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10.20. Surplus Materials in Cost Reimbursable Contracts

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  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.