Section 05 of Contract Cost Principles 1031-2 states:
"Indirect costs must 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:
- 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;
- 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".
This bulletin provides interpretation on how take out rates reflect the allocation of specific cost from indirect cost pools to suit the related costs and circumstances of the contracts. However, a fair level of overhead, or G & A costs must be charged to the particular products or services in question."
For the purpose of this Bulletin:
"Take-Out Rate" is the negotiated rate applied for the recovery of overhead costs on goods and services which do not form the major portion of the company's business but are in themselves significant relative to a government contract. The resulting rate, in most cases, should be somewhat less than that which applies to other work processed through the company's facilities.
- Take-out rates may be established to apportion overhead expenses on a reasonable and justifiable basis on goods and services which requires less overhead effort than the company's regular activity.
- The task of identifying where and when a take-out rate is applicable is left to the discretion of the negotiators, who are in the best position to establish the need, based on the information available at the time.
- Some of the areas for applications of take-out rates are:
- Drop shipments, other resale and high value purchases;
- Mobile repair party and field services;
- Other specialized applications such as for travel and living that are charged directly to a contract.
- The purpose of a take out rate is to allocate costs to a contract. Other overhead recovery rates must not include any of the costs of any contracts that are subject to take out rates. This means that take out rates that are established without taking into account the full costs of specific situations may result in unrecovered overhead as this overhead cannot be recovered on other contracts. As an example; this situation can arise if a contract is established using a take out rate that is set to limit the total price of the contract and the rate is not sufficient to allow full cost recovery.