10. Chapter 10 - Cost and Profit

1. Contracting officers should refer to the Practitioner’s Guide for Procurement Pricing for more information and guidance on contract pricing.
2. When a contract must be awarded on a non-competitive basis, or when, following a competitive process, price negotiations with the successful bidder are required, contracting officers must determine the contract price based on the procedures outlined in this Chapter.
3. Where the contract price is based on estimated or actual costs, there may be a need to mitigate price risk and make adjustment to allowable amounts based on a verification of the supporting records. To mitigate price risk, SACC Manual clause C1004C should be included in the terms and conditions of the contract.
4. In addition, when a procurement presents any of the characteristics noted below and described in the Directive on the Use of Cost and Price Analysis Services, it is mandatory that the contracting officer consult a Price Support Directorate advisor and document the consultation and pricing decisions in the procurement file:
   1. Any potential sole-source procurement with a total estimated value of $1,000,000 or more, including applicable taxes, options and amendments.
   2. Any competitive procurement with a total estimated value of $1,000,000 or more, including applicable taxes and options where only one compliant bid is received.
   3. Any competitive procurement with a total estimated value of $1,000,000 or more, including applicable taxes, with contract provisions for negotiated prices or where prices are likely to be negotiated as a result of a contract amendment.
   4. Any competitive procurement, with a total estimated value of $10,000,000 or more, including applicable taxes, options and amendments.
5. Where a contract price will be based on estimated or actual costs, the contracting authority, in consultation with the Procurement Support Services Sector, may require an accepted Cost Accounting Practices (CAP) Submission evidenced by a CAP Submission Acceptance Letter to clarify the cost accounting practices to be used for contract pricing.
6. The calculation of prices and costs depends on the circumstances of each contract. Before referring to the general sections for the establishing of costs (see 10.5 Establishing Costs) and profit (see 10.65 Calculation of profit on negotiated contracts), the contracting officer must determine that the following special circumstances do not apply:
   1. Travel and Living Expenses (see 10.10 Travel and living expenses);
   2. Prices for Out of Plant Services of Individuals (see 10.15 Prices for out of plant services of individuals);
   3. Surplus Materials in Cost-Reimbursable Contracts (see 10.20 Surplus Materials in Cost Reimbursable Contracts);
   4. Costing of Lease Transactions (see 10.25 Costing of Lease Transactions);
   5. Service Contracts (see 10.30 Service Contracts);
   6. Joint Ventures (see 10.35 Joint Ventures);
   7. Research and Development Contracts with Universities and Colleges (see 10.40 Research and Development Contracts with Universities and Colleges);
   8. Non-competitive Contracts with Non-profit Organizations, excluding Universities and Colleges (see 10.45 Non-competitive Contracts with Non-profit Organizations, excluding Universities and Colleges);
   9. Non-competitive Acquisitions of Manufactured Products and Repair and Overhaul Services from Agency and Resale Outlets (see 10.50 Non-competitive Acquisitions of Manufactured Products and Repair and Overhaul Services, from Agency and Resale Outlets);
   10. Transfer Pricing (see 10.55 Transfer Pricing);
   11. Special Production Tooling and Special Test Equipment (see 10.60 Special Production Tooling and Special Test Equipment).

Contracting officers should also refer to the requirements for audit. (see 4.70.35 Audit)

1. Whenever a contract price is negotiated based on costs, the costs will be determined using Contract Cost Principles 1031-2 of the Standard Acquisition Clauses and Conditions (SACC) Manual.
   In particular, for non-competitive contracts valued at $50,000 and over, with a firm price or fixed time rate basis of payment, except in cases for the acquisition of commercial goods and services, the price or rate will be negotiated based on the estimated costs computed in accordance with the Contract Cost Principles 1031-2.
   For non-competitive contracts valued at $50,000 or over, with a cost reimbursable basis of payment, except in cases for the acquisition of commercial goods and services, the price will be determined based on actual costs incurred computed in accordance with the Contract Cost Principles.
   In both of the above cases, the Contract Cost Principles will be included as a condition of the contract. Annex 10.4: Reasons for the non-applicability of certain costs when utilizing Contract Cost Principles 1031-2 explains why certain costs are considered non-applicable when utilizing Contract Cost Principles 1031-2.
   For determining costs in accordance with the Contract Cost Principles, the Cost Interpretations Bulletins issued by Policy, Risk, Integrity and Strategic Management Sector should be taken into consideration at the time of negotiations. There are currently Cost Interpretation Bulletins on:
   1. Excess Facilities - Annex 10.5.1: Cost Interpretation Bulletin - Number 01 Excess Facilities
   2. Depreciation - Annex 10.5.2: Cost Interpretation Bulletin - Number 02 Depreciation
   3. Lease Costs - Annex 10.5.3: Cost Interpretation Bulletin - Number 03 Lease Costs
   4. Travel Costs - Annex 10.5.4: Cost Interpretation Bulletin - Number 04 Travel Costs
   5. Head Office Expenses - Annex 10.5.5: Cost Interpretation Bulletin - Number 05 Head Office Expense
   6. Pension Costs - Annex 10.5.6: Cost Interpretation Bulletin - Number 06 Pension Costs
   7. Research and Development Expenses - Annex 10.5.7: Cost Interpretation Bulletin - Number 07 Research and Development Expenses
   8. Bid and Proposal Expenses - Annex 10.5.8: Cost Interpretation Bulletin - Number 08 Bid and Proposal Expenses
   9. Selling and Marketing Expenses - Annex 10.5.9: Cost Interpretation Bulletin - Number 09 Selling and Marketing Expenses
   10. Severance Payments - Annex 10.5.10: Cost Interpretation Bulletin - Number 10 Severance Payments
   11. Pension Plan Refunds - Annex 10.5.11: Cost Interpretation Bulletin - Number 11 Pension Plan Refunds
   12. Company Funded Costs - Annex 10.5.12: Cost Interpretation Bulletin - Number 12 Company Funded Costs
   13. Executive Compensation - Annex 10.5.13: Cost Interpretation Bulletin - Number 13 Executive Compensation
   14. Mobile Repair Party Requirements - Annex 10.5.14: Cost Interpretation Bulletin - Number 14 Mobile Repair Party Requirements
   15. Environmental Costs - Annex 10.5.15: Cost Interpretation Bulletin - Number 15 Environmental Costs
   16. Take Out Rates - Annex 10.5.16: Cost Interpretation Bulletin - Number 16 Take-out Rates
   17. Government Supplied Materials - Annex 10.5.17: Cost Interpretation Bulletin - Number 17 Government Supplied Materiel
   18. Incentive Remuneration Profit Sharing Plans - Annex 10.5.18: Cost Interpretation Bulletin - Number 18 Incentive Remuneration Profit Sharing Plans
   19. Purchased Labour B Personnel Procured from Outside Sources - Annex 10.5.19: Cost Interpretation Bulletin - Number 19 Purchased Labour - Personnel Procured From Outside Sources.
2. The Contract Cost Principles 1031-2 are not required for commercial goods and services, since these are used regularly for other than government purposes, and are sold by the supplier in the course of carrying out its normal business operations; and there is a sufficient number of buyers, other than the government, to establish a going price for the good or service.

1. Normally, traveling and living expenses incurred by a contractor in the ordinary course of business are to be treated as indirect costs chargeable to overhead. Contracts bear their proportionate share of such overhead, and this overhead is profit bearing. Therefore, no special provision with respect to these incidental travel and living expenses is required for such contracts.
   However, some contractors consistently charge travel and living expenses directly to contracts. Where a price is negotiated with suppliers, these charges will be acceptable as direct charges against the contract if:
   1. the expenses are directly attributable to the performance of the work under the contract, and these expenses are deducted from indirect costs; and
   2. the practice of direct charging is consistently followed by the contractor in the costing of both government and commercial work; and
   3. the expenses referred to in (i) above are eliminated from indirect costs allocated to contracts.
2. When travel and living expenses are to be directly charged to the contract, these expenses will attract administrative overhead either at full rates, where adequate support for the claimed general and administrative rate can be demonstrated, or at a lower negotiated rate where such substantiation cannot be provided. Alternatively, where industry practice dictates, a contract may provide for travel and living expenses to be charged at cost with no allowance for overhead or profit.
   When travel and living expenses, plus profit and/or overhead, as applicable, are to be directly charged to a contract on a cost reimbursable basis, contracting officers must use Standard Acquisition Clauses and Conditions (SACC) Manual clause C4000C; when there is no allowance for profit and/or overhead, clause C4001C must be used.
   The National Joint Council Travel Directive applies to travel expenses incurred on contracts with persons outside the Public Service, when these expenses are a specific element of the contract. For more details, consult the NJC Travel Directive and Treasury Board Special Travel Authorities.
   The contracting officer may accept the contractor's travel and living rates, if they are lower than the rate allowances specified in Appendices B, C, and D of the National Joint Council Travel Directive.
   For additional information, contracting officers should consult Annex 10.5.4: Cost Interpretation Bulletin - Number 04 Travel Costs.
3. Department of National Defence (DND) service establishments may be able to provide transportation, mess and lodging facilities to the contractor's employees performing work at or near these establishments under mobile repair party and maintenance-type contracts. The commanding officer of the establishment must, upon request, advise the contractor as to the availability of these facilities, which must reduce direct contract expenses.

   Any costs incurred by the contractor for the use of these facilities, plus any incidental expenses incurred, will be reimbursed under the contract, together with allowances for profit and/or administrative overhead. In order for the contractor to be reimbursed, contracting officers must use C4004C in the contract.

1. The following methods are applicable to all negotiated charge-out rates, irrespective of whether any subsequent contract is fixed price, fixed unit price, cost reimbursable, etc. and covers out-of-plant services of individuals or groups of individuals, with or without equipment.
   Services include field service representatives, out-of-plant technical services and mobile repair parties away from the contractor's plant.
2. When rates have not been established commercially or when they are considered excessive, the Contract Cost Principles 1031-2 must be used as a basis for negotiating out-of-plant charge-out rates (including applicable overhead). Profit must be negotiated in accordance with 10.65 Calculation of Profit on Negotiated Contracts. Travel and living expenses must be determined in accordance with 10.10 Travel and Living Expenses.
3. Contracting officers are responsible for negotiating fair and reasonable charge-out rates which would normally be on a fixed time rate, i.e. hourly, per diem, monthly, etc. Charge-out rates will be shown as a separate line item in the basis of payment.
   In determining charge-out rates, some items to be considered are:
   1. normal industrial practice/commercial rates;
   2. whether the company usually provides the service;
   3. availability of the service from other sources;
   4. wages of the individuals;
   5. whether the plant overhead should apply or whether a separate overhead should be negotiated;
   6. equipment utilized;
   7. use of the facilities of Canada.
   Before contract award, contracting officers are advised to seek guidance and cost interpretations from the sector/region cost analyst with respect to negotiated charge-out rates, in accordance with the Guideline on the Use of Cost and Price Analysis Services (PDF).
4. Full plant overhead should not be applied to out-of-plant charge-out rates, unless the out of plant technical services are a relatively minor part (less than 10 percent) of the contractor's total business (volume/direct labour) in any one year.
5. Dislocation/displacement pay allowances may be allowed provided that the amount of the displacement pay is reasonable; the displacement pay is for justifiable purposes; and/or displacement pay is in accordance with the contractor's established practice.
   For removal, living, car allowances and outside Canada expenses, contracting officers must consider the following:
   1. Only one removal from and back to the original residence will be paid for any one representative. Where removal expenses to the site of the work have been paid by the Canada on a previous contract and the services are being extended for a further period, such contract amendment or subsequent contract should provide for reimbursement only for expenses incurred for moving the representative back to the original residence.
   2. Removal expenses should not be paid on assignments of less than six months, and any removal by an employee with dependents for assignments exceeding six months must be carried out during the first 90 days, and by an employee without dependents during the first 60 days.
   3. Reimbursement for living expenses for an employee with dependents on an assignment exceeding six months should cease when the family is moved (whether or not removal expenses have been paid) to permanent quarters at the location of the work.
   4. Reimbursement for living expenses for an employee without dependents on an assignment exceeding six months should cease when the employee's effects have been moved (whether or not removal expenses have been paid) to the location of the work or in any event after the first 60 days of such assignment.
   5. Reasonable car allowances in accordance with the contractor's practice may be paid for the use of personally owned motorcars by the contractor's personnel for essential on-base traveling where local Canada transportation is not available.
   6. Cases where the representative is required to go abroad must be dealt with individually and considered on their merits.
   For additional information, contracting officers should consult Annex 10.5.14: Cost Interpretation Bulletin - Number 14 Mobile Repair Party Requirements.

1. Surplus materials resulting from the performance of a contract may be disposed of in several ways:
   1. declared surplus at a Crown Assets Distribution Centre (CADC);
   2. transferred to the client, or to another contract with the same contractor, or to another contractor; or
   3. returned to the original supplier.
   Each of these has implications on the terms of the contract relating to costs and profits.
2. Costs of surplus materials are allowable costs in a production contract if the surplus is due to:
   1. normal accumulation of stores, during or on completion of a contract, and which are declared surplus to CADC, or transferred to the client or to another contract with the same or a different contractor;
   2. major design changes or other major adjustments of a substantial nature not including termination;
   3. minor design changes or other minor adjustments in the scope of the work provided the contract does not specifically exclude such items.
3. When the surplus is due to excess purchasing by a contractor, the costs are not allowable in a contract.
4. Handling costs associated with the surplus materials are allowable costs in a contract whenever the costs of surplus materials are allowable.
5. General and administrative overhead costs associated with surplus materials are allowable costs in a contract only when the surplus materials consist of work-in-process and finished goods resulting from design changes and minor cutbacks.
6. Profit will be allowed on the following categories (10.20(b), 10.20(d), 10.20(e)) of allowable costs, except that:
   1. in the case of surplus materials arising from the normal accumulation of stores, during or on completion of a contract, profit will be allowed only if the inventories acquired for a contract were financed by the contractor;
   2. in the case of surplus materials arising from major design changes, or other major changes of a substantial nature, profit will be allowed only if the inventories were either purchased by the contractor or, if not purchased by the contractor, were manufactured by the contractor and rendered surplus as the result of the changes.
7. For cost reimbursable with fixed fee or cost reimbursable with incentive fee contracts, and contracts containing a ceiling price, allowable costs of surplus materials will be treated as an extra direct cost to the contract, outside the area of fixed fee, incentive fee or ceiling price considerations. It may be necessary to renegotiate the principal terms of the contract.
8. Where incentive fee contracts require negotiation of targets, the costs of surplus materials should be included in the revision of a target only where other reasons make it essential to re-open the calculation for the protection of either the contractor or Canada. Alternatively, when a contract so provides, these costs may be paid for as an extra to the target or other arrangements, e.g. at cost plus a fixed fee at whatever rate of profit is appropriate.

1. When a contractor proposes to include, in the cost of a contract, costs relating to the leasing by the contractor of an asset, the amount of allowable charge depends on the type of lease.
2. The necessary information for contracting officers is in Annex 10.5.3: Cost Interpretation Bulletin - Number 03 Lease Costs.

1. Fees for all services not established by price competition, except repair and overhaul, are negotiated on the basis of the prevailing rates for the type of work required and recognizing the circumstances of each contract. Considerations are:
   1. requirements of the task: an assessment of skill level, expertise necessary, or complexity of the task requirements;
   2. bidder qualifications: fees will vary in terms of factors like the calibre of proposed personnel, knowledge or expertise, previous experience, personnel utilization rate, use of facilities, or the area of specialization;
   3. market conditions: a determination as to whether there is a commercial or going rate for a particular expertise or service capability in private industry should be made. If these rates cannot be determined, the fee scales recommended by provincial professional associations may be used as a reference point from which the reasonableness of a negotiated rate can be compared;
   4. costing/fee practices: the costing structures of individuals, bidders and universities are different and will vary significantly. Some costs that would otherwise be charged separately are sometimes charged to overhead, thus increasing the total rate.
2. Fees should include only those elements of cost properly associated with the actual time expended on the work. These are the direct labour costs and their fair share of overheads, general and administrative expenses and profit. Other direct costs such as charges for publication of reports, special computer or test services, travel and living, should normally be shown separately. Each case must be taken on its own merits to arrive at an assessment of which amounts are reasonable charges, either as a fee element, or as a separately charged item.
3. In all contracts for services with a cost reimbursable or fixed time rate basis of payment, the time rates of payment must be specified for the entire period required for performance of the contract, including all phases and specified option periods. When this is not possible, payments for each year or phase must be based on a pre-agreed rate or formula that is to be specified in the contract.

1. For non-competitive contracts intended to be awarded to a joint venture, special costs that may be attributed to the joint venture arrangement alone, such as legal, accounting and consulting fees in connection with the setting up of the joint venture, are not acceptable charges.
2. Ongoing operational costs related to the joint venture arrangement are acceptable to the extent that they are considered reasonable and can be allocated to the contract using the Contract Cost Principles 1031-2.
3. When materials, supplies or services must be transferred to the joint venture under subcontracts issued to a representative of the joint venture, the contracting officer should negotiate acceptable subcontract costs with the representative in accordance with the establishment of costs policy stated in 10.50 Non-competitive Acquisitions of Manufactured Products and Repair and Overhaul Services, from Agency and Resale Outlets to 10.50.5(b).
4. The joint venture cannot submit a price bid based on average rates. Each joint venture member's workload must be priced separately using appropriate costing procedures. The total of all the joint venture member prices must be the total proposed contract price.

1. Research and development work carried out by universities or colleges is priced at direct costs plus a contribution to overhead. This contribution is a maximum take-out rate of 65 percent of direct payroll costs for on-campus work, and 30 percent of direct payroll costs for off-campus work. In addition, a contribution equivalent to 2 percent of applicable and acceptable travel and living expenses must be made.
2. Contract Cost Principles 1031-2 must not be called up in the contract, and post-contract audits of overhead charges must not be carried out. Direct costs must be subject to cost verification or audit.
3. Allowable direct costs are:
   1. Direct Payroll Costs
      1. professional salaries
      2. clerical salaries
      3. technicians' wages
      4. fellowships - daily rate of personnel working directly on a contract
      5. fringe benefits including:
         1. unemployment insurance
         2. workers' compensation
         3. Canada or Quebec Pension Plan
      6. university pension plan (current service only)
      7. university portion of medical plans
      8. sick leave
      Annual salaries must be prorated over annual working days, taking into account statutory holidays and annual vacation.
   2. Materials and Supplies
      1. stationery
      2. postage
      3. materials issued from stores
      4. materials, parts and components purchased specially for the contract at "laid-down cost"
      5. long distance telephone charges
      6. telegrams and cables
      7. freight and express
      8. publication charges as agreed in contract
   3. Direct expenses - those costs which can be specifically identified and measured as having been used or to be used in the performance of the contract, and which are so identified and measured by the institution's cost accounting system. These expenses may include such items as:
      1. travel expenses
      2. consultant services
      3. apparatus and equipment acquisition. (This must remain Canada's property and be subject to Crown Assets Distribution Centre procedures.)
      4. other costs as agreed and negotiated, including charges for computer time.
4. Consultants are to be considered in three separate categories:
   1. in-house standard rate of pay: the 65 percent overhead is applicable;
   2. external type consultant, which is in-house personnel working additional hours at increased rates, but using university equipment: direct charge without overhead;
   3. outside consultant: direct charge without overhead.
5. Manufactured equipment is to be considered as a "make" or "buy" decision for the contracting officer. If it is a "buy", it must be a direct charge, and be Canada's property: a decision regarding disposal must be made later. If it is a "make", the university would be allowed the cost of parts and labour as laid out in the bid, including the 65 percent overhead, with ownership and disposal the same as for a buy. This should be a separate item under the contract.
6. Allowable overhead costs are:
   1. maximum of 65 percent applicable to Direct Payroll Costs for on-campus work;
   2. maximum of 30 percent applied to Direct Payroll Costs for off-campus work;
   3. an administration charge of 2 percent on travel and living expenses incurred directly against the contract is allowed.
7. Costs incurred by the university or college that have no direct bearing on the research activity are not acceptable as direct charges against Canada research contracts. These include:
   1. university annual reports
   2. contingency reserves
   3. convention expenses - unless applicable to specific contract
   4. post service lump-sum payments
   5. termination allowances not earned during the course of the contract
   6. admissions department
   7. grants - unless for services rendered for a specific contract
   8. finance charges (bank, debenture, bond interest, etc.)
8. Additional special facility charges must not be included in the price, since these are accounted for in the contribution to overhead.
9. Charges for use of a computer centre must be directed to a contract at a predetermined rate per hour, including general overhead, and computed at a break-even level for the centre. These charges must be in line with normal policies of the university for internal use.
10. Departments and agencies of the United States (U.S.) Government negotiate directly with Canadian universities and colleges towards research and development contracts. Public Works and Government Services Canada may be asked for assistance in developing an appropriate overhead rate. These requests will be handled by the Services and Technology Acquisition Management Sector, which must develop the overhead rates from the latest certified financial statements of the university or college, with indirect costs prorated over the direct cost base in conformity with the costing principles set out in the applicable U.S. Government directive on the subject.

1. Non-profit organizations incur financing charges for working capital, over and above normal operating costs as determined in accordance with the Contract Cost Principles 1031-2. They are also subject to business and contractual risk, though less than profit-oriented organizations.
2. The price is based on costs incurred, computed using the Contract Cost Principles 1031-2 plus an allowance in lieu of profit.
3. For financing charges on working capital employed, the allowance depends on the basis of payment:
   1. if there is a provision for progress payments or milestone payments: 1.5 percent of costs incurred;
   2. if there is no provision for progress payments or milestone payments: 3 percent of costs incurred.
4. For general business risk, the allowance is based on contract costs:
   1. direct materials, subcontracts and direct charges: up to 1 percent of such costs;
   2. direct labour and overhead: up to 2 percent of such costs.
5. The allowance that may be included in recognition of contractual risk depends upon the basis of payment selected for the contract or part thereof:
   1. firm price: up to 4 percent of costs incurred;
   2. fixed time rate with ceiling price: up to 3 percent of costs incurred;
   3. cost reimbursable with ceiling price: up to 3 percent of costs incurred;
   4. fixed time rate with no ceiling price: up to 2 percent of costs incurred;
   5. cost reimbursable with no ceiling price: 0 percent.

1. The procedures detailed in 10.50.1 Non-competitive Requirements of Commercial Goods and/or Services to 10.50.15 Price Analysis provide for the establishment of fair and reasonable prices, when the competitive process cannot be used for:
   1. acquisitions from Canadian agency and resale outlets, and
   2. acquisitions of manufactured products and repair and overhaul services, from Canadian suppliers, except Canadian agency and resale outlets.
2. There are key differences between these two types of acquisitions in the determination of what costs are allowed, and how profits are determined. The procedures also differ depending on whether the good or service is commercial or non-commercial.

1. When materials, supplies or services are transferred to a supplier to Canada from divisions, subsidiaries or affiliates under common control, the transfer price must be established in conformity with standard criteria, to avoid the payment of a rate of profit exceeding departmental norms.
   Considerations of materiality and practicality must govern in the application of these criteria. Consistency is also an objective - consistency between government and commercial work, consistency among the various kinds of firm price and cost reimbursable contracts, and consistency from one year to the next. In order to ensure consistency, personnel from all sectors/regions should consult early, in the negotiation process, a repository of applicable data maintained by the Policy, Risk, Integrity and Strategic Management Sector.
2. The following criteria apply to the establishment of acceptable inter-company and intra-company transfer prices on non-competitive contracts for which a price is negotiated with the bidder through a process involving analysis of costs and determination of profit.
   These criteria do not apply if the transfer price can be verified to be reasonable by reference to comparable third party prices involving transactions between the Canadian subsidiary (agency or resale outlet) or its parent and a third party, or between unrelated parties.
3. Intra-company transfer prices (that is, for transfers between divisions of the same legal or corporate entity) must be charged under the contract at cost according to the Contract Cost Principles 1031-2 without allowances for profit or an allocation of corporate general and administrative expenses. These allowances must apply on the cost of the finished product sold to Canada.
4. Inter-company transfer prices (that is, for transfers between a company and its subsidiary or affiliate enjoying separate legal status but otherwise under common ownership control) charged under the contract must not be, whenever possible, greater than those which approximate fair market value. In those situations where approximate fair market value cannot be determined, inter-company transfer prices must be those that can be considered as reasonable under the circumstances if the parties to the transaction had been dealing at arm's length.
   Fair Market Value means the price that would be agreed to in an open and unrestricted market between knowledgeable and willing parties dealing at arm's length who are fully informed and not under any compulsion to transact.
   If the good or service has a going price at which significant quantities are known to sell in the market in arm's length transactions, such a price will represent fair market value. Examples: regulated prices, posted prices, catalogue prices and other prices actually available and given in past transactions to arm's-length parties for the size, quality, timing and location of the transaction, after all discounts have been considered. An inter-company transfer price representing fair market value will be used as "laid-down cost" for that item for the purposes of computing mark-up, profit and contract price.
   In any case where the circumstances described in the last paragraph do not apply, it must be deemed that the transfer prices of the company are established at cost calculated in accordance with Contract Cost Principles 1031-2 without allowance for profit and without an allocation of corporate general and administrative expenses.
   In interpreting the term "reasonable under the circumstances," the following considerations apply:
   1. If the supplier to Canada can prove that the transfer price is at cost, then a normal profit at rates as set out in 10.65 Calculation of Profit on Negotiated Contracts must apply to the final product cost.
   2. If the supplier to Canada can provide satisfactory price support for a transfer price in excess of cost, the profit element in such transfer price must be limited to a return (at a rate not exceeding the corporate bond rate periodically published by the Policy, Risk, Integrity and Strategic Management Sector), on the fixed and working capital used in the production of the goods and services. The formula for computing profit is as follows:
      (R/12) x M (a x (b/c)) = P
      R = corporate bond rate
      M = period (in months of capital use)
      a = fixed and working capital employed
      b = transfer price less profit
      c = total company annual cost of sales and transfers
      P = profit amount to include in transfer price
      It should be noted that satisfactory price support originating from the transferor must be capable of being verified by reference to instances of transactions in similar goods either between the Canadian subsidiary or its parent and a third party, or between unrelated parties.
   3. In situations other than (i) and (ii) above, profit must not be allowed on the transfer price component of the total costs of the final product sold to Canada.
5. Where necessary, common ownership control must be determined by reference to the latest issue of appropriate trade surveys (e.g. Financial Post Survey of Industrials, Moody's Industrials, etc.), as confirmed by means of a certification from the company as to control (use SACC Manual clause A9112C for this purpose). Ownership control is presumed in cases where at least 50 percent of the voting rights are held by the affiliate.

1. No profit is allowed on Special Production Tooling (SPT) or Special Test Equipment (STE) which is purchased by a contractor for use under a contract, or purchased or otherwise acquired by its subcontractors for use under approved subcontracts.
2. When the production of the end product involves prior or concurrent expenditures for SPT or STE under a separate agreement, or pursuant to a clause in a contract or subcontract, a profit of up to 5 percent may be allowed on all SPT fabricated in a plant owned or operated by a contractor.
   No profit is allowed on the cost of purchased equipment incorporated or built into the STE.
3. Expenditures incurred by a contractor in connection with purchased SPT or STE (other than the cost of such tooling or equipment) are usually recovered as preproduction expenses or factory overhead.
   Administrative overhead is not accepted on STE.
   Purchased tooling should be included in the cost of sales base for the distribution of administrative overhead.
4. Since the cost of SPT or STE represents part of the cost of the end product being acquired by a client, payment is made out of the client's funds appropriated for the purchase of that end product.
5. SPT may be acquired on a firm price or a cost reimbursable basis irrespective of the price arrangement for the end product for which the tooling is required.
   When SPT is to be provided on a cost basis:
   1. the cost of such tooling is to be in accordance with the Contract Cost Principles 1031-2;
   2. a dollar limit is to be placed on the cost of the tooling with the provision that the cost is not to exceed this limit until further authorization is obtained.

1. The policy and guidelines for the calculation of the amount of profit applicable to negotiated contracts and parts thereof with Canadian suppliers, for both goods and services are detailed in 10.65(b) to 10.65.35 Total Profit. Contracts valued under $50,000 do not require negotiation of profit under this section.
   There are differences in the guidelines for contracts with total costs between $50,000 and $249,999, and for contracts with total costs of $250,000 or more.
   For agency and resale outlets, the procedures for profit determination in 10.50.15 Price Analysis apply.
2. When for any reason it is not possible to establish an acceptable basis of price by competition or a fair and reasonable price assessment, the price must be negotiated. The object of price negotiation is to duplicate a fair market price, while establishing a realistic division of responsibilities and risks between the contractor and Canada.
   A fair market price for non-competitive contracts for the procurement of goods or services (other than commercial goods or services) must be negotiated. The object of such negotiation is to arrive at a price which is considered to be fair and reasonable in the circumstances based upon an estimate of the costs, to be incurred in the performance of the contract, computed in accordance with the Contract Cost Principles 1031-2, plus a fair profit. A fair profit is an amount no greater than that calculated under this section.
   There are the following exceptions:
   1. Generally, all contracts placed on behalf of the Canadian Commercial Corporation (CCC). However, if the ultimate client for the CCC contract is the United States Department of Defense or National Aeronautics and Space Administration (NASA) or the United Kingdom Ministry of Defence, the profit may be calculated in accordance with this section.
   2. Contracts or parts thereof for which the price is based on catalogues, price lists or fee schedules where only discounts are subject to negotiation.
   3. Contracts for which the pricing is determined based on alternative approaches that are not addressed by Section 10.65, such as when pricing is not determined by cost plus profit or when profit is not calculated in accordance with 10.65(c). For such contracts, follow the process outlined in 10.75 Interim pricing measure.
3. Profit levels will vary:
   1. to recognize the cost of money associated with the capital employed by the contractor in performance of the contract;
   2. to recognize the levels of general business and contractual risk assumed by the contractor in performance of the contract.
   The calculation of the amount of profit attributable to each of the above factors must normally be made in accordance with the following guidelines.

1. Introduction
   1. The recovery and settlement of contract claims adjustments refers to overclaims detected and reported in assurance engagement reports prepared for the Cost and Profit Assurance Program (CPAP). CPAP is a professional advisory program provided by the Contract Cost Analysis, Audit and Policy Directorate (CCAAPD) to assist contracting officers in safeguarding the Crown from overpaying on major contracts. Assurance engagements are commissioned as a result of either an assurance strategy developed with the assistance of CCAAPD assurance advisors, or as a response to a contracting officer’s concerns of overbilling.
   2. CCAAPD cost auditors examine the support for a contractor’s claims against the contractor’s terms and conditions related to basis of payment and compares amounts claimed against the contractor’s records. Assurance engagement reports can identify amounts in excess of what the contract allows and matters of compliance, such as related to retention of records or maintenance of proper accounting systems and controls.
   3. The level of assurance ranges from high assurance (audit engagements), to no assurance (compilations). Descriptions of the various types of assurance engagements follow:
      1. Audit engagements are designed to allow the Cost Auditor to obtain reasonable assurance about whether "contractor-submitted" financial information is free from material misstatement, whether due to fraud or error, thereby enabling the Cost Auditor to express an opinion on whether the financial information is prepared, in all material respects, in accordance with financial terms and conditions of the contract.
      2. Review engagements are designed to add a measure of credibility to the subject matter being reported on. The objective is to assess whether the information being reported on is plausible within the framework of the appropriate criteria, which may involve review and evaluation of systems documentation, analytical review of financial information and interviews of contractor staff.
      3. Specified audit procedure engagements are restricted in scope, such that assurance offered may be limited to specific transactions examined or tasks performed.
      4. Compilations offer no assurance other than the involvement by the accountant in the preparation of the information. A compilation engagement consists of the accountant receiving information from a client and then arranging it into the form of a financial statement. The accountant ensures that the assembly of information is arithmetically correct, but does not perform an audit or a review.
2. Throughout the assurance engagement, there is close collaboration and regular communication among all key stakeholders, specifically the Assurance Advisor, the Cost Auditor, PWGSC contracting officer, the client department representative, and the Cost Analyst, if the Cost Analyst was involved in negotiating the pricing arrangements relevant to the contract(s) subject to examination.
3. The process for the recovery and settlement of contract claims adjustments starts upon receipt of the assurance engagement report by the Assurance Advisor.
4. Notification Report and Action Plan
   1. A notification report is initiated, drafted and prepared by the assurance advisor, CCAAPD. Its purpose is to explain the key findings and recommend actions that should be taken by contracting officers in dealing with the contractor’s claims for payment, its accounting practices, or its internal controls. The Assurance Advisors sends this notification report, along with a copy of the Cost Auditor’s assurance engagement report, to the contracting officer and the client department representative. While the notification report summarizes and incorporates all matters raised in the assurance engagement report, unlike the assurance engagement, it contains advice on actions required by the Crown.
   2. The notification report is intended to support the contracting officer’s:
      1. negotiations with the contractor on final settlement of financial claims for payment;
      2. follow-up on matters of contractor compliance, as it relates to records, internal controls, cost accounting or billing practices; and
      3. documentation and approval of the disposition of findings raised in the assurance engagement report.
   3. The notification report includes:
      1. A plain language description of proposed adjustments to contractor claims for payment with details on its findings, time period and contract(s) covered by the engagement, and, if observed, information on internal control or accounting system weaknesses, etc.;
      2. Recommendations requiring response by the contracting officer;
      3. A request for an action plan in response to recommendations contained in the notification report with expected timelines for completion.
   4. The action plan is prepared and approved by procurement and responds to recommendations contained in the notification report, as prepared by CCAAPD.
   5. The contracting officer must provide the action plan to the Assurance Advisor within 30 calendar days of receipt of the notification report. The appropriate director of contracting must approve the action plan.
   6. The contracting officer should provide updates to the Assurance Advisor on progress made against the action plan on a monthly or as required basis.
5. General Assistance
   Once the action plan is received from the contracting officer, assistance will be provided by the Assurance Advisor. This could include pursuit of recoveries, recommendations for changes in internal control in the contractor's accounting systems and so forth. Also, assistance relates to clarifying any questions that the contracting officer may have and obtaining additional details from the Cost Auditor related to the basis of support for adjustments to contractor claims and other matters, as may be required.
6. Technical Support in Negotiation of Adjustments
   Given the technical complexity of the Cost Auditor’s findings, procurement may require assistance of a professional accountant to support the contractor negotiations. If such assistance is required, please contact CCAAPD.
7. Rejection of Adjustments to Contractor Claims
   Any plans to reject proposed adjustments to contractor claims must be approved prior to discussion with the contractor. Approvals are in accordance with subsection k. below and must include the client department, the Public Works and Government Services Canada (PWGSC) contracting authority and the Policy, Risk, Integrity and Strategic Mangement (PRISM) Sector.
8. Reporting
   1. CCAAPD closely monitors, tracks and reports on recovery and settlement actions and follows-up with the respective contracting authorities until all recommendations contained in the notification report have been resolved.
   2. CCAAPD prepares monthly status reports, which are distributed to the Senior Directors and Directors Generals of Contracting.
   3. On a quarterly basis, CCAAPD will report to the Acquisitions Branch Management Committee on the status of recovery and resolution of adjustments as well as lessons learned through the course of this process.
9. Repayment of Overclaimed Amounts
   When the contractor provides a cheque(s) to the contracting officer in repayment of overclaimed amounts, the contracting officer must provide the following items to the Assurance Advisor within 7 calendar day of deposit:
   1. Copy of contractor’s cheque(s);
   2. Copy of the Official Receipt from PWGSC’s Revenue & Receivables Cashier’s Office; and
   3. Copy of PWGSC’s Refund Coding Form indicating the financial general ledger account coding.
10. Closeout
    CCAAPD is responsible for the final administrative closeout of this recovery and settlement of contract claims process. Once the tasks contained in the action plan have been completed, the Assurance Advisor prepares a report summarizing the disposition of contract claims adjustments and matters related to contractor compliance for the contracting officer’s concurrence. Closeout is finalized upon the report’s approval, as delineated below, under subsection k.
11. Approvals of Disposition of Assurance Engagement Report
    Sign-off thresholds with tiered delegations are required from all three parties, namely the client department, the PWGSC contracting authority and PRISM. The management level required for sign-off is determined by the total dollar value of the contract claims adjustments, as stated in the notification report. The sign-off thresholds are as follows:
    1. Senior Directors: up to and including $200,000
    2. Director Generals: $200,001 to $999,999
    3. Assistant Deputy Minister, Acquisition Branch: $1,000,000 and over.
    NOTE: As an interim measure until April 1, 2014, the Assistant Deputy Minister, Acquisition Branch, must authorize the final report on the disposition of all contract claims adjustments and matters related to contractor compliance.

1. The section outlines the procedures to be followed, when contract pricing for Canadian requirements is determined based on alternative approaches that are not addressed by Section 10.65. Examples include, when pricing is not determined by an estimate of costs plus profit, or when profit is not calculated in accordance with 10.65(c).
2. The purpose of this measure is to encourage contracting officers to broadly consider other factors or alternative approaches in their pursuit of better value to Canada, in the development of contract pricing.

   For example, these could include:

   1. Access to better pricing via gain-sharing or price reductions over time;
   2. Enhanced performance of government services to the public;
   3. Flexible contracting arrangements responsive to changing budgets and/or operational demands; or
   4. Improved contractor behaviour or customer satisfaction for goods and services rendered.
3. Pricing practices that are not addressed by PWGSC’s profit policy must respect the following requirements:
   1. The contract pricing is sanctioned by the delegated contracting authority.
   2. Concurrence is obtained from the client.
   3. The decision is documented as described in the procedures below (section 10.75 d).
   4. The record of decision showing justification, client concurrence and the contracting authority’s approval is shared with the Price Support Directorate (PSD).
4. Procedures: Interim pricing measure (IPM)

   There is one over-arching principle for all PWGSC procurement activities: Integrity. Subordinate to this are guiding principles, which provide the framework for PWGSC procurement process.

   Contracting officers must always respect these principles, regardless of whether or not the actions are clearly set out in this manual. While the need for the IPM arose from non-competitive setting, measures adopted under the IPM framework can be considered for competitive contracts.

   The procedures are written from Canada’s perspective, such that the contracting officer is responsible to justify and obtain approval of pricing practices not addressed by PWGSC’s profit policy. While these procedures describe steps to be taken by contracting officers, this does not preclude the involvement of the contractor in identifying or justifying opportunities to use pricing practices that are not addressed by PWGSC’s profit policy.

   1. The contracting officer is required to document the following:
      1. Identify pricing practice proposed
      2. Explain the reasons for the pricing practice and why PWGSC profit policy was not used.
      3. Provide evidence or comparative information from other jurisdictions/sectors in support of the proposed pricing practice, if available
      4. Identify, describe and estimate expected costs and benefits of the pricing practice to Canada
      5. Explain how the pricing was calculated or determined, if applicable
      6. Explain how the pricing is intended to work
      7. Identify any limits in application of the pricing practice, such as timeframe or conditions that apply
      8. Briefly discuss, as applicable, plans and approach to:
         1. Validate contractor’s achievement of conditions that activate the pricing provisions, including gain-sharing and non-financial performance objectives
         2. For multi-year contracts, provisions for adjusting or recalibrating contract pricing, including performance objectives
         3. Review and assess the effectiveness of the pricing practice and make recommendations for its use by others

      These requirements can be addressed in the Procurement Plan, if one exists, or business case or other decision document, as prepared for other purposes. The information provided should enable others to understand how the pricing would work in support of the basis of payment provisions of the contract.

   2. Documentation must include evidence of program management (client) acceptance / concurrence with the contract pricing provisions.

   3. Once approved by the delegated contracting authority, notify PSD by email (TPSGC.padgamtp-appbipm.PWGSC@tpsgc-pwgsc.gc.ca) that the interim pricing measure has been used and provide contract number and name and contact information for follow-up by PSD. PSD will provide instructions on how to securely submit a copy of the justification to PSD. This is required to allow PWGSC to learn from its experience and incorporate into the PWGSC’s Pricing Framework.

      Upon request, for contracts valued at more than $20 million, PSD is available to assist contracting officers by reviewing and offering suggestions on the justification to use pricing practices that are not addressed by Canada’s pricing framework. Please note that, the $20 million amount is defined as the total value of the procurement or the project, inclusive of all taxes and fees, project management costs, definition costs, equipment/materiel costs, interim support costs, and contingencies. Any given project may have multiple procurements to deliver the full capability or requirement defined by the project or program.

      As described in the Directive on the Use of Cost and Price Analysis Services (PDF), PSD services continue to be available to assist contracting officers to provide advice on:

      1. Pricing and profit calculation.
      2. Payment risks, basis of payment and contract audit clauses.
      3. Techniques to validate contractor performance in support of contract administration.