended) until the necessary changes dition is satisfactory, the contracting have been made. officer shall not deny progress pay- (2) If the contractor fails to comply ments if the contractor agrees to— with the contract without fault or neg- (i) Cure the payment delinquencies; ligence, the contracting officer will not (ii) Avoid further delinquencies; and take action permitted by paragraph (iii) Make additional arrangements (c)(1) of the Progress Payments clause, adequate for completing the contract other than to correct overpayments without loss to the Government. and collect amounts due from the con- (2) If the contractor has, in good tractor. faith, disputed amounts claimed by (c) Unsatisfactory financial condition. subcontractors, suppliers, or others, (1) If the contracting officer finds that the contracting officer shall not con- contract performance (including full sider the payments delinquent until liquidation of progress payments) is en- the amounts due are established by the dangered by the contractor’s financial parties through litigation or arbitra- condition, or by a failure to make tion. However, the amounts shall be ex- progress, the contracting officer shall cluded from costs eligible for progress require the contractor to make addi- payments so long as they are disputed. tional operating or financial arrange- (3) Determinations of delinquency in ments adequate for completing the making contributions under employee

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pension, profit sharing, or stock owner- (2) If the contracting officer believes ship plans, and exclusion of costs for a loss is probable, future progress pay- such contributions from progress payment requests shall be modified as fol- ment requests, shall be in accordance lows: with paragraph (a)(2) of the clause at (i) The contract price shall be the re- 52.232–6, Progress Payments, without vised amount computed under subpara- regard to the provisions of 32.503–6. graph (1)(i) above. (f) Fair value of undelivered work. (1) (ii) The total costs eligible for For the purposes of subpart 32.5, the progress payments shall be the product fair value of undelivered work is the of (A) the sum of paid costs eligible for lesser of (i) the contract price of the progress payments times (B) the loss undelivered work, minus the estimated ratio factor computed under subpara- costs required for completing contract graph (1)(ii) above. performance, or (ii) the incurred costs (iii) The costs applicable to items de- applicable to the undelivered items. livered, invoiced, and accepted shall (2) The contracting officer shall mon- not include costs in excess of the con- itor the relationship of unliquidated tract price of the items. progress payments to the fair value of (3) The contracting officer may use undelivered work under the contract. If audit assistance, technical services, the unliquidated progress payments ex- management reports, and other sources ceed the fair value of undelivered work, of pertinent data to evaluate progress the contracting officer shall, governed payment requests. If the contracting by the principles in paragraphs (c) and officer concludes that the contractor’s (e) above, take appropriate action to figures in the contractor’s progress eliminate this excess using the loss payment request are not correct, the ratio adjustment described in para- contracting officer shall— graph (g) below, and based on full con- (i) In the manner prescribed in para- sideration of— graph (4) below, prepare a supple- (i) The degree of completion of con- mentary analysis to be attached to the tract performance; contractor’s request; (ii) The quality and amount of work (ii) Advise the contractor in writing performed on the undelivered portion of the differences; and of the contract; (iii) Adjust all further progress pay- (iii) The amount of work remaining ments in accordance with paragraph (1) to be done and the estimated costs of above, using the contracting officer’s completion of performance; and figures, until the difference is resolved. (iv) The amount remaining unpaid (4) The following is an example of the under the contract. supplementary analysis required in (g) Loss contracts. (1) If the sum of the paragraph (3) above: total costs incurred under a contract Section I: plus the estimated costs to complete Contract price ...... $950,000 Change orders and unpriced orders (to ex- the performance are likely to exceed tent funds have been obligated) ...... 50,000 the contract price, the contracting officer shall compute a loss ratio factor Revised contract price ...... $1,000,000 and adjust future progress payments to Section II: exclude the element of loss. The loss Total costs incurred to date ...... $900,000 ratio factor is computed as follows: Estimated additional costs to complete ...... 300,000 (i) Revise the current contract price Total costs to complete ...... $1,200,000 used in progress payment computations (the current ceiling price under $1,000,000 Loss ratio factor ÐÐÐÐÐ = 83.3% fixed-price incentive contracts) to in- $1,200,000 clude any pending change orders and Total costs eligible for progress payments $900,000 unpriced orders to the extent funds for Loss ratio factor ...... × 83.3% the orders have been obligated. Recognized costs for progress payments .. $749,700 Progress payment rate ...... × 80.0% (ii) Divide the revised contract price Alternate amount to be used ...... $599,760 by the sum of the total costs incurred Section III: to date plus the estimated additional Factored costs of items delivered * ...... $250,000 costs of completing the contract performance.

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Recognized costs applicable to undeliv- suspense account. The adjusted liquida- ered items ($749,700¥$250,000) ...... $499,700 tion rate shall be established by (a) di- * This amount shall be the same as the contract price of the items delivered. viding the unbilled G&A by the contract price, (b) multiplying the [48 FR 42328, Sept. 19, 1983, as amended at 52 quotient by the progress payment rate FR 30077, Aug. 12, 1987; 54 FR 5056, Jan. 31, stated in the contract, and (c) sub- 1989; 54 FR 48989, Nov. 28, 1989] tracting the resulting rate from the 32.503–7 Limitation on general and ad- progress payment rate. For example, if ministrative expenses (G&A) for the price is $1,100,000 and the unbilled progress payments. G&A is $47,600, the adjusted liquidation rate would be 76.5 percent, computed as If the contractor established an inventory suspense account under Appen- follows: dix A of Cost Accounting Standard Unbilled G&A divided by contract price (47,600/ 1,100,000) ...... 4.33% (CAS) 410, Allocation of Business Unit Result x progress payment rate (4.33% x 80%) ..... 3.46% General and Administrative Expenses Result subtracted from progress payment rate to Final Cost Objectives (48 CFR (80% - 3.46%) ...... 76.54% 9904.410 (appendix B, FAR loose-leaf edition)), and the account is $5 million [48 FR 42328, Sept. 19, 1983, as amended 52 FR or more, the following limitations 30077, Aug. 12, 1987] shall apply to progress payments: (a) G&A shall not be eligible for 32.503–9 Liquidation rates—alternate method. progress payments until the value of work in process inventories under new (a) The liquidation rate determined contracts exceeds that under the old. under 32.503–8 shall apply throughout For this purpose, new contracts shall the period of contract performance un- be considered to be those awarded after less the contracting officer adjusts the CAS 410 became applicable to the work liquidation rate under the alternate of the contractor. Old contracts are method in this 32.503–9. The objective those included in the suspense account of the alternate liquidation rate meth- prescribed in CAS 410. od is to permit the contractor to retain (b) The amount of G&A eligible for the earned profit element of the con- progress payments under the contract tract prices for completed items in the shall be the contractor’s pro rata share liquidation process. The contracting of- of G&A allocable to the excess under ficer may reduce the liquidation rate paragraph (a) above. if— [48 FR 42328, Sept. 19, 1983, as amended at 59 (1) The contractor requests a reduc- FR 67043, Dec. 28, 1994] tion in the rate; (2) The rate has not been reduced in 32.503–8 Liquidation rates—ordinary the preceding 12 months; method. (3) The contract delivery schedule ex- Progress payments are recouped by tends at least 18 months from the con- the Government through the deduction tract award date; of liquidations from payments that (4) Data on actual costs are available would otherwise be due to the contrac- (i) for the products delivered, or (ii) if tor for completed contract items. To no deliveries have been made, for a per- determine the amount of the liquida- formance period of at least 12 months; tion, a liquidation rate is applied to (5) The reduced liquidation rate the contract price of contract items de- would result in the Government re- livered and accepted. The ordinary couping under each invoice the full ex- method is that the liquidation rate is tent of the progress payments applica- the same as the progress payment rate; ble to the costs allocable to that in- at the beginning of a contract, only voice; this method may be used. If the con- (6) The contractor would not be paid tract is subject to the CAS limitation for more than the costs of items deliv- in 32.503–7 on G&A eligible for progress ered and accepted (less allocable payments, the ordinary method in- progress payments) and the earned cludes the use of an adjusted liquida- profit on those items; tion rate to reflect the applicable G&A

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(7) The unliquidated progress pay- (b) The minimum liquidation rate is ments would not exceed the limit pre- the expected progress payments di- scribed in paragraph (a)(4) of the vided by the contract price. Each of Progress Payments clause; these factors is discussed below: (8) The parties agree on an appro- (1) Usually, the contracting officer priate rate; and shall compute the expected progress (9) The contractor agrees to certify payments by multiplying the esti- annually, or more often if requested by mated cost of performing the contract the contracting officer, that the alter- by the progress payment rate. In cer- nate rate continues to meet the condi- tain cases, part of the contractor’s tions of subsections 5, 6, and 7 above. G&A is excluded from the estimated The certificate must be accompanied cost for the purpose of calculating ex- by adequate supporting information. pected progress payments for the liq- (b) The contracting officer shall uidation rate. These cases pertain to change the liquidation rate in the fol- the implementation of CAS 410 (see lowing circumstances: 32.503–7 and 32.503–8). (1) The rate shall be increased for (2) For purposes of computing the liq- both previous and subsequent trans- uidation rate, the contracting officer actions, if the contractor experiences a may adjust the estimated cost and the lower profit rate than the rate antici- contract price to include the estimated pated at the time the liquidation rate value of any work authorized but not was established. Accordingly, the con- yet priced and any projected economic tracting officer shall adjust the adjustments; however, the contracting progress payments associated with con- officer’s adjustment shall not exceed tract items already delivered, as well the Government’s estimate of the price as subsequent progress payments. of all authorized work or the funds ob- (2) The rate shall be increased or de- ligated for the contract. creased in keeping with the successive (3) The following are examples of the changes to the contract price or target computation. Assuming an estimated profit when— price of $1,100,000 and total estimated (i) The target profit is changed under costs eligible for progress payments of a fixed-price incentive contract with $1,000,000: successive targets; or (i) If the progress payment rate is 80 (ii) A redetermined price involves a percent, the minimum liquidation rate change in the profit element under a should be 72.7 percent, computed as fol- contract with prospective price rede- lows: termination at stated intervals. (c) Whenever the liquidation rate is ($1,000 , 000× 80%) changed, the contracting officer shall = 72. 7% issue a contract modification to speci- $1,100 , 000 fy the new rate in the Progress Pay- (ii) If the progress payment rate is 85 ments clause. Adequate consideration percent, the minimum liquidation rate for these contract modifications is pro- should be 77.3 percent, computed as fol- vided by the consideration included in lows: the initial contract. The parties shall promptly make the payment or liq- ($1,000 , 000× 85%) uidation required in the circumstances. = 77. 3% $1,100 , 000 32.503–10 Establishing alternate liq- (iii) If the contract is subject to CAS uidation rates. limitation on G&A eligible for progress (a) The contracting officer shall en- payments (see 32.503–7), an adjusted al- sure that the liquidation rate is— ternate liquidation rate shall be estab- (1) High enough to result in Govern- lished by subtracting the estimated ment recoupment of the applicable G&A not eligible for progress payments progress payments on each billing; and from the total estimated contract (2) Supported by documentation in- costs. For example, if the price is cluded in the administration office $1,100,000, costs are $1,000,000, and contract file. unbilled G&A is $47,600, the liquidation

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rate should be 69.3 percent, computed (2) The alternate method of liquida- as follows: tion (see 32.503–9) is used and the actual costs of performance exceed the cost ($1,000 , 000− $47, 600 ) ×80% = 69. 3% estimates used to establish the liquida- $1,100 , 000 tion rate. (3) The rate of progress or the quality (4) Minimum liquidation rates will of contract performance is unsatisfac- generally be expressed to tenths of a tory. percent. Decimals between tenths will (4) The rate of rejections, waste, or be rounded up to the next highest tenth spoilage is excessive. (not necessarily the nearest tenth), since rounding down would produce a (c) As required, the services of the rate below the minimum rate cal- cognizant independent audit agency or culated. office should be fully utilized, along with the services of qualified cost anal- [48 FR 42328, Sept. 19, 1983, as amended 52 FR ysis and engineering personnel. 30077, Aug. 12, 1987] 32.503–13 Quarterly statements for 32.503–11 Adjustments for price reduc- price revision contracts. tion. Under price revision or redetermina- (a) If a retroactive downward price reduction occurs under a redeterminable contracts that include progress ble contract that provides for progress payments clauses, the contracting offi- payments, the contracting officer cer shall occasionally compare the shall— quarterly statements submitted under (1) Determine the refund due and ob- the price revision or renegotiation tain repayment from the contractor for clause at 52.216–5, 52.216–6, 52.216–16, or the excess of payments made for deliv- 52.216–17 with the contractor’s requests ered items over amounts due as recom- for progress payments. The contracting puted at the reduced prices; and officer should ensure, as far as is rea- (2) Increase the unliquidated progress sonably possible, that costs of deliv- payments amount for overdeductions ered items in the quarterly statements made from the contractor’s billings for are excluded from the costs of undeliv- items delivered. ered items (the basis for unliquidated (b) The contracting officer shall also progress payments) in the contractor’s increase the unliquidated progress pay- request for progress payments. ments amount if the contractor makes an interim or voluntary price reduc- 32.503–14 Protection of Government tion under a redeterminable or incen- title. tive contract. (a) Since the Progress Payments clause gives the Government title to 32.503–12 Maximum unliquidated amount. all of the materials, work-in-process, finished goods, and other items of prop- (a) The contracting officer shall en- erty described in paragraph (d) of the sure that any excess of the unliqui- Progress Payments clause, under the dated progress payments over the con- contract under which progress pay- tractual limitation in paragraph (a) of ments have been made, the ACO must the Progress Payments clause in the ensure that the Government title to contract is promptly corrected through these inventories is not compromised one or more of the following actions: by other encumbrances. Ordinarily, the (1) Increasing the liquidation rate. ACO, in the absence of reason to be- (2) Reducing the progress payment rate. lieve otherwise, may rely upon the contractor’s certification contained in the (3) Suspending progress payments. progress payment request. (b) The excess described in paragraph (a) above is most likely to arise under (b) If the ACO becomes aware of any the following circumstances: arrangement or condition that would (1) The costs of performance exceed impair the Government’s title to the the contract price. property affected by progress payment,

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the ACO shall require additional pro- credit to the Government an amount tective provisions (see 32.501–5) to es- equal to the unliquidated progress pay- tablish and protect the Government’s ments, allocable to the transferred title. property. (c) The existence of any such encum- (e) If excess property remains after brance is a violation of the contrac- the contract performance is complete tor’s obligations under the contract, and all contractor obligations under and the ACO may, if necessary, suspend the contract are satisfied, including or reduce progress payments under the full liquidation of progress payments, terms of the Progress Payments clause the excess property is outside the scope covering failure to comply with any of the Progress Payments clause. material requirement of the contract. Therefore, the contractor holds title to In addition, if the contractor fails to it. disclose an existing encumbrance in the progress payments certification, 32.503–16 Risk of loss. the ACO should consult with legal (a) Under the Progress Payments counsel concerning possible violation clause, and except for normal spoilage, of 31 U.S.C. 3729, the False Claims Act. the contractor bears the risk for loss, [48 FR 42328, Sept. 19, 1983, as amended at 51 theft, destruction, or damage to prop- FR 2665, Jan. 17, 1986] erty affected by the clause, even though title is vested in the Govern- 32.503–15 Application of Government ment, unless the Government has ex- title terms. pressly assumed this risk. The clauses (a) Property to which the Govern- prescribed in this regulation related to ment obtains title by operation of the progress payments, default, and termi- Progress Payments clause solely is not, nations do not constitute a Govern- as a consequence, Government-fur- ment assumption of this risk. nished property. (b) If a loss occurs in connection with (b) Although property title is vested property for which the contractor in the Government under the Progress bears the risk, the contractor is obli- Payments clause, the acquisition, han- gated to repay to the Government the dling, and disposition of certain types amount of unliquidated progress pay- of property are governed by other ments based on costs allocable to the clauses, as follows: property. (1) The clause at 52.245–17, Special (c) The contractor is not obligated to Tooling, for special tooling. pay for the loss of property for which (2) The termination clauses at 52.249, the Government has assumed the risk for termination inventory. of loss. However, a serious loss may im- (c) The contractor may sell or other- pede the satisfactory progress of con- wise dispose of current production tract performance, so that the con- scrap in the ordinary course of business tracting officer may need to act under on its own volition, even if title has paragraph (c)(5) of the Progress Pay- vested in the Government under the ments clause. Progress Payments clause. The contracting officer shall require the con- 32.504 Subcontracts. tractor to credit the costs of the con- (a) The contracting officer shall en- tract performance with the proceeds of courage the contractor to provide the scrap disposition. progress payments to subcontractors (d) When the title to materials or on terms that meet the standards in other inventories is vested in the Gov- 32.502–1 for customary progress pay- ernment under the Progress Payments ments. clause, the contractor may transfer the (b) The contractor’s requests for inventory items from the contract for progress payments may include the full its own use or other disposition only if, amount paid to subcontractors as and on terms, approved by the con- progress payments under the contract tracting officer. The contractor shall and subcontracts. (1) eliminate the costs allocable to the (c) If the contractor is considering transferred property from the costs of making unusual progress payments to contract performance, and (2) repay or a subcontractor, the parties shall be

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guided by the policies in 32.501–2. If un- Payments clause in the contract, but usual progress payments for the sub- may expand the terms as follows: contract are approved by the Govern- (i) The term Contracting Officer may ment, the contracting officer shall be changed to Contracting Officer or issue a contract modification to speci- Prime Contractor. fy the new rate in subdivision (j)(4) of (ii) The term the Government may be the Progress Payments clause in the changed to the Government or Prime prime contract. This will allow the Contractor. contractor to include the progress pay- (3) The subcontract special terms re- ments to the subcontractor in the cost garding default shall include paragraph basis for progress payments by the (h) of the Progress Payments clause in Government. This modification shall the contract through its subdivision not be considered a deviation and shall (i). The rest of paragraph (h) is op- not require the clearance prescribed in tional. 32.502–2(b). (f) If the contractor makes progress (d) The contractor has a duty to en- payments to a subcontractor under a sure that progress payments to sub- cost-reimbursement prime contract, contractors conform to the standards the contracting officer shall accept the and principles prescribed in paragraph progress payments as reimbursable (j) of the Progress Payments clause in costs of the prime contract only under the prime contract. Although the con- the following conditions: tracting officer should, to the extent appropriate, review the subcontract as (1) The payments are made under the part of the overall administration of criteria in 32.502–1 for customary progress payments in the prime con- progress payments. tract, there is no special requirement (2) The payments do not exceed the for contracting officer review or con- progress payment rate in 32.501–1 un- sent merely because the subcontract less unusual progress payments to the includes a progress payments clause subcontractor have been approved in except as provided in paragraph (c) accordance with 32.501–2. above. However, the contracting officer (3) The subcontractor complies with shall ensure that the contractor has in- the liquidation principles of 32.503–8, stalled the necessary management con- 32.503–9, and 32.503–10. trol systems, including internal audit (4) The subcontract contains progress procedures. payments terms as prescribed in this (e) The subcontract terms shall in- section. clude the substance of the Progress [48 FR 42328, Sept. 19, 1983, as amended at 52 Payments clause in the prime contract, FR 9039, Mar. 20, 1987] modified to indicate that the contractor, not the Government, awards the subcontract and administers the Subpart 32.6—Contract Debts progress payments. The following ex- 32.600 Scope of subpart. ceptions apply to wording modifications: This subpart prescribes policies and (1) The subcontract terms on title to procedures for the Government’s ac- property under progress payments tions in ascertaining and collecting shall provide for vesting of title in the contract debts, charging interest on Government, not the contractor, as in the debts, deferring collections, and paragraph (d) of the Progress Pay- compromising and terminating certain ments clause in the prime contract. A debts. reference to the contractor may, however, be substituted for Government in 32.601 Definition. subdivision (d)(2)(iv) of the clause. Responsible official, as used in this (2) In the subcontract terms on re- subpart, means the contracting officer ports and access to records, the con- (see subpart 2.1) or other official des- tractor shall not delete the references ignated under agency procedures to ad- to Contracting Officer and Government in minister the collection of contract adapting paragraph (g) of the Progress debts and applicable interest.

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32.602 General. Sections 32.613, 32.614, and 32.616 do not The contract debts covered in this apply to claims against common car- subpart arise in various ways. The fol- riers for transportation overcharges lowing are some examples: and freight and cargo losses. (a) Damages or excess costs related 32.605 Responsibilities and coopera- to defaults in performance. tion among Government officials. (b) Breach of contract obligations concerning progress payments, advance (a) To protect the Government’s in- payments, or Government-furnished terests, contracting officers, contract property or material. financing offices, disbursing officials, (c) Government expense of correcting and auditors shall cooperate fully with defects. each other to— (d) Overpayments related to errors in (1) Discover promptly when a con- quantity or billing or deficiencies in tract debt arises; quality. (2) Ascertain the correct amount of (e) Retroactive price reductions re- the debt; sulting from contract terms for price (3) Act promptly and effectively to redetermination or for determination collect the debt; of prices under incentive type con- (4) Administer deferment of collec- tracts. tion agreements; and (f) Overpayments disclosed by quar- (5) Provide up-to-date information on terly statements required under price the status of the debt. redetermination or incentive contracts. (b) For most kinds of contract debts, (g) Delinquency in contractor pay- including reimbursement of protest ments due under agreements or ar- costs, the contracting officer has the rangements for deferral or postpone- primary responsibility for determining ment of collections. the amounts of and collecting contract (h) Reimbursement of costs, as pro- debt. Under some agency procedures, vided in 33.102(b) and 33.104(h)(1), paid however, the individual who is respon- by the Government where a postaward sible for payment under the contract; protest is sustained as a result of an e.g., the disbursing officer, may have awardee’s misstatement, misrepresen- this primary responsibility. tation, or miscertification. [48 FR 42328, Sept. 19, 1983, as amended at 60 [48 FR 42328, Sept. 19, 1983, as amended at 60 FR 48275, Sept. 18, 1995] FR 48275, Sept. 18, 1995; 61 FR 41470, Aug. 8, 1996] 32.606 Debt determination and collection. 32.603 Applicability. (a) If any indication of a contract Except as otherwise specified, this debt arises, the responsible official subpart applies to all debts to the Gov- shall determine promptly whether an ernment arising in connection with actual debt is due the Government and contracts and subcontracts for the ac- the amount. Any unwarranted delay quisition of supplies or services, and may contribute to— debts arising from the Government’s (1) Loss of timely availability of the payment of costs, as provided in funds to the program for which the 33.102(b) and 33.104(h)(1), where a funds were initially provided; postaward protest is sustained as a re- (2) Increased difficulty in collecting sult of an awardee’s misstatement, the debt; or misrepresentation, or miscertification. (3) Actual monetary loss to the Gov- [61 FR 41470, Aug. 8, 1996] ernment. (b) In determining the amount of any 32.604 Exclusions. contract debt, the responsible official This subpart does not apply to claims shall fairly consider both the Govern- of the Government against military or ment’s claim and any contract claims civilian employees or their dependents by the contractor against the Govern- arising in connection with current or ment. This determination does not con- past employment by the Government. stitute a settlement of such claims, nor

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is it a contracting officer’s final deter- 32.607 Tax credit. mination under the Contract Disputes (a) If the contractor is entitled to a Act of 1978. tax credit under section 1481 of the In- (c) The responsible official shall es- ternal Revenue Code (26 U.S.C. 1481) tablish a control record for each con- and requests recognition of the credit tract debt, to include at least the fol- in the debt collection, the responsible lowing information: official shall comply. (1) The name and address of the contractor. (b) The tax credit shall be considered (2) The contract number, if any. to reduce the amount of the debt as of (3) A description of the debt. the date when interest on the debt be- (4) The amount of debt and the appro- gins to accrue. priation to be credited. (c) The amount of the debt reduction (5) The date the debt was determined. shall be the amount of the tax credit (6) The dates of demands for pay- certificate, if a certificate was issued ment. by the Internal Revenue Service (IRS). (7) The amounts and dates of collec- If the IRS has not yet issued a certifi- tions, as they occur. cate, the responsible official may ac- (8) The date of any appeal filed or accept the contractor’s estimate of the tion brought in the Court of Claims tax credit amount until the certificate under the Disputes clause. is issued, subject to any verification (9) The status of collections. Exam- that the responsible official considers ples include— appropriate. (i) Actions reported to the disbursing (d) A reduction for a tax credit does officer (name, location, and date); not apply to a debt arising from a sub- (ii) Funds requested to be withheld contract. by the disbursing officer; (iii) Funds requested to be withheld 32.608 Negotiation of contract debts. by other offices (date and office); (a) The responsible official shall en- (iv) Deferment or installment pay- sure that any negotiations concerning ment arrangement requested; debt determinations are completed ex- (v) Deferment or installment request peditiously. If consistent with the con- reviewed; tract, the official shall make a unilat- (vi) Supplemental information re- eral determination promptly if the quested to support deferment requests; contractor is delinquent in any of the and following actions: (vii) Actions transferred to the con- (1) Furnishing pertinent information. tract financing office. (2) Negotiating expeditiously. (d) Except in cases in which an agree- (3) Entering into an agreement on a ment has been entered into for fair and reasonable price revision. deferment of collections (32.613) or (4) Signing an interim memorandum bankruptcy proceedings against the evidencing a negotiated pricing agree- contractor have been initiated, the ment involving refund. contractor shall be required to liq- (5) Executing an appropriate contract uidate the debt by— modification reflecting the result of (1) Cash payment in a lump sum, on negotiations. demand; or (b) The amount of indebtedness de- (2) Credit against existing unpaid termined unilaterally shall be an bills due the contractor. amount that— (e) The responsible officials shall use (1) Is proper based on the merits of all proper means available to them for the case; collecting debts as rapidly as possible. (2) Does not exceed an amount that Practices for ascertaining and collect- would have been considered acceptable ing debts shall be comprehensive, dy- in a negotiated agreement; and namic, and as uniform as practicable. (3) Is consistent with the contract Full consideration shall be given to terms. personal contact and followup. (c) For unilateral debt determina- [48 FR 42328, Sept. 19, 1983, as amended at 55 tions, the contracting officer shall FR 38517, Sept. 18, 1990] issue a decision as required by the

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clause at 52.233–1, Disputes. Such deci- set forth in a Cost Accounting Stand- sion shall include a demand for pay- ards (CAS) clause in the contract, that ment (see 33.211(a)(4)(vi)). No demand interest will run from the date of over- for payment under 32.610 shall be issued payment by the Government until re- prior to a contracting officer’s final de- payment by the contractor at the cision. A copy of the final decision underpayment rate established by the shall be sent to the appropriate finance Secretary of the Treasury, for the peri- office. ods affected, under 26 U.S.C. 6621(a)(2). [48 FR 42328, Sept. 19, 1983, as amended at 54 (3) A notification that the contractor FR 34755, Aug. 21, 1989] may submit a proposal for deferment of collection if immediate payment is not 32.609 Memorandum of pricing agree- practicable or if the amount is dis- ment with refund. puted. (a) If a refund to the Government is (4) Identification of the responsible agreed upon in negotiations under a official designated for determining the price revision type of contract, the re- amount of the debt and for its collec- sponsible official shall promptly write tion. a memorandum to document the agree- (c) If subparagraph (b)(3) of the ment and the contract debt. The clause at 52.232–17, Interest, applies, memorandum shall be signed by the ne- the demand mentioned in paragraph (a) gotiators for the Government and the above shall accompany or be included contractor. If the procedures of either in the transmittal mentioned in the the agency or the contractor require clause. approval of the negotiation results by higher authority, the memorandum [48 FR 42328, Sept. 19, 1983, as amended at 54 shall be written without prejudice to FR 34755, Aug. 21, 1989; 55 FR 52794, Dec. 21, 1990; 56 FR 29128, June 25, 1991; 61 FR 18922, the final pricing. After negotiations Apr. 29, 1996] are completed, a supplemental agreement shall be executed without delay. 32.611 Routine setoff. (b) The amount of refund shall be computed promptly, without waiting If a disbursing officer is the respon- for itemization of adjustment of past sible official for collection of a con- billings, accounting adjustments, or tract debt, or is notified of the debt by the adjusted invoices. the responsible official and has contractor invoices on hand for payment, 32.610 Demand for payment of con- the disbursing officer shall make an ap- tract debt. propriate setoff. The disbursing officer (a) A demand for payment shall be shall give the contractor an expla- made as soon as the responsible official nation of the setoff. To the extent that has computed the amount of refund the setoff reduces the debt, the expla- due. If the debt arises from excess costs nation shall replace the demand pre- for a default termination, the demand scribed in 32.610. shall be made without delay, as explained in 49.402–6. 32.612 Withholding and setoff. (b) The demand shall include the fol- During the 30 days following the issu- lowing: ance of a demand, the advisability of (1) A description of the debt, includ- withholding payments otherwise due to ing the debt amount. the contractor shall be considered (2) Notification that any amounts based on the circumstances of the indi- not paid within 30 days from the date vidual cases. If payment is not com- of the demand will bear interest from pleted within 30 days, and deferment is the date of the demand, or from any not requested, withholding of principal earlier date specified in the contract, and interest shall be initiated imme- and that the interest rate shall be the diately. In the event the contract is as- rate established by the Secretary of signed under the Assignment of Claims the Treasury, for the period affected, Act of 1940 (31 U.S.C. 3727 and 41 U.S.C. under Public Law 92–41. In the case of 15), the rights of the assignee will be a debt arising from a price reduction scrupulously respected and withholding for defective pricing, or as specifically of payments shall be consistent with

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those rights. For additional informa- deferment/installment payments if the tion on assignment of claims, see subcontractor is unable to pay at once in part 32.8. full or the contractor’s operations [48 FR 42328, Sept. 19, 1983, as amended at 51 under national defense contracts would FR 2665, Jan. 17, 1986] be seriously impaired. The arrangement shall include appropriate cov- 32.613 Deferment of collection. enants and securities and should be (a) If the responsible official receives limited to the shortest practicable ma- a written request from the contractor turity. for a deferment of the debt collection (g) Contracts and arrangements for or installment payments, the official deferment may not provide that a shall promptly review the request to claim of the Government will not be- see if the information included is ade- come due and payable pending mutual quate for action on the request. If not, agreement on the amount of the claim the contractor shall be asked to fur- or, in the case of a dispute, until the nish the needed information. Any nec- decision is reached. essary changes to the terms of the pro- (h) At a minimum, the deferment posed deferment/installment agree- agreement shall contain the following: ment shall also be suggested. (1) A description of the debt. (b) If the contractor has appealed the (2) The date of first demand for pay- debt under the procedures of the Dis- ment. putes clause of the contract, the infor- (3) Notice of an interest charge, in mation with the request for deferment conformity with FAR 32.614 and the may be limited to an explanation of clause at FAR 52.232–17, Interest; or, in the contractor’s financial condition. the case of a debt arising from a defec- (c) If there is no appeal pending or tive pricing or a CAS noncompliance action filed under the Disputes clause overpayment, interest, as prescribed by of the contract, the following informa- the applicable Price Reduction for De- tion about the contractor should be fective Cost or Pricing Data or CAS submitted with the request: clause. (1) Financial condition. (4) Identification of the office to (2) Contract backlog. which the contractor is to send debt (3) Projected cash receipts and re- payments. quirements. (4) The feasibility of immediate pay- (5) A requirement for the contractor ment of the debt. to submit financial information re- (5) The probable effect on operations quested by the Government and for of immediate payment in full. reasonable access to the contractor’s (d) Although the existence of a con- records and property by Government tractor appeal of the debt does not of representatives. itself require the Government to sus- (6) Provision for the Government to pend or delay collection action, the re- terminate the deferment agreement sponsible official shall consider wheth- and accelerate the maturity of the debt er deferment of the debt collection is if the contractor defaults or if bank- advisable to avoid possible overcollec- ruptcy or insolvency proceedings are tion. The responsible official may au- instituted by or against the contractor. thorize a deferment pending the resolu- (7) Protective requirements that are tion of appeal. considered by the Government to be (e) Deferments pending disposition of prudent and feasible in the specific cir- appeal may be granted to small busi- cumstances. The coverage of protective ness concerns and financially weak terms at 32.409 and 32.501–5 may be used contractors, with a reasonable balance as a guide. of the need for Government security (i) If a contractor appeal of the debt against loss and undue hardship on the determination is pending, the contractor. deferment agreement shall also include (f) If a contractor has not appealed a requirement that the contractor the debt or filed an action under the shall— Disputes clause of the contract, the re- (1) Diligently prosecute the appeal; sponsible official may arrange for and

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(2) Pay the debt in full when the ap- debt unpaid after 30 days from the issu- peal is decided, or when the parties ance of a demand, unless— reach agreement on the debt amount. (1) The contract specifies another due (j) If the contractor does not plan to date or procedure for charging or col- appeal the debt or file an action under lecting interest; the Disputes clause of the contract, the (2) The contract is a kind excluded deferment/installment agreement shall under 32.617; or include a specific schedule or plan for (3) The contract or debt has been ex- payment. It should permit the Govern- empted from interest charges under ment to make periodic financial re- agency procedures. views of the contractor and to require (b) If not already applicable under prepayments if the Government consid- the contract terms, interest on con- ers the contractor’s ability to pay im- tract debt shall be made an element of proved. It should also provide for re- any agreement entered into on quired stated or measurable prepay- deferment of collection. ments on the occurrence of specific (c) Unless specified otherwise in the events or contingencies that improve clause at FAR 52.232–17, the interest the contractor’s ability to pay. charge shall be at the rate established by the Secretary of the Treasury under (k) If desired by the contractor, the Public Law 92–41 for the period in deferment agreement may provide for which the amount becomes due. The in- the right to make prepayments with- terest charge shall be computed for the out prejudice, for refund of overpay- actual number of calendar days in- ments, and for crediting of interest (see volved beginning on the due date and 32.614–2). ending on— (l) Actions filed by contractors under (1) The date on which the designated the Disputes clause shall not suspend office receives payment from the con- or delay collection. Until the action is tractor; decided, deferments shall only be (2) The date of issuance of a Govern- granted if, within 30 days after the fil- ment check to the contractor from ing of such action, the contractor pre- which an amount otherwise payable sents to the responsible official a good has been withheld as a credit against and sufficient bond, or other collateral the contract debt; acceptable to the responsible official, (3) The date on which an amount in the amount of the claim, and ap- withheld and applied to the contract proved by the responsible official. Any debt would otherwise have become pay- amount collected by the Government able to the contractor; or in excess of the amount found to be due (4) The date of any applicable tax on appeal under the Disputes clause of credit under 32.607. the contract shall be refunded to the contractor with interest thereon from [48 FR 42328, Sept. 19, 1983, as amended at 56 the date of collection by the Govern- FR 29128, June 25, 1991; 61 FR 18922, Apr. 29, 1996] ment at the annual rate established by the Secretary of Treasury under Pub. 32.614–2 Interest credits. L. 92–41. Simple interest shall be cal- (a) An equitable interest credit shall culated through the period of indebted- be applied under the following cir- ness to reflect each 6-month period cumstances: change in the rates established by the (1) When the amount of debt initially Secretary. determined is subsequently reduced; [48 FR 42328, Sept. 19, 1983, as amended at 55 e.g., through a successful appeal. FR 52795, Dec. 21, 1990; 56 FR 29128, June 25, (2) When the collection procedures 1991; 61 FR 18922, Apr. 29, 1996] followed in a given case result in an overcollection of the debt due. 32.614 Interest. (3) When the responsible official determines that the Government has un- 32.614–1 Interest charges. duly delayed payments to the contrac- (a) Under the clause at 52.232–17, In- tor on the same contract at some time terest, the responsible official shall during the period to which the interest apply interest charges to any contract charge applied, provided an interest

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penalty was not paid for such late pay- contemplated that the contract will be ment. in one or more of the following cat- (b) Any appropriate interest credits egories: shall be computed under the following (1) Contracts at or below the sim- procedures: plified acquisition threshold. (1) Interest at the rate under 32.614– (2) Contracts with Government agen- 1(c) shall be charged on the reduced cies. debt from the date specified in the first (3) Contracts with a State or local demand made for payment of the high- government or instrumentality. er debt. (2) Interest may not be reduced for (4) Contracts with a foreign govern- any time between the due date under ment or instrumentality. the demand and the period covered by (5) Contracts without any provision a deferment of collection, unless the for profit or fee with a nonprofit orga- contract includes an interest clause; nization. e.g., the clause prescribed in 32.617. (6) Contracts described in subpart 5.5, (3) Interest shall not be credited in Paid advertisements. an amount that, when added to other (7) Any other exceptions authorized amounts refunded or released to the under agency procedures. contractor, exceeds the total amount (b) The contracting officer may in- that has been collected, or withheld for sert the clause at 52.232–17, Interest, in the purpose of collecting the debt. This solicitations and contracts when it is limitation shall be further reduced by contemplated that the contract will be the amount of any limitation applica- in any of the categories specified in ble under 32.614–2(b)(2). 32.617(a). 32.615 Delays in receipt of notices or [48 FR 42328, Sept. 19, 1983, as amended at 60 demands. FR 34759, July 3, 1995] If delivery of the demands or notices required by the clause at 52.232–17, In- Subpart 32.7—Contract Funding terest, is delayed by the Government (e.g., undue delay after dating at the 32.700 Scope of subpart. originating office or delays in the This subpart (a) describes basic re- mail), the date of the debt and accrual quirements for contract funding and (b) of interest shall be extended to a time prescribes procedures for using limita- that is fair and reasonable under the tion of cost or limitation of funds particular circumstances. clauses. Detailed acquisition funding 32.616 Compromise actions. requirements are contained in agency fiscal regulations. For debts under $100,000, excluding interest, if further collection is not 32.701 [Reserved] practicable or would cost more than the amount of recovery, the agency 32.702 Policy. may compromise the debt or terminate or suspend further collection action. No officer or employee of the Govern- Compromise is authorized by the Fed- ment may create or authorize an obli- eral Claims Collection Act of 1966 (31 gation in excess of the funds available, U.S.C. 3711). Compromise actions shall or in advance of appropriations (Anti- conform to Federal claims collection Deficiency Act, 31 U.S.C. 1341), unless standards (4 CFR 101–105), and agency otherwise authorized by law. Before regulations. executing any contract, the contracting officer shall (a) obtain written as- [48 FR 42328, Sept. 19, 1983, as amended at 51 surance from responsible fiscal author- FR 2665, Jan. 17, 1986; 56 FR 29128, June 25, 1991] ity that adequate funds are available or (b) expressly condition the contract 32.617 Contract clause. upon availability of funds in accord- (a) The contracting officer shall in- ance with 32.703–2. sert the clause at 52.232–17, Interest, in [48 FR 42328, Sept. 19, 1983, as amended at 51 solicitations and contracts, unless it is FR 2665, Jan. 17, 1986]

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32.703 Contract funding requirements. 41 U.S.C. 253l (see paragraph (b) of this section)), or when the contract calls for 32.703–1 General. an end product that cannot feasibly be (a) If the contract is fully funded, subdivided for separate performance in funds are obligated to cover the price each fiscal year (e.g., contracts for ex- or target price of a fixed-price contract pert or consultant services). or the estimated cost and any fee of a (b) 41 U.S.C. 253l, as amended by Sec- cost-reimbursement contract. tion 1073 of the Federal Acquisition (b) If the contract is incrementally Streamlining Act of 1994 (Pub. L. 103– funded, funds are obligated to cover the 355), authorizes heads of executive amount allotted and any corresponding agencies other than the Department of increment of fee. Defense, United States Coast Guard, and the National Aeronautics and 32.703–2 Contracts conditioned upon Space Administration (41 U.S.C. availability of funds. 252(a)(1)), to enter into a basic con- (a) Fiscal year contracts. The contract- tract, options, or orders under that ing officer may initiate a contracting contract for procurement of severable action properly chargeable to funds of services for a period that begins in one the new fiscal year before these funds fiscal year and ends in the next fiscal are available; provided, that the con- year if the period of the basic contract, tract includes the clause at 52.232–18, options or orders under that contract Availability of Funds (see 32.705–1(a)). does not exceed one year each. Funds This authority may be used only for made available for a fiscal year may be operation and maintenance and con- obligated for the total amount of an tinuing services (e.g., rentals, utilities, action entered into under this author- and supply items not financed by stock ity (see 37.106(b)). Consult agency sup- funds) (1) necessary for normal oper- plements for similar authorities that ations and (2) for which Congress pre- may exist for the Department of De- viously had consistently appropriated fense, United States Coast Guard, or funds, unless specific statutory author- the National Aeronautics and Space ity exists permitting applicability to Administration. other requirements. [60 FR 37778, July 21, 1995] (b) Indefinite-quantity or requirements contracts. A one-year indefinite-quan- 32.704 Limitation of cost or funds. tity or requirements contract for serv- (a)(1) When a contract contains the ices that is funded by annual appro- clause at 52.232–20, Limitation of Cost; priations may extend beyond the fiscal 52.232–21, Limitation of Cost (Facili- year in which it begins; provided, that ties); or 52.232–22, Limitation of Funds, (1) any specified minimum quantities the contracting officer, upon learning are certain to be ordered in the initial that the contractor is approaching the fiscal year (see 37.106) and (2) the con- estimated cost of the contract or the tract includes the clause at 52.232–19, limit of the funds allotted, shall Availability of Funds for the Next Fis- promptly obtain funding and program- cal Year (see 32.705–1(b)). ming information pertinent to the con- (c) Acceptance of supplies or services. tract’s continuation and notify the The Government shall not accept sup- contractor in writing that— plies or services under a contract con- (i) Additional funds have been allot- ditioned upon the availability of funds ted, or the estimated cost has been in- until the contracting officer has given creased, in a specified amount; the contractor notice, to be confirmed (ii) The contract is not to be further in writing, that funds are available. funded and that the contractor should submit a proposal for an adjustment of 32.703–3 Contracts crossing fiscal fee, if any, based on the percentage of years. work completed in relation to the total (a) A contract that is funded by an- work called for under the contract; nual appropriations may not cross fis- (iii) The contract is to be terminated; cal years, except in accordance with or statutory authorization (see 41 U.S.C. (iv)(A) The Government is consider- 11a, 31 U.S.C. 1308, 42 U.S.C. 2459a and ing whether to allot additional funds or

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increase the estimated cost, (B) the 32.705–2 Clauses for limitation of cost contractor is entitled by the contract or funds. terms to stop work when the funding or (a) The contracting officer shall in- cost limit is reached, and (C) any work sert the clause at 52.232–20, Limitation beyond the funding or cost limit will be of Cost, in solicitations and contracts at the contractor’s risk. if a fully funded cost-reimbursement (2) Upon learning that a partially contract is contemplated, except those funded contract containing any of the for consolidated facilities, facilities ac- clauses referenced in subparagraph (1) quisition, or facilities use, whether or above will receive no further funds, the not the contract provides for payment contracting officer shall promptly give of a fee. the contractor written notice of the de- (b) The contracting officer shall in- cision not to provide funds. sert the clause at 52.232–21, Limitation (b) Under a cost-reimbursement con- of Cost (Facilities), in solicitations and tract, the contracting officer may issue contracts for consolidated facilities, fa- a change order, a direction to replace cilities acquisition, or facilities use or repair defective items or work, or a (see 45.301). termination notice without imme- (c) The contracting officer shall in- diately increasing the funds available. sert the clause at 52.232–22, Limitation Since a contractor is not obligated to of Funds, in solicitations and contracts incur costs in excess of the estimated if an incrementally funded cost-reim- cost in the contract, the contracting bursement contract is contemplated. officer shall ensure availability of funds for directed actions. The con- Subpart 32.8—Assignment of tracting officer may direct that any in- Claims crease in the estimated cost or amount allotted to a contract be used for the 32.800 Scope of subpart. sole purpose of funding termination or This subpart prescribes policies and other specified expenses. procedures for the assignment of (c) Government personnel encourag- claims under the Assignment of Claims ing a contractor to continue work in Act of 1940, as amended, 31 U.S.C. 3727 the absence of funds will incur a viola- (hereafter referred to as the Act). tion of Revised Statutes Section 3679 (31 U.S.C. 1341) that may subject the vi- [48 FR 42328, Sept. 19, 1983, as amended at 51 olator to civil or criminal penalties. FR 2665, Jan. 17, 1986] [48 FR 42328, Sept. 19, 1983, as amended at 51 32.801 Definitions. FR 2665, Jan. 17, 1986] Assignment of claims, as used in this 32.705 Contract clauses. subpart, means the transfer or making over by the contractor to a bank, trust 32.705–1 Clauses for contracting in ad- company, or other financing institu- vance of funds. tion, as security for a loan to the con- (a) The contracting officer shall in- tractor, of its right to be paid by the sert the clause at 52.232–18, Availability Government for contract performance. of Funds, in solicitations and contracts Designated agency, as used in this if the contract will be chargeable to subpart, means any department or funds of the new fiscal year and the agency of the executive branch of the contracting action is to be initiated be- United States Government (see fore the funds are available. 32.803(d)). (b) The contracting officer shall in- No-setoff commitment, as used in this sert the clause at 52.232–19, Availability subpart, means a contractual under- of Funds for the Next Fiscal Year, in taking that, to the extent permitted by solicitations and contracts if a one- the Act, payments by the designated year indefinite-quantity or require- agency to the assignee under an assignments contract for services is con- ment of claims will not be reduced to templated and the contract (a) is fund- liquidate the indebtedness of the con- ed by annual appropriations and (b) is tractor to the Government. to extend beyond the initial fiscal year [48 FR 42328, Sept. 19, 1983, as amended at 60 (see 32.703–2(b)). FR 49730, Sept. 26, 1995]

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32.802 Conditions. tion of need is made by the head of the Under the Assignment of Claims Act, agency, in accordance with the Presi- a contractor may assign moneys due or dential delegation of authority dated to become due under a contract if all October 3, 1995, and after such deter- the following conditions are met: mination has been published in the (a) The contract specifies payments FEDERAL REGISTER. The Presidential aggregating $1,000 or more. delegation makes such determinations (b) The assignment is made to a of need subject to further guidance is- bank, trust company, or other financ- sued by the Office of Federal Procure- ing institution, including any Federal ment Policy. The following guidance lending agency. has been provided: Use of the no-setoff (c) The contract does not prohibit the provision may be appropriate to facili- assignment. tate the national defense; in the event (d) Unless otherwise expressly per- of a national emergency or natural dis- mitted in the contract, the assign- aster; or when the use of the no-setoff ment— provision may facilitate private financ- (1) Covers all unpaid amounts paying of contract performance. However, able under the contract; in the event an offeror is significantly (2) Is made only to one party, except indebted to the United States, the con- that any assignment may be made to tracting officer should consider wheth- one party as agent or trustee for two or er the inclusion of the no-setoff com- more parties participating in the fi- mitment in a particular contract is in nancing of the contract; and the best interests of the United States. (3) Is not subject to further assign- In such an event, the contracting offi- ment. cer should consult with the Govern- (e) The assignee sends a written no- ment officer(s) responsible for collect- tice of assignment together with a true ing the debt(s). copy of the assignment instrument to (e) When an assigned contract does the— not include a no-setoff commitment, (1) Contracting officer or the agency the Government may apply against head; payments to the assignee any liability (2) Surety on any bond applicable to of the contractor to the Government the contract; and arising independently of the assigned (3) Disbursing officer designated in contract if the liability existed at the the contract to make payment. time notice of the assignment was received even though that liability had 32.803 Policies. not yet matured so as to be due and (a) Any assignment of claims that payable. has been made under the Act to any type of financing institution listed in [48 FR 42328, Sept. 19, 1983, as amended at 60 32.802(b) may thereafter be further as- FR 49730, Sept. 26, 1995; 61 FR 18921, Apr. 29, signed and reassigned to any such in- 1996] stitution if the conditions in 32.802(d) 32.804 Extent of assignee’s protection. and (e) continue to be met. (b) A contract may prohibit the as- (a) No payments made by the Govern- signment of claims if the agency deter- ment to the assignee under any con- mines the prohibition to be in the Gov- tract assigned in accordance with the ernment’s interest. Act may be recovered on account of (c) Under a requirements or indefi- any liability of the contractor to the nite quantity type contract that au- Government. This immunity of the as- thorizes ordering and payment by mul- signee is effective whether the contrac- tiple Government activities, amounts tor’s liability arises from or independ- due for individual orders for $1,000 or ently of the assigned contract. more may be assigned. (b) Except as provided in paragraph (d) Any contract of a designated (c) below, the inclusion of a no-setoff agency (see FAR 32.801), except a con- commitment in an assigned contract tract under which full payment has entitles the assignee to receive con- been made, may include a no-setoff tract payments free of reduction or commitment only when a determina- setoff for—

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(1) Any liability of the contractor to cate or photostat copy of the original the Government arising independently assignment. of the contract; and (c) Format for notice of assignment. (2) Any of the following liabilities of The following is a suggested format for the contractor to the Government aris- use by an assignee in providing the no- ing from the assigned contract: tice of assignment required by 32.802(e). (i) Renegotiation under any statute NOTICE OF ASSIGNMENT or contract clause. (ii) Fines. TO: ————— [address to one of the parties specified in 32.802(e)]. (iii) Penalties, exclusive of amounts This has reference to Contract No. ——— that may be collected or witheld from dated ———, entered into between ———— the contractor under, or for failure to [contractor’s name and address] and ———— comply with, the terms of the contract. [government agency, name of office, and ad- (iv) Taxes or social security contribu- dress], for ———— [describe nature of the con- tions. tract]. (v) Withholding or nonwithholding of Moneys due or to become due under the contract described above have been assigned taxes or social security contributions. to the undersigned under the provisions of (c) In some circumstances, a setoff the Assignment of Claims Act of 1940, as may be appropriate even though the as- amended, 31 U.S.C. 3727, 41 U.S.C. 15. signed contract includes a no-setoff A true copy of the instrument of assign- commitment, e.g.— ment executed by the Contractor on ———— (1) When the assignee has neither [date], is attached to the original notice. Payments due or to become due under this made a loan under the assignment nor contract should be made to the undersigned made a commitment to do so; or assignee. (2) To the extent that the amount Please return to the undersigned the three due on the contract exceeds the enclosed copies of this notice with appro- amount of any loans made or expected priate notations showing the date and hour to be made under a firm commitment of receipt, and signed by the person acknowl- for financing. edging receipt on behalf of the addressee. Very truly yours, ———————————————————————— 32.805 Procedure. [name of assignee] (a) Assignments. (1) Assignments by By —————————————————————— corporations should be (i) executed by [signature of signing officer an authorized representative, (ii) at- Title ————————————————————— tested by the secretary or the assistant [title of signing officer] ———————————————————————— secretary of the corporation, and (iii) ———————————————————————— impressed with the corporate seal or [address of assignee] accompanied by a certified copy of the resolution of the corporation’s board of ACKNOWLEDGEMENT directors authorizing the signing rep- Receipt is acknowledged of the above no- resentative to execute the assignment. tice and of a copy of the instrument of as- (2) If the contractor is a partnership, signment. They were received at —— (a.m.) the assignment may be signed by one (p.m.) on ————, 19——. partner, if it is accompanied by an ac- ———————————————————————— [signature] knowledged certification that the sign- ———————————————————————— er is a general partner of the partner- [title] ship. ———————————————————————— (3) If the contractor is an individual, On behalf of the assignment must be signed by that ———————————————————————— individual and the signature acknowl- [name of addressee of this notice] edged before a notary public or other (d) Examination by the Government. In person authorized to administer oaths. examining and processing notices of as- (b) Filing. The assignee shall forward signment and before acknowleging to each party specified in 32.802(e) an their receipt, contracting officers original and three copies of the notice should assure that the following condi- of assignment, together with one true tions and any additional conditions copy of the instrument of assignment. specified in agency regulations, have The true copy shall be a certified dupli- been met:

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(1) The contract has been properly in purchase orders expected to exceed approved and executed. the micro-purchase threshold, that are (2) The contract is one under which accepted in writing by the contractor, claims may be assigned. if such use is consistent with agency (3) The assignment covers only policies and regulations. money due or to become due under the (2) If a no-setoff commitment has contract. been authorized (see FAR 32.803(d)), the (e) Release of assignment. (1) A release contracting officer shall use the clause of an assignment is required when- with its Alternate I. ever— (b) The contracting officer shall in- (i) There has been a further assign- sert the clause at 52.232–24, Prohibition ment or reassignment under the Act; of Assignment of Claims, in solicita- or tions and contracts for which a deter- (ii) The contractor wishes to reestab- mination has been made under agency lish its right to receive further pay- regulations that the prohibition of as- ments after the contractor’s obliga- signment of claims is in the Govern- tions to the assignee have been satis- ment’s interest. fied and a balance remains due under [48 FR 42328, Sept. 19, 1983, as amended at 51 the contract. FR 2665, Jan. 17, 1986; 60 FR 49730, Sept. 26, (2) The assignee, under a further as- 1995; 61 FR 18921, Apr. 29, 1996] signment or reassignment, in order to establish a right to receive payment Subpart 32.9—Prompt Payment from the Government, must file with the addressees listed in 32.802(e) a— (i) Written notice of release of the SOURCE: 53 FR 3690, Feb. 8, 1988, unless otherwise noted. contractor by the assigning financing institution; 32.900 Scope of subpart. (ii) Copy of the release instrument; This subpart prescribes policies, pro- (iii) Written notice of the further as- cedures, and clauses for implementing signment or reassignment; and Office of Management and Budget (iv) Copy of the further assignment (OMB) Circular A–125, Prompt Payment. or reassignment instrument. (3) If the assignee releases the con- [54 FR 13333, Mar. 31, 1989] tractor from an assignment of claims under a contract, the contractor, in 32.901 Applicability. order to establish a right to receive This subpart applies to all Govern- payment of the balance due under the ment contracts (including contracts at contract, must file a written notice of or below the simplified acquisition release together with a true copy of the threshold), except contracts with pay- release of assignment instrument with ment terms and late payment penalties the addressees noted in 32.802(e). established by other governmental au- (4) The addressee of a notice of re- thority (e.g., tariffs). lease of assignment or the official act- [60 FR 34759, July 3, 1995, as amended at 61 ing on behalf of that addressee shall ac- FR 39198, July 26, 1996] knowledge receipt of the notice. [48 FR 42328, Sept. 19, 1983, as amended at 51 32.902 Definitions. FR 2665, Jan. 17, 1986; 52 FR 9039, Mar. 20, Contract financing payment, as used in 1987] this subpart, means a Government disbursement of monies to a contractor 32.806 Contract clauses. under a contract clause or other au- (a)(1) The contracting officer shall thorization prior to acceptance of sup- insert the clause at 52.232–23, Assign- plies or services by the Government. ment of Claims, in solicitations and Contract financing payments include contracts expected to exceed the advance payments, progress payments micro-purchase threshold, unless the based on cost under the clause at contract will prohibit the assignment 52.232–16, Progress Payments, progress of claims (see 32.803(b)). The use of the payments based on a percentage or clause is not required for purchase or- stage of completion (see 32.102(e)(1)) ders. However, the clause may be used other than those made under the clause

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at 52.232–5, Payments Under Fixed- not include contract financing pay- Price Construction Contracts or the ments. clause at 52–232–10, Payments Under Payment date means the date on Fixed-Price Architect-Engineer Con- which a check for payment is dated or, tracts, and interim payments on cost- for an electronic funds transfer, the type contracts. Contract financing pay- specified payment date. ments do not include invoice payments Proper invoice means a bill or written or payments for partial deliveries. request for payment which meets the Day, as used in this subpart, means minimum standards specified in the calendar day, unless otherwise indi- clauses at 52.232–25, Prompt Payment, cated. 52.232–26, Prompt Payment for Fixed- Designated billing office, as used in Price Architect-Engineer Contracts, or this subpart, means the office or person 52.232–27, Prompt Payment for Con- designated in the contract where the struction Contracts (also see 32.905(e)), contractor first submits invoices and and other terms and conditions con- contract financing requests. This tained in the contract for invoice sub- might be the Government disbursing mission. office, contract administration office, Receiving report means written evi- office accepting the supplies delivered dence meeting the requirements of or services performed by the contrac- 32.905(f) which indicates Government tor, contract audit office, or a non- acceptance of supplies delivered or governmental agent. In some cases, dif- services performed by the contractor ferent offices might be designated to (see subpart 46.6). receive invoices and contract financing Specified payment date, as it applies to requests. electronic funds transfer (EFT), means Designated payment office means the the date which the Government has place designated in the contract to placed in the EFT payment transaction make invoice payments or contract fi- instruction given to the Federal Re- nancing payments. Normally, this will serve System as the date on which the be the Government disbursing office. funds are to be transferred to the con- Discount for prompt payment means an tractor’s account by the financial invoice payment reduction voluntarily agent. If no date has been specified in offered by the contractor, in conjunc- the instruction, the specified payment tion with the clause at 52.232–8, Dis- date is 3 business days after the pay- counts for Prompt Payment, if payment office releases the EFT payment ment is made by the Government prior transaction instruction. to the due date. The due date is calculated from the date of the contrac- [53 FR 3690, Feb. 8, 1988, as amended at 54 FR tor’s invoice. 13333, Mar. 31, 1989; 55 FR 25530, June 21, 1990; Due date means the date on which 61 FR 45772, Aug. 29, 1996] payment should be made. Invoice payment, as used in this sub- 32.903 Policy. part, means a Government disburse- All solicitations and contracts sub- ment of monies to a contractor under a ject to this subpart shall specify pay- contract or other authorization for ment procedures, payment due dates, supplies or services accepted by the and interest penalties for late invoice Government. This includes payments payment. Invoice payments and con- of partial deliveries that have been ac- tract financing payments will be made cepted by the Government and final by the Government as close as possible cost or fee payments where amounts to (or earlier as determined by the owed have been settled between the Agency head to be necessary on a case- Government and the contractor. For by-case basis), but not later than the purposes of this subpart, invoice pay- due dates specified in the contract by ments also include all payments made incorporation of the clauses at 52.232– under the clause at 52.232–5, Payments 25, Prompt Payment, 52.232–26, Prompt Under Fixed-Price Construction Con- Payment for Fixed-Price Architect-En- tracts, and the clause at 52.232–10, Pay- gineer Contracts or 52.232–27, Prompt ments Under Fixed-Price Architect-En- Payment for Construction Contracts. gineer Contracts. Invoice payments do Payment will be based on receipt of a

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proper invoice or contract financing re- struction to the Federal Reserve Bank quest and satisfactory contract per- 1 day before the specified payment date formance. Agency procedures shall en- could not constitute a valid date under sure that, when specifying due dates, the rules of the Federal Reserve Sys- full consideration is given to the time tem. reasonably required by Government of- [54 FR 13333, Mar. 31, 1989, as amended at 61 ficials to fulfill their administrative FR 45772, Aug. 29, 1996] responsibilities under the contract. Checks will be mailed and electronic 32.904 Responsibilities. funds transfers will be transmitted on Agency heads shall establish the poli- or about the same day the payment ac- cies and procedures necessary to imple- tion is dated. When appropriate, Gov- ment this subpart. Agency heads are ernment contracts should allow the authorized to prescribe additional contractor to be paid for partial deliv- standards for establishing due dates on eries that have been accepted by the invoice payments (32.905) and contract Government (see 32.102(d)). Discounts financing payments (32.906), as deemed for prompt payment offered by the con- necessary to support agency programs tractor shall be taken only when pay- and foster prompt payment to contrac- ments are made within the discount pe- tors. Agency heads may also adopt dif- riod specified by the contractor. Agen- ferent payment procedures in order to cies shall pay an interest penalty, accommodate unique circumstances, without request from the contractor, provided that such procedures are con- for late invoice payments or improp- sistent with the policies set forth in erly taken discounts for prompt pay- this subpart. ment. The interest penalty shall be ab- sorbed within funds available for ad- 32.905 Invoice payments. ministration or operation of the pro- (a) Except as prescribed in 32.905(b), gram for which the penalty was in- 32.905(c), and 32.905(d), the due date for curred. The temporary unavailability making an invoice payment by the des- of funds to make a timely payment ignated payment office shall be: does not relieve the obligation to pay (1) The 30th day after the designated interest penalties. For contracts billing office has received a proper in- awarded after October 1, 1989, if the invoice from the contractor; or the 30th terest penalty is not paid within 10 day after Government acceptance of days after it is due and the contractor supplies delivered or services per- makes a written demand for payment formed by the contractor, whichever is within 40 days after payment of the later. principal amount due, agencies shall (i) On a final invoice where the pay- pay an additional penalty amount, ment amount is subject to contract which shall be calculated in accordance settlement actions, acceptance shall be with regulations issued by the Office of deemed to have occurred on the effec- Management and Budget. For pay- tive date of the contract settlement. ments made by electronic funds trans- (ii) For the sole purpose of computing fer, the specified payment date, in- an interest penalty that might be due cluded in the Government’s order to the contractor, Government accept- pay the contractor, is the date of pay- ance shall be deemed to have occurred ment for prompt payment purposes, constructively on the 7th day after the whether or not the Federal Reserve contractor has delivered supplies or System actually makes the payment performed services in accordance with by that date, and whether or not the the terms and conditions of the con- contractor’s financial agent credits the tract, unless there is a disagreement contractor’s account on that date. over quantity, quality, or contractor However, a specified payment date compliance with a contract require- must be a valid date under the rules of ment. In the event that actual accept- the Federal Reserve System. For exam- ance occurs within the constructive ac- ple, if the Federal Reserve System re- ceptance period, the determination of quires 2 days’ notice before a specified an interest penalty shall be based on payment date to process a transaction, the actual date of acceptance. The con- release of a payment transaction in- structive acceptance requirement does

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not, however, compel Government offi- contractor has completed the work or cials to accept supplies or services, per- services in accordance with the terms form contract administration func- and conditions of the contract (see also tions, or make payment prior to fulfill- 32.905(b)(4)). In the event that actual ing their responsibilities. Except in the acceptance occurs within the construc- case of a contract for the procurement tive acceptance period, the determina- of a brand name commercial item for tion of an interest penalty shall be authorized resale (e.g., commissary based on the actual date of acceptance. items), the contracting officer may (2) The due date for progress pay- specify a longer period for constructive ments shall be the 30th day after Gov- acceptance in the solicitation and re- ernment approval of contractor esti- sulting contract, if required to afford mates of work or services accom- the Government a reasonable oppor- plished. For the sole purpose of com- tunity to inspect and test the property puting an interest penalty that might furnished or to evaluate the services be due the contractor, Government ap- performed. The contract file shall indi- proval shall be deemed to have oc- cate the justification for extending the constructive acceptance period beyond curred constructively on the 7th day 7 days. after contractor estimates have been (iii) If the contract does not require received by the designated billing of- submission of an invoice for payment fice (see also 32.905(b)(4)). In the event (e.g., periodic lease payments), the due that actual approval occurs within the date will be as specified in the con- constructive approval period, the detract. termination of an interest penalty (2) However, if the designated billing shall be based on the actual date of ap- office fails to annotate the invoice proval. with the actual date of receipt of the (3) However, if the designated billing invoice, the invoice payment due date office fails to annotate the invoice or shall be deemed to be the 30th day after payment request with the actual date the date the contractor’s invoice is of receipt, the payment due date shall dated, provided a proper invoice is re- be the 30th day after the date the conceived and there is no disagreement tractor’s invoice or payment request is over quantity, quality, or contractor dated, provided a proper invoice or pay- compliance with contract requirement request is received and there is ments. no disagreement over quantity, qual- (b) The due date for making pay- ity, or contractor compliance with con- ments on contracts that contain the tract requirements. clause at 52.232–10, Payments Under (4) The constructive acceptance and Fixed-Price Architect-Engineer Con- constructive approval requirements de- tracts, shall be as follows: scribed in 32.905(b)(1) and (b)(2) are con- (1) The due date for work or services ditioned upon receipt of a proper pay- completed by the contractor shall be ment request and no disagreement over the later of the following two events: quantity, quality, contractor compli- (i) The 30th day after the designated billing office has received a proper in- ance with contract requirements, or voice from the contractor. the requested progress payment (ii) The 30th day after Government amount. These requirements do not acceptance of the work or services compel Government officials to accept completed by the contractor. On a final work or services, approve contractor invoice where the payment amount is estimates, perform contract adminis- subject to contract settlement actions tration functions, or make payment (e.g., release of claims), acceptance prior to fulfilling their responsibilities. shall be deemed to have occurred on The contracting officer may specify a the effective date of the settlement. longer period for constructive accept- For the sole purpose of computing an ance or constructive approval, if re- interest penalty that might be due the quired to afford the Government a rea- contractor, Government acceptance sonable opportunity to inspect and test shall be deemed to have occurred con- the property furnished or to evaluate structively on the 7th day after the the services performed.

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(c) The due date for making pay- ed separately in the contract) shall be ments on construction contracts shall as follows: be as follows: (i) Either the 30th day after receipt (1) The due date for making progress by the designated billing office of a payments based on contracting officer proper invoice from the contractor, or approval of the estimated amount and the 30th day after Government accept- value of work or services performed, ance of the work or services completed including payments for reaching mile- by the contractor, whichever is later. stones in any project, shall be 14 days However, if the designated billing of- after receipt of a proper payment re- fice fails to annotate the invoice with quest by the designated billing office. the actual date of receipt, the invoice However, if the designated billing of- payment due date shall be deemed to fice fails to annotate the payment re- be the 30th day after the date the con- quest with the actual date of receipt, tractor’s invoice is dated, provided a the payment due date shall be deemed proper invoice is received and there is to be the 14th day after the date the no disagreement over quantity, qual- contractor’s payment request is dated, ity, or contractor compliance with con- provided a proper payment request is tract requirements. received and there is no disagreement (ii) On a final invoice where the pay- over quantity, quality, or contractor ment amount is subject to contract compliance with contract require- settlement actions (e.g., release of con- ments. The contracting officer may tractor claims), acceptance shall be deemed to have occurred on the effec- specify a longer period in the solicita- tive date of the contract settlement. tion and resulting contract if required (4) For the sole purpose of computing to afford the Government a reasonable an interest penalty that might be due opportunity to adequately inspect the the contractor for payments described work and to determine the adequacy of in subdivision (c)(3)(i) of this section, the contractor’s performance under the Government acceptance or approval contract. The contract file shall indi- shall be deemed to have occurred con- cate the justification for extending the structively on the 7th day after the due date beyond 14 days. The contract- contractor has completed the work or ing officer or his representative shall services in accordance with the terms not approve progress payment requests and conditions of the contract (see also unless the certification and substan- 32.905(c)(5)). In the event that actual tiation of amounts requested are pro- acceptance occurs within the construc- vided as required by the clause at tive acceptance period, the determina- 52.232–5, Payments Under Fixed-Price tion of an interest penalty shall be Construction Contracts. based on the actual date of acceptance. (2) The due date for payment of any (5) The constructive acceptance and amounts retained by the contracting constructive approval requirements de- officer in accordance with the clause at scribed in subparagraph (c)(4) of this 52.232–5, Payments Under Fixed-Price section are conditioned upon receipt of Construction Contracts, shall be as a proper payment request and no dis- specified in the contract or, if not spec- agreement over quantity, quality, con- ified, 30 days after approval by the contractor compliance with contract re- tracting officer for release to the con- quirements, or the requested amount. tractor. This release of retained These requirements do not compel Gov- amounts shall be based on the con- ernment officials to accept work or tracting officer’s determination that services, approve contractor estimates, satisfactory progress has been made. perform contract administration func- (3) The due date for final payments tions, or make payment prior to fulfill- based on completion and acceptance of ing their responsibilities. The contract- all work (including any retained ing officer may specify a longer period amounts), and payments for partial de- for constructive acceptance or con- liveries that have been accepted by the structive approval in the solicitation Government (e.g., each separate build- and resulting contract, if required to ing, public work, or other division of afford the Government a reasonable op- the contract for which the price is stat- portunity to adequately inspect the

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work and to determine the adequacy of from edible fats or oils) after receipt of the contractor’s performance under the the invoice at the designated billing of- contract. fice. The reason that the invoice is not (d) The payment terms on contracts a proper invoice must be specified. If for meat, meat food products, or fish; such notice is not timely, then an ad- contracts for perishable agricultural justed due date for the purpose of de- commodities, and contracts for dairy termining an interest penalty, if any, products, edible fats or oils, and food will be established in accordance with products prepared from edible fats or 32.907–1(b): oils are as follows: (1) Name and address of the contrac- (1) The due date on contractor in- tor. voices for meat or meat food products, (2) Invoice date. as defined in section 2(a)(3) of the (3) Contract number or other author- Packers and Stockyard Act of 1921 (7 ization for supplies delivered or serv- U.S.C. 182(3)), as further defined in Pub. ices performed (including order number L. 98–181, including any edible fresh or and contract line item number). frozen poultry meat, any perishable (4) Description, quantity, unit of poultry meat food product, fresh eggs, measure, unit price, and extended price and any perishable egg product, will be of supplies delivered or services per- as close as possible to, but not later formed. than, the seventh day after product de- (5) Shipping and payment terms (e.g., livery. shipment number and date of ship- (2) The due date on contractor in- ment, prompt payment discount voices for fresh or frozen fish, as de- terms). Bill of lading number and fined in section 204(3) of the Fish and weight of shipment will be shown for Seafood Protection Act of 1986 (16 shipments on Government bills of lad- U.S.C. 4003(3)), will be as close as pos- ing. sible to, but not later than, the seventh (6) Name and address of contractor day after product delivery. official to whom payment is to be sent (3) The due date on contractor in- (must be the same as that in the con- voices for perishable agricultural com- tract or on a proper notice of assign- modities, as defined in section 1(4) of ment). the Perishable Agricultural Commod- (7) Name (where practicable), title, ities Act of 1930 (7 U.S.C. 499a(4)), will phone number, and mailing address of be as close as possible to, but not later person to be notified in event of a de- than, the tenth day after product deliv- fective invoice. ery, unless another date is specified in (8) Any other information or docu- the contract. mentation required by the contract (4) The due date on contractor in- (such as evidence of shipment). voices for dairy products (as defined in (f) All invoice payments shall be sup- section 111(e) of the Dairy Production ported by a receiving report or any Stabilization Act of 1983 (7 U.S.C. other Government documentation au- 4502(e)), edible fats or oils, and food thorizing payment. The receiving re- products prepared from edible fats or port or other Government documenta- oils, will be as close as possible to, but tion should be forwarded to the des- not later than, the tenth day after the ignated payment office by the 5th date on which a proper invoice has working day after Government accept- been received. ance or approval, unless other arrange- (e) A proper invoice must include the ments have been made. This period of items listed in subparagraphs (e)(1) time does not extend the due dates pre- through (e)(8) of this section. If the in- scribed in 32.905. Acceptance should be voice does not comply with these re- completed as expeditiously as possible. quirements, then the contractor must The receiving report or other Govern- be notified of the defect within 7 days ment documentation authorizing pay- (3 days on contracts for meat, meat ment shall, as a minimum, include the food products, or fish, and 5 days on following: contracts for perishable agricultural (1) Contract number or other author- commodities, dairy products, edible ization for supplies delivered or serv- fats or oils, and food products prepared ices performed.

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(2) Description of supplies delivered date specified. Agency heads may pre- or services performed. scribe shorter periods for payment, if (3) Quantities of supplies received appropriate based on contract pricing and accepted, if applicable. or administrative considerations. For (4) Date supplies delivered or services example, a shorter period may be justi- performed. fied by an Agency if the nature and ex- (5) Date supplies or services were ac- tent of contract financing arrange- cepted by the designated Government ments are integrated with Agency con- official (or progress payment request tract pricing policies. A period shorter was approved if being made under the than 7 days or longer than 30 days shall clause at 52.232–5, Payments Under not be prescribed. Fixed-Price Construction Contracts, or (b) For advance payments, loans, or the clause at 52.232–10, Payments Under other arrangements that do not involve Fixed-Price Architect-Engineer Con- recurrent submission of contract fi- tracts). nancing requests, payment shall be (6) Signature printed name, title, made in accordance with the applicable mailing address, and telephone number contract financing terms or as directed of the designated Government official by the contracting officer. responsible for acceptance or approval functions. (c) A proper contract financing re- (7) If the contract provides for the quest must comply with the terms and use of certified invoices in lieu of a sep- conditions specified by contract financ- arate receiving report, the certified in- ing clauses or other authorizing terms. voice must also contain the informa- The contractor shall correct any de- tion described in subparagraphs (f)(1) fects in requests submitted in the man- through (f)(6) of this section. ner specified in the contract or as di- (g) When a discount for prompt pay- rected by the contracting officer. ment is to be taken, payment will be (d) The designated billing officer and made as close as possible to, but not designated payment office shall anno- later than, the end of the discount pe- tate each contract financing request riod. Payment terms are specified in with the date a proper request was re- the clause at 52.232–8, Discounts for ceived in their respective offices. Prompt Payment. (h) The designated billing office shall 32.907 Interest penalties. immediately annotate each invoice 32.907–1 Late invoice payment. with the actual date it receives the invoice. (a) An interest penalty shall be paid (i) The designated payment office automatically by the designated pay- shall annotate each invoice and receiv- ment office, without request from the ing report with the date a proper in- contractor, when all of the following voice was received by the designated conditions, if applicable, have been payment office. met: [54 FR 13334, Mar. 31, 1989, as amended at 57 (1) A proper invoice has been received FR 44268, Sept. 24, 1992] by the designated billing office. (2) A receiving report or other Gov- 32.906 Contract financing payments. ernment documentation authorizing (a) Unless otherwise prescribed in payment has been processed and there policies and procedures issued by the was no disagreement over quantity, Agency head, the due date for making quality, or contractor compliance with contract financing payments by the any contract requirement. designated payment office will be the (3) In the case of a final invoice, the 30th day after the designated billing of- payment amount is not subject to fur- fice has received a proper request. In ther contract settlement actions be- the event that an audit or other review tween the Government and the con- of a specific financing request is re- tractor. quired to ensure compliance with the (4) The designated payment office terms and conditions of the contract, paid the contractor after the due date. the designated payment office is not (b) The interest penalty computation compelled to make payment by the due shall not include (1) the time taken by

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the Government to notify the contrac- by an appropriate electronic data mes- tor of a defective invoice, unless it ex- sage accompanying the wire transfer. ceeds the periods prescribed in 32.905(e), Adjustments will be made by the des- or (2) the time taken by the contractor ignated payment office for errors in to correct the invoice. If the designated calculating interest penalties, if re- billing office failed to notify the con- quested by the contractor. tractor of a defective invoice within (e) Interest penalties under the the periods prescribed in 32.905(e), then Prompt Payment Act will not continue the due date on the corrected invoice to accrue (1) after the filing of a claim will be adjusted by subtracting the for such penalties under the clause at number of days taken beyond the pre- 52.233–1, Disputes, or (2) for more than scribed notification of defects period 1 year. Interest penalties of less than from the payment due date. Any inter- $1.00 need not be paid. est penalty owed the contractor will be (f) Interest penalties are not required based on this adjusted due date. on payment delays due to disagreement (c) An interest penalty shall be paid between the Government and contrac- automatically by the designated pay- tor over the payment amount, or other ment office, without request from the issues involving contract compliance, contractor, if a discount for prompt or on amounts temporarily withheld or payment is taken improperly. The in- retained in accordance with the terms terest penalty shall be calculated on of the contract. Claims involving dis- the amount of discount taken for the putes, and any interest that may be period beginning with the first day payable, will be resolved in accordance after the end of the discount period with the Disputes clause. through the date when the contractor (g) For contracts awarded on or after is paid. October 1, 1989, a penalty amount (cal- (d) The interest penalty shall be at culated in accordance with regulations the rate established by the Secretary issued by the Office of Management of the Treasury under section 12 of the and Budget) shall be paid, in addition Contract Disputes Act of 1978 (41 U.S.C. to the interest penalty amount, if the 611) that is in effect on the day after contractor— the due date, except where the interest (1) Is owed an interest penalty; penalty is prescribed by other govern- (2) Is not paid the interest penalty mental authority (e.g., tariffs). The within 10 days after the date the in- rate in effect on the day after the due voice amount is paid; and date shall remain fixed during the pe- (3) Makes a written demand that the riod for which an interest penalty is agency pay such a penalty not later calculated. This rate is referred to as than 40 days after the date the invoice the Renegotiation Board Interest Rate, amount is paid. and it is published in the FEDERAL REG- [53 FR 3690, Feb. 8, 1988, as amended at 54 FR ISTER semiannually on or about Janu- 13336, Mar. 31, 1989] ary 1 and July 1. The interest penalty will accrue daily on the invoice pay- 32.907–2 Late contract financing payment amount approved by the Govern- ment. ment and be compounded in 30-day in- No interest penalty shall be paid to crements inclusive from the first day the contractor as a result of delayed after the due date through the pay- contract financing payments. ment date. That is, interest accrued at the end of any 30-day period will be 32.908 Contract clauses. added to the approved invoice payment (a) If the solicitation or contract con- amount and be subject to interest pen- tains the clause at 52.232–10, Payments alties if not paid in the succeeding 30- Under Fixed-Price Architect-Engineer day period. The interest penalty Contracts, the contracting officer shall amount, interest rate and the period insert the clause at 52.232–26, Prompt for which the interest penalty was Payment for Fixed-Price Architect-En- computed, will be separately stated by gineer Contracts. the designated payment office on the (b) The contracting officer shall in- check, in accompanying remittance ad- sert the clause at 52.232–27, Prompt vice, or, in the case of wire transfers, Payment for Construction Contracts,

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in all solicitations and contracts for (c) Contracts for research or develop- construction (see part 36). ment; or (c) The contracting officer shall in- (d) Contracts awarded through sealed sert the clause at 52.232–25, Prompt bid or competitive negotiation proce- Payment, in all other solicitations and dures. contracts (including contracts at or below the simplified acquisition 32.1001 Policy. threshold), except as indicated in (a) Performance-based payments are 32.901. contract financing payments that are [54 FR 13336, Mar. 31, 1989, as amended at 60 not payment for accepted items. FR 34759, July 3, 1995; 61 FR 39190, July 26, (b) Performance-based payments are 1996; 61 FR 45772, Aug. 29, 1996] fully recoverable, in the same manner as progress payments, in the event of 32.909 Contractor inquiries. default. Except as provided in Questions concerning delinquent pay- 32.1003(c), performance-based payments ments should be directed to the des- shall not be used when other forms of ignated billing office or designated contract financing are provided. payment office. If a question involves a (c) For Government accounting pur- disagreement in payment amount or poses, performance-based payments timing, it should be directed to the should be treated like progress pay- contracting officer for resolution. The ments based on costs under subpart contracting officer shall coordinate 32.5. within appropriate contracting chan- (d) Performance-based payments are nels and seek the advice of other of- contract financing payments and, fices as may be necessary to resolve therefore, are not subject to the inter- disagreements. Small business con- est-penalty provisions of prompt pay- cerns may obtain additional assistance ment (see subpart 32.9). However, these related to payment issues, late pay- payments shall be made in accordance ment interest penalties, and informa- with the agency’s policy for prompt tion on the Prompt Payment Act, by payment of contract financing pay- contacting the Agency’s local rep- ments. resentative from the Office of Small (e) Performance-based payments are and Disadvantaged Business Utiliza- the preferred financing method when tion. the contracting officer finds them practical, and the contractor agrees to [53 FR 3690, Feb. 8, 1988, as amended at 54 FR their use. 13336, Mar. 31, 1989] 32.1002 Bases for performance-based Subpart 32.10—Performance- payments. Based Payments Performance-based payments may be made on any of the following bases: SOURCE: 60 FR 49715, Sept. 26, 1995, unless (a) Performance measured by objec- otherwise noted. tive, quantifiable methods; (b) Accomplishment of defined 32.1000 Scope of subpart. events; or This subpart provides policy and pro- (c) Other quantifiable measures of re- cedures for performance-based pay- sults. ments under non-commercial purchases pursuant to subpart 32.1. This 32.1003 Criteria for use. subpart does not apply to— Performance-based payments shall be (a) Payments under cost-reimburse- used only if the following conditions ment contracts; are met: (b) Contracts for architect-engineer (a) The contracting officer and services or construction, or for ship- offeror are able to agree on the per- building or ship conversion, alteration, formance-based payment terms; or repair, when the contracts provide (b) The contract is a definitized for progress payments based upon a fixed-price type contract (but see percentage or stage of completion; 32.1005(b)); and

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(c) The contract does not provide for than one series of severable and/or cu- other methods of contract financing, mulative performance events or cri- except that advance payments in ac- teria performed in parallel. The follow- cordance with subpart 32.4, or guaran- ing shall be included in the contract: teed loans in accordance with subpart (i) The contract shall not permit pay- 32.3 may be used. ment for a cumulative event or criterion until the dependent event or cri- 32.1004 Procedure. terion has been successfully completed. Performance-based payments may be (ii) Severable events or criteria shall made either on a whole contract or on be specifically identified in the con- a deliverable item basis, unless other- tract. wise prescribed by agency regulations. (iii) The contract shall identify Financing payments to be made on a which events or criteria are pre- whole contract basis are applicable to conditions for the successful achieve- the entire contract, and not to specific ment of each cumulative event or cri- deliverable items. Financing payments terion. to be made on a deliverable item basis (iv) If payment of performance-based are applicable to a specific individual finance amounts is on a deliverable deliverable item. (A deliverable item item basis, each event or performance for these purposes is a separate item criterion shall be part of the perform- with a distinct unit price. Thus, a con- ance necessary for that deliverable tract line item for 10 airplanes, with a item and shall be identified to a spe- unit price of $1,000,000 each, has ten de- cific contract line item or subline liverable items—the separate planes. A item. contract line item for 1 lot of 10 air- (b) Establishing performance-based fi- planes, with a lot price of $10,000,000, nance payment amounts. (1) The con- has only one deliverable item—the lot.) tracting officer shall establish a com- (a) Establishing performance bases. (1) plete, fully defined schedule of events The basis for performance-based pay- or performance criteria and payment ments may be either specifically de- amounts when negotiating contract scribed events (e.g., milestones) or terms. If a contract action signifi- some measurable criterion of perform- cantly affects the price, or event or ance. Each event or performance cri- performance criterion, the contracting terion that will trigger a finance pay- officer responsible for pricing the con- ment shall be an integral and nec- tract modification shall adjust the per- essary part of contract performance formance-based payment schedule ap- and shall be identified in the contract, propriately. along with a description of what con- (2) Total performance-based pay- stitutes successful performance of the ments shall not exceed 90 percent of event or attainment of the perform- the contract price if on a whole con- ance criterion. The signing of contracts tract basis, or 90 percent of the deliv- or modifications, the exercise of op- ery item price if on a delivery item tions, or other such actions shall not basis. The amount of each perform- be events or criteria for performance- ance-based payment shall be specifi- based payments. An event need not be cally stated either as a dollar amount a critical event in order to trigger a or as a percentage of a specifically payment, but successful performance of identified price (e.g., contract price, or each such event or performance cri- unit price of the deliverable item). The terion shall be readily verifiable. payment of contract financing has a (2) Events or criteria may be either cost to the Government in terms of in- severable or cumulative. The success- terest paid by the Treasury to borrow ful completion of a severable event or funds to make the payment. Because criterion is independent of the accom- the contracting officer has wide discre- plishment of any other event or cri- tion as to the timing and amount of terion. Conversely, the successful ac- the performance-based payments, the complishment of a cumulative event or contracting officer must ensure that criterion is dependent upon the pre- the total contract price is fair and rea- vious accomplishment of another sonable, all factors (including the fi- event. A contract may provide for more nancing costs to the Treasury of the

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performance-based payments) consid- 32.1005 Contract clauses. ered. Performance-based payment (a) If performance-based contract fi- amounts may be established on any ra- nancing will be provided, the contract- tional basis determined by the con- ing officer shall insert the clause at tracting officer, or agency procedures, 52.232–32, Performance-Based Pay- which may include (but are not limited ments, in the solicitation and contract to)— with the description of the basis for (i) Engineering estimates of stages of payment and liquidation as required in completion; 32.1004. (ii) Engineering estimates of hours or (b) In solicitations for undefinitized other measures of effort to be expended contracts, the contracting officer may in performance of an event or achieve- include the clause at 52.232–32, Per- ment of a performance criterion; or formance-Based Payments, with a pro- (iii) The estimated projected cost of vision that the clause is not effective until the contract is definitized and the performance of particular events. performance-based payment schedule is (3) When subsequent contract modi- included in the contract. fications are issued, the performance- based payment schedule shall be ad- 32.1006 Agency approvals. justed as necessary to reflect the ac- The contracting officer shall obtain tions required by those contract modi- such approvals as are required by agen- fications. cy regulations. (c) Instructions for multiple appropriations. If there is more than one appro- 32.1007 Administration and payment priation account (or subaccount) fund- of performance-based payments. ing payments on the contract, the con- (a) Responsibility. The contracting of- tracting officer shall provide instruc- ficer responsible for administration of tions to the Government payment of- the contract shall be responsible for re- fice for distribution of financing pay- view and approval of performance- ments to the respective funds accounts. based payments. Distribution instructions must be con- (b) Approval of financing requests. Un- sistent with the contract’s liquidation less otherwise provided in agency regulations, or by agreement with the ap- provisions. propriate payment official— (d) Liquidating performance-based fi- (1) The contracting officer shall be nance payments. Performance-based responsible for receiving, approving, amounts shall be liquidated by deduct- and transmitting all performance- ing a percentage or a designated dollar based payment requests to the appro- amount from the delivery payments. priate payment office; and The contracting officer shall specify (2) Each approval shall specify the the liquidation rate or designated dol- amount to be paid, necessary contrac- lar amount in the contract. The meth- tual information, and the appropria- od of liquidation shall ensure complete tion account(s) (see 32.1004(c)) to be liquidation no later than final pay- charged for the payment. ment. (c) Reviews. The contracting officer is (1) If the performance-based pay- responsible for determining what re- ments are established on a delivery views are required for protection of the item basis, the liquidation amount for Government’s interests. The contract- each line item shall be the percent of ing officer should consider the contrac- that delivery item price that was pre- tor’s 0experience, performance record, viously paid under performance-based reliability, financial strength, and the adequacy of controls established by the finance payments or the designated contractor for the administration of dollar amount. performance-based payments. Based (2) If the performance-based finance upon the risk to the Government, post- payments are on a whole contract payment reviews and verifications basis, liquidation shall be by should normally be arranged as consid- predesignated liquidation amounts or ered appropriate by the contracting of- liquidation percentages. ficer. If considered necessary by the

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contracting officer, pre-payment re- (c) The existence of any such encum- views may be required. brance is a violation of the contrac- (d) Incomplete performance. The con- tor’s obligations under the contract, tracting officer shall not approve a per- and the contracting officer may, if nec- formance-based payment until the essary, suspend or reduce payments specified event or performance cri- under the terms of the Performance- terion has been successfully accom- Based Payments clause covering fail- plished in accordance with the con- ure to comply with a material require- tract. If an event is cumulative, the ment of the contract. In addition, if contracting officer shall not approve the contractor fails to disclose an ex- the performance-based payment unless isting encumbrance in the certifi- all identified preceding events or cri- cation, the contracting officer should teria are accomplished. consult with legal counsel concerning (e) Government-caused delay. Entitle- possible violation of 31 U.S.C. 3729, the ment to a performance-based payment False Claims Act. is solely on the basis of successful performance of the specified events or per- 32.1010 Risk of loss. formance criteria. However, if there is (a) Under the clause at 52.232–32, Per- a Government-caused delay, the contracting officer may renegotiate the formance-Based Payments, and except performance-based payment schedule, for normal spoilage, the contractor to facilitate contractor billings for any bears the risk for loss, theft, destruc- successfully accomplished portions of tion, or damage to property affected by the delayed event or criterion. the clause, even though title is vested in the Government, unless the Govern- 32.1008 Suspension or reduction of ment has expressly assumed this risk. performance-based payments. The clauses prescribed in this regula- The contracting officer shall apply tion related to performance-based pay- the policy and procedures in para- ments, default, and terminations do graphs (a), (b), (c), and (e) of 32.503–6, not constitute a Government assump- Suspension or reduction of payments, tion of risk. whenever exercising the Government’s (b) If a loss occurs in connection with rights to suspend or reduce perform- property for which the contractor ance-based payments in accordance bears the risk, and the property is with paragraph (e) of the clause at needed for performance, the contractor 52.232–32, Performance-Based Pay- is obligated to repay the Government ments. the performance-based payments related to the property. 32.1009 Title. (c) The contractor is not obligated to (a) Since the clause at 52.232–32, Per- pay for the loss of property for which formance-Based Payments, gives the the Government has assumed the risk Government title to the property de- of loss. However, a serious loss may im- scribed in paragraph (f) of the clause, pede the satisfactory progress of con- the contracting officer must ensure tract performance, so that the con- that the Government title is not com- tracting officer may need to act under promised by other encumbrances. Ordi- paragraph (e)(2) of the Performance- narily, the contracting officer, in the Based Payments clause. In addition, absence of reason to believe otherwise, while the contractor is not required to may rely upon the contractor’s certifi- repay previous performance-based pay- cation contained in the payment re- ments in the event of a loss for which quest. the Government has assumed the risk, (b) If the contracting officer becomes such a loss may prevent the contractor aware of any arrangement or condition from making the certification required that would impair the Government’s by the Performance-Based Payments title to the property affected by the Performance-Based Payments clause, clause. the contracting officer shall require additional protective provisions.

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Subpart 32.11—Electronic Funds provide for payment by other than Transfer EFT. (3) Classified contracts (see 4.401) shall provide for payment by other SOURCE: 61 FR 45772, Aug. 29, 1996, unless otherwise noted. than EFT where payment by EFT could compromise the safeguarding of 32.1100 Scope of subpart. classified information or national secu- This subpart provides policy and pro- rity, or where arrangements for appro- cedures for Government payment by priate EFT payments would be imprac- electronic funds transfer (EFT). tical due to security considerations. (4) Contracts executed by deployed 32.1101 Policy. contracting officers in the course of (a) 31 U.S.C. 3332(e) requires payment military operations, including, but not by EFT in certain situations. The pay- limited to, contingency operations as ment office, not the contracting offi- defined in 10 U.S.C. 101(a)(13), or con- cer, determines if payment is to be tracts executed by any contracting of- made by EFT. The payment office may ficer in the conduct of emergency oper- determine not to require submission of ations, such as responses to natural EFT information in accordance with disasters or national or civil emer- paragraph (j) of the contract clauses at gencies, shall provide for payment by 52.232–33 and 52.232–34. other than EFT where (i) EFT payment (b) The Government will protect is not known to be possible, or (ii) EFT against improper disclosure of a con- payment would not support the objec- tractor’s EFT information. The clauses tives of the operation. Contracting offi- at 52.232–33 and 52.232–34 require the cers predesignated to perform contract- contractor to submit such information ing duties in the event of these oper- directly to the payment office. ations shall include coordinated plans (c) Contractors that do not have an for payment arrangements as part of account at a domestic United States fi- the pre-contingency contract oper- nancial institution or an authorized ations planning. payment agent are exempted by 31 U.S.C. 3332 until January 1, 1999, from 32.1102 Assignment of claims. the requirement to be paid by EFT. The use of EFT payment methods is The clause at 52.232–33 provides for the not a substitute for a properly exe- contractor to submit a certification to cuted assignment of claims in accord- that effect directly to the payment of- ance with subpart 32.8. EFT informa- fice in lieu of the EFT information oth- tion which shows the ultimate recipi- erwise required by the clause. ent of the transfer to be other than the (d) Payment by EFT is the preferred contractor, in the absence of a proper method of contract payment in normal assignment of claims, is considered to contracting situations. However, in ac- be incorrect EFT information within cordance with 31 CFR 208.3(c), certain the meaning of the ‘‘Suspension of classes of contracts have been author- Payment’’ paragraphs of the EFT ized specific limited exceptions as list- clauses at 52.232–33 and 52.232–34. ed in paragraphs (d) (1) through (4) of this section. In these situations, the 32.1103 Contract clauses. method of payment shall be specified (a) Unless instructed otherwise by by the payment office, either through the cognizant payment office or agency agency regulations or by specific guidance, the contracting officer shall agreement. insert the clause at 52.232–33, Manda- (1) Contracts awarded by contracting tory Information for Electronic Funds officers outside the United States and Transfer Payment, in all solicitations Puerto Rico shall provide for payment and resulting contracts which (1) will by other than EFT. However, payment not be paid through use of the Govern- by EFT is acceptable for this type of mentwide commercial purchase card contract if the contractor agrees and (see 13.103(e)); and (2) are not otherwise the payment office concurs. excepted in accordance with 32.1101(d). (2) Contracts denominated or paid in The clause may be inserted in other other than United States dollars shall contracts if the contractor requests

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payment by EFT and the payment of- 33.202 Contract Disputes Act of 1978. fice concurs. 33.203 Applicability. (b) Unless instructed otherwise by 33.204 Policy. 33.205 Relationship of the Act to Pub. L. 85– agency guidance, the contracting offi- 804. cer shall insert the clause at 52.232–34, 33.206 Initiation of a claim. Optional Information for Electronic 33.207 Contractor certification. Funds Transfer Payment, in all solici- 33.208 Interest on claims. tations and resulting contracts which 33.209 Suspected fraudulent claims. (1) Do not contain the clause at 52.232– 33.210 Contracting officer’s authority. 33; (2) Will not be paid through use of 33.211 Contracting officer’s decision. the Governmentwide commercial pur- 33.212 Contracting officer’s duties upon appeal. chase card (see 13.103(e)); and (3) Are 33.213 Obligation to continue performance. not otherwise excepted in accordance 33.214 Alternative dispute resolution (ADR). with 32.1101(d). 33.215 Contract clause. (c) For contracts containing the AUTHORITY: 40 U.S.C. 486(c); 10 U.S.C. Chap- clause at 52.212–4, Contract Terms and ter 137; and 42 U.S.C. 2473(c). Conditions—Commercial Items, if the clause at 52.232–33, Mandatory Informa- 33.000 Scope of part. tion for Electronic Funds Transfer This part prescribes policies and pro- Payment, will not be included in the cedures for filing protests and for proc- contract in accordance with paragraph essing contract disputes and appeals. (a) of this section, the contracting officer shall attach an addendum to the [50 FR 2270, Jan. 15, 1985] contract that deletes the clause at 52.232–33 and— Subpart 33.1—Protests (1) If required by paragraph (b) of this section, incorporates the clause at 33.101 Definitions. 52.232–34, Optional Information for Day, as used in this subpart, means a Electronic Funds Transfer Payment, in calendar day, unless otherwise speci- the contract; or fied. In the computation of any pe- (2) If the clause at 52.232–34 is not re- riod— quired, specifies that the Government (a) The day of the act, event, or de- will make payment under the contract fault from which the designated period by check. of time begins to run is not included; (d) If more than one disbursing office and will make payment under a contract, (b) The last day after the act, event, the contracting officer shall include or default is included unless— the EFT clause appropriate for each of- (1) The last day is a Saturday, Sun- fice and shall identify the applicability day, or legal holiday; or by disbursing office and contract line (2) In the case of a filing of a paper at item. any appropriate administrative forum, the last day is a day on which weather PART 33—PROTESTS, DISPUTES, AND or other conditions cause the closing of APPEALS the forum for all or part of the day, in which event the next day on which the Sec. appropriate administrative forum is 33.000 Scope of part. open is included. (c) In the case of the 5-day period Subpart 33.1—Protests after a debriefing date and the 10-day 33.101 Definitions. period after contract award for filing a 33.102 General. protest resulting in a suspension (as 33.103 Protests to the agency. described at 33.104(c)), Saturdays, Sun- 33.104 Protests to GAO. days, and legal holidays shall be count- 33.105 [Reserved] ed. 33.106 Solicitation provision and contract Filed, as used in this subpart, means clause. the complete receipt of any document by an agency before its close of busi- Subpart 33.2—Disputes and Appeals ness. Documents received after close of 33.201 Definitions. business are considered filed as of the

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next day. Unless otherwise stated, the misstatement, misrepresentation, or agency close of business is presumed to miscertification. In addition to any be 4:30 p.m., local time. other remedy available, and pursuant Interested Party for the purpose of fil- to the requirements of Subpart 32.6, ing a protest, as used in this subpart, the Government may collect this debt means an actual or prospective offeror by offsetting the amount against any whose direct economic interest would payment due the awardee under any be affected by the award of a contract contract between the awardee and the or by the failure to award a contract. Government. Protest, as used in this subpart, (i) When a protest is sustained by means a written objection by an inter- GAO under circumstances that may ested party to any of the following: allow the Government to seek reim- (a) A solicitation or other request by bursement for protest costs, the con- an agency for offers for a contract for tracting officer will determine whether the procurement of property or serv- the protest was sustained based on the ices. awardee’s negligent or intentional mis- (b) The cancellation of the solicita- representation. If the protest was sus- tion or other request. tained on several issues, protest costs (c) An award or proposed award of shall be apportioned according to the the contract. costs attributable to the awardee’s ac- (d) A termination or cancellation of tions. an award of the contract, if the written objection contains an allegation that (ii) The contracting officer shall re- the termination or cancellation is view the amount of the debt, degree of based in whole or in part on impropri- the awardee’s fault, and costs of collec- eties concerning the award of the con- tion, to determine whether a demand tract. for reimbursement ought to be made. If it is in the best interests of the Gov- [50 FR 2270, Jan. 15, 1985, as amended at 53 ernment to seek reimbursement, the FR 43391, Oct. 26, 1988; 54 FR 19827, May 8, contracting officer shall notify the 1989; 60 FR 48225, Sept. 18, 1995] contractor in writing of the nature and 33.102 General. amount of the debt, and the intention to collect by offset if necessary. Prior (a) Contracting officers shall con- to issuing a final decision, the consider all protests and seek legal advice, tracting officer shall afford the con- whether protests are submitted before tractor an opportunity to inspect and or after award and whether filed di- copy agency records pertaining to the rectly with the agency or the General debt to the extent permitted by statute Accounting Office (GAO). (See 19.302 for and regulation, and to request review protests of small business status and of the matter by the head of the con- 22.608–3 for protests involving eligibility under the Walsh-Healey Public tracting activity. Contracts Act.) (iii) When appropriate, the contract- (b) If, in connection with a protest, ing officer shall also refer the matter the head of an agency determines that to the agency debarment official for a solicitation, proposed award, or consideration under Subpart 9.4. award does not comply with the re- (c) In accordance with 31 U.S.C. 1558, quirements of law or regulation, the with respect to any protest filed with head of the agency may— the GAO, if the funds available to the (1) Take any action that could have agency for a contract at the time a been recommended by the Comptroller protest is filed in connection with a so- General had the protest been filed with licitation for, proposed award of, or the General Accounting Office; and award of such a contract would other- (2) Pay appropriate costs as stated in wise expire, such funds shall remain 33.104(h). available for obligation for 100 days (3) Require the awardee to reimburse after the date on which the final ruling the Government’s costs, as provided in is made on the protest. A ruling is con- this paragraph, where a postaward pro- sidered final on the date on which the test is sustained as the result of an time allowed for filing an appeal or re- awardee’s intentional or negligent quest for reconsideration has expired,

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or the date on which a decision is ren- (i) Name, address, fax number, and dered on such appeal or request, which- telephone number of the protester. ever is later. (ii) Solicitation or contract number. (d) Protest likely after award. The con- (iii) Detailed statement of the legal tracting officer may stay performance and factual grounds for the protest, to of a contract within the time period include a description of resulting prej- contained in 33.104(c)(1) if the contract- udice to the protester. ing officer makes a written determina- (iv) Copies of relevant documents. tion that— (v) Request for a ruling by the agen- (1) A protest is likely to be filed; and cy. (2) Delay of performance is, under the (vi) Statement as to the form of re- circumstances, in the best interests of lief requested. the United States. (vii) All information establishing (e) An interested party wishing to that the protester is an interested protest is encouraged to seek resolu- party for the purpose of filing a pro- tion within the agency (see 33.103) be- test. fore filing a protest with the GAO, but (viii) All information establishing may protest to the GAO in accordance the timeliness of the protest. with GAO regulations (4 CFR part 21). (3) All protests filed directly with the agency will be addressed to the con- [50 FR 2270, Jan. 15, 1985, as amended at 55 tracting officer or other official des- FR 38517, Sept. 18, 1990; 55 FR 52795, Dec. 21, ignated to receive protests. 1990; 60 FR 48226, 48275, Sept. 18, 1995; 61 FR (4) Interested parties may request an 41470, Aug. 8, 1996] independent review at a level above the 33.103 Protests to the agency. contracting officer, of any decision by the contracting officer that is alleged (a) Reference. Executive Order 12979, to have violated a statute or regulation Agency Procurement Protests, estab- and thereby caused prejudice to the lishes policy on agency procurement offeror. This independent review need protests. not be established within the contract- (b) Prior to submission of an agency ing officer’s supervisory chain. protest, all parties shall use their best (e) Protests based on alleged appar- efforts to resolve concerns raised by an ent improprieties in a solicitation shall interested party at the contracting of- be filed before bid opening or the clos- ficer level through open and frank dis- ing date for receipt of proposals. In all cussions. other cases, protests shall be filed no (c) The agency should provide for in- later than 14 days after the basis of expensive, informal, procedurally sim- protest is known or should have been ple, and expeditious resolution of pro- known, whichever is earlier. The agen- tests. Where appropriate and permitted cy, for good cause shown, or where it by law, the use of alternative dispute determines that a protest raises issues resolution techniques, third party significant to the agency’s acquisition neutrals, and another agency’s person- system, may consider the merits of any nel are acceptable protest resolution protest which is not timely filed. methods. (f) Action upon receipt of protest. (1) (d) The following procedures are es- Upon receipt of a protest before award, tablished to resolve agency protests ef- a contract may not be awarded, pend- fectively, to build confidence in the ing resolution of the protest, unless Government’s acquisition system, and contract award is justified, in writing, to reduce protests outside of the agen- for urgent and compelling reasons or is cy: determined, in writing, to be in the (1) Protests shall be concise and logi- best interest of the Government. Such cally presented to facilitate review by justification or determination shall be the agency. Failure to substantially approved at a level above the contract- comply with any of the requirements of ing officer, or by another official pur- paragraph (d)(2) of this section may be suant to agency procedures. grounds for dismissal of the protest. (2) If award is withheld pending reso- (2) Protests shall include the follow- lution of the protest, the contracting ing information: officer will inform the offerors whose

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offers might become eligible for award to furnish a complete copy of the proof the contract. If appropriate, the test within 1 day. offerors should be requested, before ex- (2) Immediately after receipt of the piration of the time for acceptance of GAO’s written notice that a protest has their offers, to extend the time for ac- been filed, the agency shall give notice ceptance to avoid the need for resolici- of the protest to the contractor if the tation. In the event of failure to obtain award has been made, or, if no award such extension of offers, consideration has been made, to all parties who ap- should be given to proceeding with pear to have a reasonable prospect of award pursuant to paragraph (f)(1) of receiving award if the protest is denied. this section. The agency shall furnish copies of the (3) Upon receipt of a protest within 10 protest submissions to such parties days after contract award or within 5 with instructions to (i) communicate days after a debriefing date offered to directly with the GAO, and (ii) provide the protester under a timely debriefing copies of any such communication to request in accordance with 15.1004, the agency and to other participating whichever is later, the contracting offi- parties when they become known. How- cer shall immediately suspend perform- ever, if the protester has identified sen- ance, pending resolution of the protest sitive information and requests a pro- within the agency, including any re- tective order, then the contracting offi- view by an independent higher level of- cer shall obtain a redacted version ficial, unless continued performance is from the protester to furnish to other justified, in writing, for urgent and interested parties, if one has not al- compelling reasons or is determined, in ready been provided. writing, to be in the best interest of (3)(i) Upon notice that a protest has the Government. Such justification or been filed with the GAO, the contract- determination shall be approved at a ing officer shall immediately begin level above the contracting officer, or compiling the information necessary by another official pursuant to agency for a report to the GAO. The agency procedures. shall submit a complete report to the (g) Agencies shall make their best ef- GAO within 30 days after the GAO noti- forts to resolve agency protests within fies the agency by telephone that a 35 days after the protest is filed. protest has been filed, or within 20 days (h) Agency protest decisions shall be after receipt from the GAO of a deter- well-reasoned, and shall provide suffi- mination to use the express option, un- cient factual detail explaining the less the GAO— agency position. A copy of the written (A) Advises the agency that the pro- protest decision shall be furnished to test has been dismissed; or the protester. A method that provides (B) Authorizes a longer period in re- evidence of receipt should be used. sponse to an agency’s request for an extension. Any new date is documented [61 FR 39219, July 29, 1996] in the agency’s file. (ii) When a protest is filed with the 33.104 Protests to GAO. GAO, and an actual or prospective Procedures for protests to GAO are offeror so requests, the procuring agen- found at 4 CFR Part 21 (GAO Bid Pro- cy shall, in accordance with any appli- test Regulations). In the event guid- cable protective orders, provide actual ance concerning GAO procedure in this or prospective offerors reasonable ac- section conflicts with 4 CFR Part 21, 4 cess to the protest file. However, if the CFR Part 21 governs. GAO dismisses the protest before the (a) General procedures. (1) A protester documents are submitted to the GAO, is required to furnish a copy of its com- then no protest file need be made avail- plete protest to the official and loca- able. Information exempt from disclo- tion designated in the solicitation or, sure under 5 U.S.C. 552 may be redacted in the absence of such a designation, to from the protest file. The protest file the contracting officer, so it is received shall be made available to non-inter- no later than 1 day after the protest is vening actual or prospective offerors filed with the GAO. The GAO may dis- within a reasonable time after submit- miss the protest if the protester fails tal of an agency report to the GAO.

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The protest file shall include an index (B) Protester’s documents which the and as appropriate— agency determines, pursuant to law or (A) The protest; regulation, to withhold from any inter- (B) The offer submitted by the pro- ested party. tester; (ii)(A) If the protester requests addi- (C) The offer being considered for tional documents within 2 days after award or being protested; the protester knew the existence or rel- (D) All relevant evaluation docu- evance of additional documents, or ments; should have known, the agency shall (E) The solicitation, including the provide the requested documents to the specifications or portions relevant to GAO within 5 days of receipt of the re- the protest; quest. (F) The abstract of offers or relevant (B) The additional documents shall portions; and also be provided to the protester and (G) Any other documents that the other interested parties within this 5- agency determines are relevant to the day period unless the agency has de- protest, including documents specifi- cided to withhold them for any reason cally requested by the protester. (see subdivision (a)(4)(i) of this sec- (iii) The agency report to the GAO tion). This includes any documents shall include— covered by a protective order issued by (A) A copy of the documents de- the GAO. Documents covered by a proscribed in 33.104(a)(3)(ii); tective order shall be provided only in (B) The contracting officer’s signed accordance with the terms of the order. statement of relevant facts and a (C) The agency shall notify the GAO memorandum of law. The contracting of any documents withheld from the officer’s statement shall set forth find- protester and other interested parties ings, actions, and recommendations, and shall state the reasons for with- and any additional evidence or infor- holding them. mation not provided in the protest file that may be necessary to determine (5) The GAO may issue protective or- the merits of the protest; ders which establish terms, conditions, (C) A list of the documents withheld and restrictions for the provision of from the protester, or intervenors, and any document to an interested party. the reasons for withholding them. The Protective orders prohibit or restrict list identifies any documents specifi- the disclosure by the party of procure- cally requested by, and withheld from, ment sensitive information, trade se- the protester; and crets or other proprietary or confiden- (D) A list of parties being provided tial research, development or commer- the documents. cial information that is contained in (4)(i) At the same time the agency such document. Protective orders do submits its report to the GAO, the not authorize withholding any docu- agency shall furnish copies of its report ments or information from the United to the protester and any intervenors. A States Congress or an executive agen- party shall receive all relevant docu- cy. ments, except— (i) Requests for protective orders. Any (A) Those that the agency has de- party seeking issuance of a protective cided to withhold from that party for order shall file its request with the any reason, including those covered by GAO as soon as practicable after the a protective order issued by the GAO. protest is filed, with copies furnished Documents covered by a protective simultaneously to all parties. order shall be released only in accord- (ii) Exclusions and rebuttals. Within 2 ance with the terms of the order. Ex- days after receipt of a copy of the pro- amples of documents the agency may tective order request, any party may decide to exclude from a copy of the re- file with the GAO a request that par- port include documents previously fur- ticular documents be excluded from nished to or prepared by a party; clas- the coverage of the protective order, or sified information; and information that particular parties or individuals that would give the party a competi- be included in or excluded from the tive advantage; and protective order. Copies of the request

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shall be furnished simultaneously to (ii) Award is likely to occur within 30 all parties. days of the written finding. (iii) Additional documents. If the exist- (2) A contract award shall not be au- ence or relevance of additional docu- thorized until the agency has notified ments first becomes evident after a the GAO of the finding in subparagraph protective order has been issued, any (b)(1) of this section. party may request that these addi- (3) When a protest against the mak- tional documents be covered by the ing of an award is received and award protective order. Any party to the pro- will be withheld pending disposition of tective order also may request that in- the protest, the contracting officer dividuals not already covered by the should inform the offerors whose offers protective order be included in the might become eligible for award of the order. Requests shall be filed with the protest. If appropriate, those offerors GAO, with copies furnished simulta- should be requested, before expiration neously to all parties. of the time for acceptance of their (iv) Sanctions and remedies. The GAO offer, to extend the time for acceptance may impose appropriate sanctions for to avoid the need for resolicitation. In any violation of the terms of the pro- the event of failure to obtain such ex- tective order. Improper disclosure of tensions of offers, consideration should protected information will entitle the be given to proceeding under subpara- aggrieved party to all appropriate rem- graph (b)(1) of this section. edies under law or equity. The GAO (c) Protests after award. (1) When the may also take appropriate action agency receives notice of a protest against an agency which fails to pro- from the GAO within 10 days after con- vide documents designated in a protec- tract award or within 5 days after a de- tive order. briefing date offered to the protester (6) The protester and other interested for any debriefing that is required by parties are required to furnish a copy 15.1004, whichever is later, the con- of any comments on the agency report tracting officer shall immediately sus- directly to the GAO within 14 days, or pend performance or terminate the 7 days if express option is used, after awarded contract, except as provided in receipt of the report, with copies pro- paragraphs (c) (2) and (3) of this sec- vided to the contracting officer and to tion. other participating interested parties. (2) In accordance with agency proce- If a hearing is held, these comments dures, the head of the contracting ac- are due within 7 days after the hearing. tivity may, on a nondelegable basis, (7) Agencies shall furnish the GAO authorize contract performance, not- with the name, title, and telephone withstanding the protest, upon a writ- number of one or more officials (in ten finding that— both field and headquarters offices, if (i) Contract performance will be in desired) whom the GAO may contact the best interests of the United States; who are knowledgeable about the sub- or ject matter of the protest. Each agency (ii) Urgent and compelling cir- shall be responsible for promptly advis- cumstances that significantly affect ing the GAO of any change in the des- the interests of the United States will ignated officials. not permit waiting for the GAO’s deci- (b) Protests before award. (1) When the sion. agency has received notice from the (3) Contract performance shall not be GAO of a protest filed directly with the authorized until the agency has noti- GAO, a contract may not be awarded fied the GAO of the finding in subpara- unless authorized, in accordance with graph (c)(2) of this section. agency procedures, by the head of the (4) When it is decided to suspend per- contracting activity, on a nondelegable formance or terminate the awarded basis, upon a written finding that— contract, the contracting officer should (i) Urgent and compelling cir- attempt to negotiate a mutual agree- cumstances which significantly affect ment on a no-cost basis. the interest of the United States will (5) When the agency receives notice not permit awaiting the decision of the of a protest filed with the GAO after GAO; and the dates contained in subparagraph

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(c)(1), the contracting officer need not a contract does not comply with a stat- suspend contract performance or ter- ute or regulation, the GAO may rec- minate the awarded contract unless ommend that the agency pay to an ap- the contracting officer believes that an propriate protester the cost, exclusive award may be invalidated and a delay of profit, of filing and pursuing the pro- in receiving the supplies or services is test, including reasonable attorney, not prejudicial to the Government’s in- consultant and expert witness fees, and terest. bid and proposal preparation costs. The (d) Findings and notice. If the decision agency shall use funds available for the is to proceed with contract award, or procurement to pay the costs awarded. continue contract performance under (2) If the GAO recommends the award paragraphs (b) or (c) of this section, the of costs to an interested party, the contracting officer shall include the agency shall attempt to reach an written findings or other required doc- agreement on the amount of the cost umentation in the file. The contracting to be paid. If the agency and the inter- officer also shall give written notice of ested party are unable to agree on the the decision to the protester and other amount to be paid, GAO may, upon re- interested parties. quest of the interested party, rec- (e) Hearings. The GAO may hold a ommend to the agency the amount of hearing at the request of the agency, a cost that the agency should pay. protester, or other interested party (3) No agency shall pay a party, other who has responded to the notice in than a small business concern within paragraph (a)(2) of this section. A re- the meaning of section 3(a) of the cording or transcription of the hearing Small Business Act (see 19.001, ‘‘Small will normally be made, and copies may business concern’’), costs under para- be obtained from the GAO. All parties graph (h)(2) of this section— may file comments on the hearing and (i) For consultant and expert witness report within 7 days of the hearing. fees that exceed the highest rate of (f) GAO decision time. GAO issues its compensation for expert witnesses paid recommendation on a protest within by the Government pursuant to 5 100 days from the date of filing of the U.S.C. 3109 and Expert and Consultant protest with the GAO, or within 65 days Appointments, 60 FR 45649, September under the express option. The GAO at- 1, 1995 (5 CFR 304.105); or tempts to issue its recommendation on (ii) For attorneys’ fees that exceed an amended protest that adds a new $150 per hour, unless the agency deter- ground of protest within the time limit mines, based on the recommendation of of the initial protest. If an amended the Comptroller General on a case-by- protest cannot be resolved within the case basis, that an increase in the cost initial time limit, the GAO may re- of living or a special factor, such as the solve the amended protest through an limited availability of qualified attor- express option. neys for the proceedings involved, jus- (g) Notice to GAO. If the agency has tifies a higher fee. The cap placed on not fully implemented the GAO rec- attorneys’ fees for businesses, other ommendations with respect to a solici- than small businesses, constitutes a tation for a contract or an award or a benchmark as to a ‘‘reasonable’’ level proposed award of a contract within 60 for attorneys’ fees for small businesses. days of receiving the GAO rec- (4) A recommended award of costs ommendations, the head of the con- may be paid by the agency from funds tracting activity responsible for that available to or for the use of the agen- contract shall report the failure to the cy for the acquisition of supplies or GAO not later than 5 days after the ex- services. Before paying a recommended piration of the 60-day period. The re- award of costs, agency personnel port shall explain the reasons why the should consult legal counsel. Section GAO’s recommendation, exclusive of 33.104(h) applies to all recommended costs, has not been followed by the awards of costs which have not yet agency. been paid. (h) Award of costs. (1) If the GAO de- (5) If the GAO recommends that the termines that a solicitation for a con- agency pay costs (as defined in para- tract, a proposed award, or an award of graph (h)(1) of this section) and the

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agency does not promptly pay the liability of either the Government or costs, the agency shall promptly report the contractor and permit assertion of to GAO the reasons for the failure to the claim, were known or should have follow the GAO recommendation. been known. For liability to be fixed, (6) Any costs the contractor receives some injury must have occurred. How- under this section shall not be the sub- ever, monetary damages need not have ject of subsequent proposals, billings, been incurred. or claims against the Government and Alternative dispute resolution (ADR) those exclusions should be reflected in means any procedure or combination of the cost agreement. procedures voluntarily used to resolve (7) If the Government pays costs, as issues in controversy without the need provided in paragraph (h)(1) of this sec- to resort to litigation. These proce- tion, where a postaward protest is sus- dures may include, but are not limited tained as the result of an awardee’s in- to, assisted settlement negotiations, tentional or negligent misstatement, conciliation, facilitation, mediation, misrepresentation, or miscertification, fact-finding, minitrials, and arbitra- the Government may require the tion. awardee to reimburse the Government Claim, as used in this subpart, means the amount of such costs. In addition a written demand or written assertion to any other remedy available, and by one of the contracting parties seek- pursuant to the requirements of Sub- ing, as a matter of right, the payment part 32.6, the Government may collect of money in a sum certain, the adjust- this debt by offsetting the amount ment or interpretation of contract against any payment due the awardee terms, or other relief arising under or under any contract between the award- relating to the contract. A claim aris- ee and the Government. ing under a contract, unlike a claim re- [57 FR 60585, Dec. 21, 1992, as amended at 60 lating to that contract, is a claim that FR 48227, 48275, Sept. 18, 1995; 61 FR 41470, can be resolved under a contract clause Aug. 8, 1996] that provides for the relief sought by the claimant. However, a written de- 33.105 [Reserved] mand or written assertion by the contractor seeking the payment of money 33.106 Solicitation provision and con- exceeding $100,000 is not a claim under tract clause. the Contract Disputes Act of 1978 until (a) The contracting officer shall in- certified as required by the Act and sert the provision at 52.233–2, Service of 33.207. A voucher, invoice, or other rou- Protest, in solicitations for contracts tine request for payment that is not in expected to exceed the simplified ac- dispute when submitted is not a claim. quisition threshold. The submission may be converted to a (b) The contracting officer shall in- claim, by written notice to the con- sert the clause at 52.233–3, Protest tracting officer as provided in 33.206(a), After Award, in all solicitations and if it is disputed either as to liability or contracts. If a cost reimbursement con- amount or is not acted upon in a rea- tract is contemplated, the contracting sonable time. officer shall use the clause with its Al- Defective certification, as used in this ternate I. subpart, means a certificate which al- [50 FR 25681, June 20, 1985, as amended at 60 ters or otherwise deviates from the lan- FR 34759, July 3, 1995] guage in 33.207(c) or which is not executed by a person duly authorized to Subpart 33.2—Disputes and bind the contractor with respect to the Appeals claim. Failure to certify shall not be deemed to be a defective certification. SOURCE: 48 FR 42349, Sept. 19, 1983, unless Issue in controversy means a material otherwise noted. Redesignated at 50 FR 2270, disagreement between the Government Jan. 15, 1985. and the contractor which (1) may result in a claim or (2) is all or part of an 33.201 Definitions. existing claim. Accrual of a claim occurs on the date Misrepresentation of fact, as used in when all events, which fix the alleged this part, means a false statement of

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substantive fact, or any conduct which Contract Appeals (BCA’s) authorized leads to the belief of a substantive fact under the Act continue to have all of material to proper understanding of the authority they possessed before the the matter in hand, made with intent Act with respect to disputes arising to deceive or mislead. under a contract, as well as authority Neutral person, as used in this sub- to decide disputes relating to a con- part, means an impartial third party, tract. The clause at 52.233–1, Disputes, who serves as a mediator, fact finder, recognizes the all disputes authority es- or arbitrator, or otherwise functions to tablished by the Act and states certain assist the parties to resolve the issues requirements and limitations of the in controversy. A neutral person may Act for the guidance of contractors and be a permanent or temporary officer or contracting agencies. The clause is not employee of the Federal Government intended to affect the rights and obli- or any other individual who is accept- gations of the parties as provided by able to the parties. A neutral person the Act or to constrain the authority shall have no official, financial, or per- of the statutory agency BCA’s in the sonal conflict of interest with respect handling and deciding of contractor ap- to the issues in controversy, unless peals under the Act. such interest is fully disclosed in writing to all parties and all parties agree [48 FR 42349, Sept. 19, 1983. Redesignated and that the neutral person may serve (5 amended at 50 FR 2270, Jan. 15, 1985] U.S.C. 583). 33.204 Policy. [48 FR 42349, Sept. 19, 1983. Redesignated and amended at 50 FR 2270, Jan. 15, 1985; 56 FR The Government’s policy is to try to 67417, Dec. 30, 1991; 59 FR 11381, Mar. 10, 1994; resolve all contractual issues in con- 60 FR 48230, Sept. 18, 1995] troversy by mutual agreement at the contracting officer’s level. Reasonable 33.202 Contract Disputes Act of 1978. efforts should be made to resolve con- The Contract Disputes Act of 1978, as troversies prior to the submission of a amended (41 U.S.C. 601–613) (the Act), claim. Agencies are encouraged to use establishes procedures and require- ADR procedures to the maximum ex- ments for asserting and resolving tent practicable. Certain factors, how- claims subject to the Act. In addition, ever, may make the use of ADR inap- the Act provides for: (a) the payment of propriate (see 5 U.S.C. 572(b)). Except interest on contractor claims; (b) cer- for arbitration conducted pursuant to tification of contractor claims; and (c) the Administrative Dispute Resolution a civil penalty for contractor claims Act (ADRA), Public Law 100–522, agen- that are fraudulent or based on a mis- cies have authority which is separate representation of fact. from that provided by the ADRA to use [56 FR 67417, Dec. 30, 1991, as amended at 59 ADR procedures to resolve issues in FR 11381, Mar. 10, 1994] controversy. Agencies may also elect to proceed under the authority and re- 33.203 Applicability. quirements of the ADRA. (a) Except as specified in paragraph (b) below, this part applies to any ex- [59 FR 11381, Mar. 10, 1994] press or implied contract covered by 33.205 Relationship of the Act to Pub. the Federal Acquisition Regulation. L. 85–804. (b) This subpart does not apply to any contract with (1) a foreign govern- (a) Requests for relief under Pub. L. ment or agency of that government, or 85–804 (50 U.S.C. 1431–1435) are not (2) an international organization or a claims within the Contract Disputes subsidiary body of that organization, if Act of 1978 or the Disputes clause at the agency head determines that the 52.233–1, Disputes, and shall be proc- application of the Act to the contract essed under part 50, Extraordinary Con- would not be in the public interest. tractual Actions. However, relief for- (c) This part applies to all disputes merly available only under Pub. L. 85– with respect to contracting officer de- 804; i.e., legal entitlement to rescission cisions on matters arising under or re- or reformation for mutual mistake, is lating to a contract. Agency Boards of now available within the authority of

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the contracting officer under the Con- year period shall not apply to contract Disputes Act of 1978 and the Dis- tracts awarded prior to October 1, 1995, putes clause. In case of a question or to a Government claim based on a whether the contracting officer has au- contractor claim involving fraud. thority to settle or decide specific [60 FR 48230, Sept. 18, 1995] types of claims, the contracting officer should seek legal advice. 33.207 Contractor certification. (b) A contractor’s allegation that it is entitled to rescission or reformation (a) Contractors shall provide the cer- of its contract in order to correct or tification specified in 33.207(c) when mitigate the effect of a mistake shall submitting any claim— be treated as a claim under the Act. A (1) Exceeding $100,000; or contract may be reformed or rescinded (2) Regardless of the amount claimed by the contracting officer if the con- when using— tractor would be entitled to such rem- (i) Arbitration conducted pursuant to edy or relief under the law of Federal 5 U.S.C. 575–580; or contracts. Due to the complex legal is- (ii) Any other ADR technique that sues likely to be associated with alle- the agency elects to handle in accord- gations of legal entitlement, contract- ance with the ADRA. ing officers shall make written deci- (b) The certification requirement sions, prepared with the advice and as- does not apply to issues in controversy sistance of legal counsel, either grant- that have not been submitted as all or ing or denying relief in whole or in part of a claim. part. (c) The certification shall state as (c) A claim that is either denied or follows: not approved in its entirety under paragraph (b) above may be cognizable I certify that the claim is made in good as a request for relief under Pub. L. 85– faith; that the supporting data are accurate and complete to the best of my knowledge 804 as implemented by part 50. How- and belief; that the amount requested accu- ever, the claim must first be submitted rately reflects the contract adjustment for to the contracting officer for consider- which the contractor believes the Govern- ation under the Contract Disputes Act ment is liable; and that I am duly authorized of 1978 because the claim is not cog- to certify the claim on behalf of the contrac- nizable under Public Law 85–804, as im- tor. plemented by part 50, unless other (d) The aggregate amount of both in- legal authority in the agency con- creased and decreased costs shall be cerned is determined to be lacking or used in determining when the dollar inadequate. thresholds requiring certification are met (see example in 15.804–2(a)(1)(iii) 33.206 Initiation of a claim. regarding cost or pricing data). (a) Contractor claims shall be sub- (e) The certification may be executed mitted, in writing, to the contracting by any person duly authorized to bind officer for a decision within 6 years the contractor with respect to the after accrual of a claim, unless the con- claim. tracting parties agreed to a shorter (f) A defective certification shall not time period. This 6-year time period deprive a court or an agency BCA of ju- does not apply to contracts awarded risdiction over that claim. Prior to the prior to October 1, 1995. The contract- entry of a final judgment by a court or ing officer shall document the contract a decision by an agency BCA, however, file with evidence of the date of receipt the court or agency BCA shall require of any submission from the contractor a defective certification to be cor- deemed to be a claim by the contract- rected. ing officer. (b) The contracting officer shall issue [59 FR 11381, Mar. 10, 1994, as amended at 60 a written decision on any Government FR 48218, 48230, Sept. 18, 1995] claim initiated against a contractor within 6 years after accrual of the 33.208 Interest on claims. claim, unless the contracting parties (a) The Government shall pay inter- agreed to a shorter time period. The 6- est on a contractor’s claim on the

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amount found due and unpaid from the specifically authorized to administer, date that— settle, or determine; or (1) The contracting officer receives (b) The settlement, compromise, pay- the claim (certified if required by ment or adjustment of any claim in- 33.207(a)); or volving fraud. (2) Payment otherwise would be due, [48 FR 42349, Sept. 19, 1983. Redesignated and if that date is later, until the date of amended at 50 FR 2270, Jan. 15, 1985; 51 FR payment. 36972, Oct. 16, 1986; 59 FR 11381, Mar. 10, 1994] (b) Simple interest on claims shall be paid at the rate, fixed by the Secretary 33.211 Contracting officer’s decision. of the Treasury as provided in the Act, (a) When a claim by or against a con- which is applicable to the period during tractor cannot be satisfied or settled which the contracting officer receives by mutual agreement and a decision on the claim and then at the rate applica- the claim is necessary, the contracting ble for each 6-month period as fixed by officer shall— the Treasury Secretary during the (1) Review the facts pertinent to the pendency of the claim. (See 32.614 for claim; the right of the Government to collect (2) Secure assistance from legal and interest on its claims against a con- other advisors; tractor). (3) Coordinate with the contract ad- (c) With regard to claims having de- ministration office or contracting of- fective certifications, interest shall be fice, as appropriate; and paid from either the date that the con- (4) Prepare a written decision that tracting officer initially receives the shall include a— claim or October 29, 1992, whichever is (i) Description of the claim or dis- later. However, if a contractor has pro- pute; vided a proper certificate prior to Octo- (ii) Reference to the pertinent con- ber 29, 1992, after submission of a defec- tract terms; tive certificate, interest shall be paid (iii) Statement of the factual areas of from the date of receipt by the Govern- agreement and disagreement; ment of a proper certificate. (iv) Statement of the contracting of- [59 FR 11381, Mar. 10, 1994, as amended at 60 ficer’s decision, with supporting ration- FR 48230, Sept. 18, 1995] ale; (v) Paragraph substantially as fol- 33.209 Suspected fraudulent claims. lows: If the contractor is unable to support ‘‘This is the final decision of the Con- any part of the claim and there is evi- tracting Officer. You may appeal this dence that the inability is attributable decision to the agency board of con- to misrepresentation of fact or to fraud tract appeals. If you decide to appeal, on the part of the contractor, the con- you must, within 90 days from the date tracting officer shall refer the matter you receive this decision, mail or oth- to the agency official responsible for erwise furnish written notice to the investigating fraud. agency board of contract appeals and provide a copy to the Contracting Offi- 33.210 Contracting officer’s authority. cer from whose decision this appeal is Except as provided in this section, taken. The notice shall indicate that contracting officers are authorized, an appeal is intended, reference this within any specific limitations of their decision, and identify the contract by warrants, to decide or resolve all number. With regard to appeals to the claims arising under or relating to a agency board of contract appeals, you contract subject to the Act. In accord- may, solely at your election, proceed ance with agency policies and 33.214, under the board’s small claim proce- contracting officers are authorized to dure for claims of $50,000 or less or its use ADR procedures to resolve claims. accelerated procedure for claims of The authority to decide or resolve $100,000 or less. Instead of appealing to claims does not extend to— the agency board of contract appeals, (a) A claim or dispute for penalties or you may bring an action directly in the forfeitures prescribed by statute or reg- United States Court of Federal Claims ulation that another Federal agency is (except as provided in the Contract

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Disputes Act of 1978, 41 U.S.C. 603, re- (g) Any failure of the contracting of- garding Maritime Contracts) within 12 ficer to issue a decision within the re- months of the date you receive this de- quired time periods will be deemed a cision’’; and decision by the contracting officer de- (vi) Demand for payment prepared in nying the claim and will authorize the accordance with 32.610(b) in all cases contractor to file an appeal or suit on where the decision results in a finding the claim. that the contractor is indebted to the (h) The amount determined payable Government. under the decision, less any portion al- (b) The contracting officer shall fur- ready paid, should be paid, if otherwise nish a copy of the decision to the con- proper, without awaiting contractor tractor by certified mail, return re- action concerning appeal. Such pay- ceipt requested, or by any other meth- ment shall be without prejudice to the od that provides evidence of receipt. rights of either party. This requirement shall apply to decisions on claims initiated by or against [48 FR 42349, Sept. 19, 1983. Redesignated at the contractor. 50 FR 2270, Jan. 15, 1985, and amended at 54 (c) The contracting officer shall issue FR 34755, Aug. 21, 1989; 59 FR 11382, Mar. 10, 1994; 60 FR 48230, Sept. 18, 1995] the decision within the following statutory time limitations: 33.212 Contracting officer’s duties (1) For claims of $100,000 or less, 60 upon appeal. days after receiving a written request from the contractor that a decision be To the extent permitted by any agen- rendered within that period, or within cy procedures controlling contacts a reasonable time after receipt of the with agency BCA personnel, the con- claim if the contractor does not make tracting officer shall provide data, doc- such a request. umentation, information, and support (2) For claims over $100,000, 60 days as may be required by the agency BCA after receiving a certified claim; pro- for use on a pending appeal from the vided, however, that if a decision will contracting officer’s decision. not be issued within 60 days, the contracting officer shall notify the con- 33.213 Obligation to continue perform- tractor, within that period, of the time ance. within which a decision will be issued. (a) In general, before passage of the (d) The contracting officer shall issue Act, the obligation to continue per- a decision within a reasonable time, formance applied only to claims aris- taking into account— ing under a contract. However, Section (1) The size and complexity of the 6(b) of the Act authorizes agencies to claim; require a contractor to continue con- (2) The adequacy of the contractor’s tract performance in accordance with supporting data; and the contracting officer’s decision pend- (3) Any other relevant factors. ing final decision on a claim relating (e) The contracting officer shall have to the contract. In recognition of this no obligation to render a final decision fact, an alternate paragraph is pro- on any claim exceeding $100,000 which vided for paragraph (h) of the clause at contains a defective certification, if 52.233–1, Disputes. This paragraph shall within 60 days after receipt of the be used only as authorized by agency claim, the contracting officer notifies procedures. the contractor, in writing, of the rea- (b) In all contracts that include the sons why any attempted certification clause at 52.233–1, Disputes, with its Al- was found to be defective. ternate I, in the event of a dispute not (f) In the event of undue delay by the arising under, but relating to, the con- contracting officer in rendering a deci- tract, the contracting officer shall con- sion on a claim, the contractor may re- sider providing, through appropriate quest the tribunal concerned to direct agency procedures, financing of the the contracting officer to issue a deci- continued performance; provided, that sion in a specified time period deter- the Government’s interest is properly mined by the tribunal. secured.

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33.214 Alternative dispute resolution has authority to resolve the issue in (ADR). controversy. If a claim has been sub- (a) The objective of using ADR proce- mitted, ADR procedures may be ap- dures is to increase the opportunity for plied to all or a portion of the claim. relatively inexpensive and expeditious When ADR procedures are used subse- resolution of issues in controversy. Es- quent to the issuance of a contracting sential elements of ADR include— officer’s final decision, their use does (1) Existence of an issue in con- not alter any of the time limitations or troversy; procedural requirements for filing an (2) A voluntary election by both par- appeal of the contracting officer’s final ties to participate in the ADR process; decision and does not constitute a re- (3) An agreement on alternative pro- consideration of the final decision. cedures and terms to be used in lieu of (d) When appropriate, a neutral per- formal litigation; son may be used to facilitate resolu- (4) Participation in the process by of- tion of the issue in controversy using ficials of both parties who have the au- the procedures chosen by the parties. thority to resolve the issue in con- (e) The confidentiality of ADR pro- troversy; and ceedings shall be protected consistent (5) Certification by the contractor in with 5 U.S.C. 574. accordance with 33.207 when using ADR procedures to resolve all or part of a [56 FR 67417, Dec. 30, 1991, as amended at 59 FR 11382, Mar. 10, 1994; 60 FR 48230, Sept. 18, claim under the authority of the 1995] ADRA. (b) If the contracting officer rejects a 33.215 Contract clause. request for ADR from a small business contractor, the contracting officer The contracting officer shall insert shall provide the contractor written the clause at 52.233–1, Disputes, in so- explanation citing one or more of the licitations and contracts, unless the conditions in 5 U.S.C. 572(b) or such conditions in 33.203(b) apply. If it is de- other specific reasons that ADR proce- termined under agency procedures that dures are inappropriate for the resolu- continued performance is necessary tion of the dispute. In any case where a pending resolution of any claim arising contractor rejects a request of an agen- under or relating to the contract, the cy for ADR proceedings, the contractor contracting officer shall use the clause shall inform the agency in writing of with its Alternate I. the contractor’s specific reasons for re- [48 FR 42349, Sept. 19, 1983. Redesignated and jecting the request. amended at 50 FR 2270, Jan. 15, 1985. Redesig- (c) ADR procedures may be used at nated at 56 FR 67417, Dec. 30, 1991; 57 FR any time that the contracting officer 60610, Dec. 21, 1992]

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