ARCHIVED Contract Cost Principles

Legal text for SACC item

1031-2 00     (16/02/98)    Contract Cost Principles


Public Works and Government Services Canada

01     General Principle
02     Definition of a Reasonable Cost
03     Direct Costs
04     Indirect Costs
05     Allocation of Indirect Costs
06     Credits
07     Non-applicable Costs




1031-2 01     (01/04/92)    General Principle

The total cost of the Contract shall be the sum of the applicable direct 
and indirect costs which are, or are to be reasonably and properly incurred 
and/or allocated, in the performance of the Contract, less any applicable 
credits.  These costs shall be determined in accordance with the 
Contractor's cost accounting practices as accepted by the Crown and applied 
consistently over time.


1031-2 02     (01/06/91)    Definition of a Reasonable Cost

1.     A cost is reasonable if, in nature and amount, it does not exceed 
       that which would be incurred by an ordinary prudent person in the 
       conduct of a competitive business.

2.     In determining the reasonableness of a particular cost, 
       consideration shall be given to:

       (a)    whether the cost is of a type generally recognized as normal 
              and necessary for the conduct of a contractor's business or 
              performance of the Contract;

       (b)    the restraints and requirements by such factors as generally 
              accepted sound business practices, arm's length  bargaining, 
              federal, provincial and local laws and regulations, and 
              Contract terms;

       (c)    the action that prudent business persons would take in the 
              circumstances, considering their responsibilities to the 
              owners of the business, their employees, customers, the 
              Government and public at large;

       (d)    significant deviations from the established practices of the 
              Contractor which may unjustifiably increase the Contract 
              costs; and

       (e)    the specifications, delivery schedule and quality 
              requirements of the particular contract as they affect costs.


1031-2 03     (01/04/92)    Direct Costs

1.     There are three categories of direct costs:

       (a)    Direct Material Cost meaning the cost of materials which can 
              be specifically identified and measured as having been used 
              or to be used on the Contract and which are so identified and 
              measured consistently by the Contractor's cost accounting 
              practices as accepted by the Crown.
 
              (1)    These materials may include, in addition to materials 
                     purchased solely for the Contract and processed by the 
                     Contractor, or obtained from subcontractors, any other 
                     materials issued from the Contractor's general stocks.

              (2)    Materials purchased solely for the Contract or 
                     subcontracts shall be charged to the Contract at the 
                     net laid-down cost to the Contractor before cash 
                     discounts for prompt payment.

              (3)    Materials issued from the Contractor's general stocks 
                     shall be charged to the Contract in accordance with 
                     the method as used consistently by the Contractor in 
                     pricing material inventories.

       (b)    Direct Labour Cost meaning that portion of gross wages or 
              salaries incurred for work which can be specifically 
              identified and measured as having been performed or to be 
              performed on the Contract and which is so identified and 
              measured consistently by the Contractor's cost accounting 
              practices as accepted by the Crown.    

       (c)    Other Direct Costs meaning those applicable costs, not 
              falling within the categories of direct material or direct 
              labour, but which can be specifically identified and measured 
              as having been incurred or to be incurred in performance of 
              the Contract and which are so identified and measured 
              consistently by the Contractor's costing practices as 
              accepted by the Crown. 


1031-2 04     (01/06/91)    Indirect Costs

1      Indirect Costs (overhead) meaning those costs which, though 
       necessarily having been incurred during the period of the Contract 
       performance for the conduct of the Contractor's business in general, 
       cannot be identified and measured as directly applicable to 
       contracts.

2.     These Indirect Costs may include, but are not necessarily restricted 
       to, such items as:

       (a)    indirect materials and supplies(*);

       (b)    indirect labour;

       (c)    fringe benefits (the Contractor's contribution only);

       (d)    service expenses: expenses of a general nature such as power, 
              heat, light, operation and maintenance of general assets and 
              facilities;
 
       (e)    fixed/period charges: recurring charges such as property 
              taxes, rentals and reasonable provision for depreciation;

       (f)    general and administrative expenses: including remuneration 
              of executive and corporate officers, office wages and 
              salaries and expenses such as stationery, office supplies, 
              postage and other necessary administration and management 
              expenses;

       (g)    selling and marketing expenses associated with the products 
              or services being acquired under the Contract;

       (h)    general research and development expenses as considered 
              applicable by the Crown.  

       (*)    For supplies of similar low-value, high-usage items the costs 
              of which meet the above definition of Direct Material Costs 
              but for which it is economically expensive to account for 
              these costs in the manner prescribed for direct costs, then 
              they may be deemed to be indirect costs for the Contract 
              purposes. 


1031-2 05     (01/06/91)    Allocation of Indirect Costs

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

       (a)    the costs included in a particular indirect cost pool should 
              have a similarity of relationship with each contract to which 
              that indirect cost pool is subsequently distributed; further, 
              the costs included in an indirect cost pool should be similar 
              enough in their relationship to each other that the 
              allocation of the total costs in the pool provides a result 
              which would be similar to that achieved if each cost within 
              that pool were separately distributed;

       (b)    the allocation basis for each indirect cost pool should 
              reflect, as far as possible, the causal relationship of the 
              pooled costs to the contracts to which these costs are 
              distributed. 


1031-2 06     (01/06/91)    Credits

The applicable portion of any income, rebate, allowance, or any other 
credit relating to any applicable direct or indirect cost, received by or 
accruing to the Contractor, shall be credited to the Contract.
 
1031-2 07     (01/06/91)    Non-applicable Costs

1.     Notwithstanding that the following costs may have been or may be 
       reasonably and properly incurred by the Contractor during the 
       performance of the Contract, they are considered non-applicable 
       costs to the Contract:

       (a)    allowance for interest on invested capital, bonds, debentures, 
              bank or other loans together with related bond discounts and 
              finance charges;

       (b)    legal, accounting and consulting fees in connection with 
              financial reorganization, security issues, capital stock 
              issues, obtaining of patents and licenses and prosecution of 
              claims against the Crown;

       (c)    losses on investments, bad debts and expenses for the 
              collection thereof;

       (d)    losses on other contracts;

       (e)    federal and provincial income taxes, excess profit taxes or 
              surtaxes and/or special expenses in connection therewith;

       (f)    provisions for contingencies;

       (g)    premiums for life insurance on the lives of officers and/or 
              directors where proceeds accrue to the Contractor;

       (h)    amortization of unrealized appreciation of assets;

       (i)    depreciation of assets paid for by the Crown;

       (j)    fines and penalties;

       (k)    expenses and depreciation of excess facilities;

       (l)    unreasonable compensation for officers and employees;

       (m)    product development or improvement expenses not associated 
              with the product being acquired under the Contract;

       (n)    advertising, except reasonable advertising of an industrial 
              or institutional character placed in trade, technical or 
              professional journals for the dissemination of information 
              for the industry or institution;

       (o)    entertainment expenses;
 
       (p)    donations except those to charities registered under the 
              Income Tax Act;

       (q)    dues and other memberships other than regular trade and 
              professional associations;

       (r)    fees, extraordinary or abnormal for professional advice in 
              regard to technical, administrative or accounting matters, 
              unless approval from the Contracting Authority is obtained.