Contract Cost Principles 1031-2 refer to "costs which are, or must be reasonably and properly incurred and/or allocated, in the performance of the contract, less any applicable credits."
This bulletin explains the establishment of costs when government assistance has been provided related to costs of fixed assets, research, and product development.
For the purpose of this Bulletin:
- "Company Funded Costs"
- are expenditures made from funds over which the enterprise has spending power and which were not provided to the company through the terms of a related agreement or understanding.
- is an unconditional payment made to a recipient, usually for a specific purpose, for which the donor will not receive any royalties, goods, or services.
- is a conditional transfer payment under an auditable agreement for which the donor will not receive any royalties, goods, or services.
- "Contribution Arrangement"
- is an undertaking between a donor department or agency and a prospective recipient of a contribution, describing the obligations of each, and the terms and conditions of payments and which contain conditions for royalties from resulting sales. The arrangement may be as informal as an exchange of letters.
The Company Funded Costs that shall be considered applicable for contracts negotiated in accordance with 1031-2 are:
Government Assistance towards the acquisition of fixed assets shall be deducted from the fixed asset acquisition cost and the relevant depreciation thereof calculated on the net asset amount. Depreciation on the net amount may be included in the applicable overhead for cost recovery on contracts.
Research and Development
Government Assistance in the form of Investment Tax Credits shall not be deducted from the related research and development expenditures when determining the applicable costs.
Government Assistance, as well as third party funded assistance, towards a specific product development shall be netted against the relevant product development costs to arrive at the portion to be recovered over the sale of that product or family of products.