guidanceT3.3.2_Cost Principles.pdf

Procurement Guidance – 4/2025 1

Procurement Guidance - (4/2025)

T3.3.2 - Contract Cost Principles Revised 10/2007 A Contract Cost Principles

1 Applicability Revised 4/2017

2 Contracts with Commercial Organizations Revised 10/2014

3 Contracts with Educational Institutions Revised 4/2017

4 Contracts with State, Local, and Federally Recognized Indian Tribal

Governments Revised 4/2017 5 Contracts with Nonprofit Organizations Revised 4/2017

B Clauses

C Forms

D Appendix Added 7/2007 1 Appendix - Summary of Selected Costs Revised 1/2012

2 Appendix - Selected Costs Revised 1/2024

3 Appendix - Definitions Added 7/2007

Procurement Guidance – 4/2025 2

T3.3.2 - Contract Cost Principles Revised 10/2007

A Contract Cost Principles

1 Applicability Revised 4/2017

a. General. To recognize different organizational characteristics, FAA cost principles and procedures are classified by organizational type, e.g., commercial concerns and educational institutions. The objective of this classification is to ensure, to the extent practicable, all similar types of organizations doing similar work follow the same cost principles and guidance. In general, FAA cost principles apply when the Contracting Officer (CO) performs cost analysis to price contracts, subcontracts, and modifications to contracts and subcontracts;

and when a contract clause requires determination, negotiation, or allowance of costs.

b. Fixed-price Contracts.

(1) The applicable parts of AMS Procurement Guidance T3.3.2 must be used to price fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever:

(a) Cost analysis is performed; or

(b) A fixed-price contract clause requires the determination or negotiation of costs.

(2) Applying cost principles to fixed-price contracts and subcontracts must not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price. Notwithstanding mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered.

c. Contracts with Commercial Organizations.

This category includes all contracts and contract modifications for supplies, services, or experimental, developmental, or research work negotiated with organizations (other than educational institutions, construction and architect-engineer contracts, State and local governments, and nonprofit organizations) on the basis of cost.

(1) The cost principles and procedures in the below Section 2. “Contracts with

Commercial Organizations” must be used to price negotiated supply, service, experimental, developmental, and research contracts and contract modifications with commercial organizations whenever cost analysis is performed.

(2) The CO must incorporate the cost principles and procedures in this

Procurement Guidance T3.3.2 by reference in contracts with commercial organizations as the basis for:

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(a) Determining reimbursable costs under cost-reimbursement contracts and cost- reimbursement subcontracts under these contracts performed by commercial organizations; and the cost-reimbursement portion of time-and-materials contracts except when material is priced on a basis other than at cost;

(b) Negotiating indirect cost rates;

(c) Proposing, negotiating, or determining costs under terminated contracts;

(d) Price revision of fixed-price incentive contracts;

(e) Price redetermination of price redetermination contracts; and

(f) Pricing changes and other contract modifications.

d. Contracts with Educational Institutions.

This category includes all contracts and contract modifications for research and development, training, and other work performed by educational institutions.

(1) The CO must incorporate the cost principles and procedures of the below Section

3. "Contracts with Educational Institutions," by reference in cost-reimbursement contracts with educational institutions as the basis for:

(a) Determining reimbursable costs under the contracts and cost-reimbursement subcontracts under these contracts performed by educational institutions;

(b) Negotiating indirect cost rates; and

(c) Settling costs of cost-reimbursement terminated contracts.

(2) The cost principles in this Procurement Guidance T3.3.2 are to be used as a guide in evaluating costs in connection with negotiating fixed-price contracts and termination settlements.

e. Construction and Architect-engineer Contracts.

This category includes all contracts and contract modifications negotiated on the basis of cost with organizations (other than educational institutions, State and local governments, and nonprofit organizations except those exempted under OMB Guidance “Uniform

Administrative Requirements, Cost Principles, and Audit Requirements for Federal

Awards” at https://www.federalregister.gov/documents/2013/12/26/2013-30465/uniform-administrative-requirements-cost-principles-and-audit-requirements-for-federal-awards

(“OMB Uniform Guidance”) for construction management or construction, alteration or repair of buildings, bridges, roads, or other kinds of real property). It also includes architect-engineer contracts related to construction projects. It does not include contracts for vessels, aircraft, or other kinds of personal property.

https://www.federalregister.gov/documents/2013/12/26/2013-30465/uniform-administrative-requirements-cost-principles-and-audit-requirements-for-federal-awards https://www.federalregister.gov/documents/2013/12/26/2013-30465/uniform-administrative-requirements-cost-principles-and-audit-requirements-for-federal-awards

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(1) Except as otherwise provided in subparagraph e.(3) below, the cost principles and procedures in the below Section 2. "Contracts with Commercial Organizations" must be used to price contracts and contract modifications in this category if cost analysis is performed.

(2) The CO must incorporate the cost principles and procedures in the below Section 2.

"Contracts with Commercial Organizations (as modified by subparagraph e.(3) below) by reference in contracts in this category as the basis for:

(a) Determining reimbursable costs under cost-reimbursement contracts, including cost-reimbursement subcontracts under these contracts;

(b) Negotiating indirect cost rates;

(c) Proposing, negotiating, or determining costs under terminated contracts;

(d) Price revision of fixed-price incentive contracts; and

(e) Pricing changes and other contract modifications.

(3) Except as otherwise provided in this subparagraph e.(3), the allowability of costs for construction and architect-engineer contracts must be determined in accordance with the below Section 2. "Contracts with Commercial Organizations."

(a) Advance agreements, as set forth in the below paragraph i. "Advance

Agreements," for such items as home office overhead, partners' compensation, employment of consultants, and equipment usage costs, are particularly important in construction and architect-engineer contracts because of widely varying factors such as the nature, size, duration, and location of the construction project. When appropriate, they serve to express the parties' understanding and avoid possible subsequent disputes or disallowances.

(b) "Construction equipment," as used in this subparagraph e.(3), means equipment (including marine equipment) in sound workable condition, either owned or controlled by the contractor or the subcontractor at any tier, or obtained from a commercial rental source, and furnished for use under

Government contracts.

(i) Allowable ownership and operating costs must be determined as follows:

(AA) Actual cost data must be used when such data can be determined for both ownership and operations costs for each piece of equipment, or groups of similar serial or series equipment, from the contractor's accounting records. When such costs cannot be so determined, the FAA may specify the use of a particular schedule of predetermined rates or any part thereof to

Procurement Guidance – 4/2025 5 determine ownership and operating costs of construction equipment (see subparagraphs e.(3)(b)(i)(BB) and (CC) below).

However, costs otherwise unallowable under this Procurement

Guidance T3.3.2 must not become allowable through the use of any schedule (see below subparagraph i(3) “Advance

Agreements”). For example, schedules need to be adjusted for

Government contract costing purposes if they are based on replacement cost, include unallowable interest costs, or use improper cost of money rates or computations. COs should review the computations and factors included within the specified schedule and ensure that unallowable or unacceptably computed factors are not allowed in cost submissions.

(BB) Predetermined schedules of construction equipment use rates (e.g., the Construction Equipment Ownership and

Operating Expense Schedule, published by the U.S. Army Corps of Engineers, industry sponsored construction equipment cost guides, or commercially published schedules of construction equipment use cost) provide average ownership and operating rates for construction equipment. The allowance for operating costs may include costs for such items as fuel, filters, oil, and grease; servicing, repairs, and maintenance; and tire wear and repair. Costs of labor, mobilization, demobilization, overhead, and profit are generally not reflected in schedules, and separate consideration may be necessary.

(CC) When a schedule of predetermined use rates for construction equipment is used to determine direct costs, all costs of equipment that are included in the cost allowances provided by the schedule must be identified and eliminated from the contractor's other direct and indirect costs charged to the contract. If the contractor's accounting system provides for site or home office overhead allocations, all costs which are included in the equipment allowances may need to be included in any cost input base before computing the contractor's overhead rate. In periods of suspension of work pursuant to a contract clause, the allowance for equipment ownership must not exceed an amount for standby cost as determined by the schedule or contract provision.

(ii) Reasonable costs of renting construction equipment are allowable

(but see preceding subparagraph e.(3)(b)(i)CC)).

(AA) Costs, such as maintenance and minor or running repairs incident to operating such rented equipment, that are not included in the rental rate are allowable.

(BB) Costs incident to major repair and overhaul of rental equipment are unallowable.

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(CC) The allowability of charges for construction equipment rented from any division, subsidiary, or organization under common control, will be determined in accordance with Attachment 2, Cost (33)(b)(3) "Rental

Costs."

(c) Costs incurred at the job site incident to performing the work, such as the cost of superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc., are allowable as direct or indirect costs, provided the accounting practice used is in accordance with the contractor's established and consistently followed cost accounting practices for all work.

(d) Rental and any other costs, less any applicable credits incurred in acquiring the temporary use of land, structures, and facilities are allowable. Costs, less any applicable credits, incurred in constructing or fabricating structures and facilities of a temporary nature are allowable.

f. Facilities Contracts.

(1) Applicable Cost Principles. The cost principles and procedures applicable to the evaluation and determination of costs under facilities contracts, and subcontracts under these contracts, will be governed by the type of entity to which a facilities contract is awarded. Except as otherwise provided in this paragraph f. "Facilities

Contracts": Section 2. "Contracts with Commercial Organizations," applies to facilities contracts awarded to commercial organizations; Section 3. "Contracts with

Educational Institutions," applies to facilities contracts awarded to educational institutions; and paragraph 1.e., “Construction and Architect-engineer Contracts,” applies to facilities contracts awarded to construction contractors.

Whichever cost principles are appropriate will be used in the pricing of facilities contracts and contract modifications if cost analysis is performed. In addition, the CO must incorporate the cost principles and procedures appropriate in the circumstances by reference in facilities contracts as the basis for:

(a) Determining reimbursable costs under facilities contracts, including cost- reimbursement subcontracts under these contracts;

(b) Negotiating indirect cost rates; and

(c) Determining costs of terminated contracts when the contractor elects to

“voucher out” costs.

(2) Exceptions to General Rules on Allowability and Allocability.

(a) A contractor's established accounting system and procedures are normally directed to the equitable allocation of costs to the types of products which the contractor produces or services rendered in the course of normal operating

Procurement Guidance – 4/2025 7 activities. The acquisition of, or work on, facilities for the Government normally does not involve the manufacturing processes, plant departmental operations, cost patterns of work, administrative and managerial control, or clerical effort usual to production of the contractor's normal products or services.

(b) Advance agreements (see below paragraph i. "Advance Agreements") should be made between the contractor and CO as to indirect cost items to be applied to the facilities acquisition. A contractor's normal accounting practice for allocating indirect costs to the acquisition of contractor facilities may range from charging all these costs to this acquisition to not charging any. When necessary to produce an equitable result, the contractor's usual method of allocating indirect cost shall be varied, and appropriate adjustment must be made to the pools of indirect cost and the bases of their distribution.

(c) The purchase of completed facilities (or services in connection with the facilities) from outside sources does not involve the contractor's direct labor or indirect plant maintenance personnel. Accordingly, indirect manufacturing and plant overhead costs, which are primarily incurred or generated by reason of direct labor or maintenance labor operations, are not allocable to the acquisition of such facilities.

(d) Contracts providing for installation of new facilities or rehabilitation of existing facilities may involve the use of the contractor's plant maintenance labor, as distinguished from direct labor engaged in the production of the company's normal products. In such instances, only those types of indirect manufacturing and plant operating costs that are related to or incurred by reason of the expenditures of the classes of labor used for the performance of the facilities work may be allocated to the facilities contract. A facilities contract which involves the use of plant maintenance labor only would not be subject to an allocation of such cost items as direct productive labor supervision, depreciation, and maintenance expense applicable to productive machinery and equipment, or raw material and finished goods storage costs.

(e) Where a facilities contract calls for the construction, production, or rehabilitation of equipment or other items that are involved in the regular course of the contractor's business by the use of the contractor's direct labor and manufacturing processes, the indirect costs normally allocated to all that work may be allocated to the facilities contract.

(3) Contractor's Commercial Items. If facilities constituting the contractor's usual commercial items (or only minor modifications thereof) are acquired by the

Government under the contract, the Government must not pay any amount in excess of the contractor's most favored customer price or the price of other suppliers for like quantities of the same or substantially the same items, whichever is lower.

g. Contracts with State, Local, and Federally Recognized Indian Tribal Governments.

(1) Applicable Cost Principles. The below Section 4. "Contracts with State, Local, Procurement Guidance – 4/2025 8 and Federally Recognized Indian Tribal Governments" provides principles and standards for determining costs applicable to contracts with State, local, and Federally recognized Indian tribal governments. They provide the basis for a uniform approach to the problem of determining costs and to promote efficiency and better relationships between State, local, and Federally recognized Indian tribal governments, and Federal

Government entities. They apply to all programs that involve contracts with State, local, and Federally recognized Indian tribal governments, except contracts with:

(a) Publicly financed educational institutions; or

(b) Publicly owned hospitals and other providers of medical care subject to requirements promulgated by the sponsoring Government agencies.

(2) The Office of Management and Budget will approve any other exceptions in particular cases when adequate justification is presented.

h. Contracts with Nonprofit Organizations.

The below Section 5. "Contract with Nonprofit Organizations" provides principles and standards for determining costs applicable to contracts with nonprofit organizations other than educational institutions, State and local governments, and those nonprofit organizations exempted under OMB Uniform Guidance.

i. Advance Agreements.

(1) The extent of allowability of the costs covered in this Procurement Guidance

T.3.3.2 applies broadly to many accounting systems in varying contract situations. The reasonableness, allocability and allowability under specific cost principles of certain costs may be difficult to determine. To avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability under the specific cost principles, COs and contractors should seek advance agreement on the treatment of special or unusual costs and on statistical sampling methodologies. However, an advance agreement is not an absolute requirement and the absence of an advance agreement on any cost will not, in itself, affect the reasonableness, allocability or the allowability under the specific cost principles.

(2) Advance agreements may be negotiated either before or during a contract but should be negotiated before incurrence of the costs involved. The agreements must be in writing, executed by both contracting parties, and incorporated into applicable current and future contracts. An advance agreement must contain a statement of its applicability and duration.

(3) The CO is not authorized by this paragraph i. to agree to a treatment of costs inconsistent with this Procurement Guidance T3.3.2. For example, an advance agreement may not provide that, notwithstanding Attachment 2, Cost (17) “Interest and

Other Financial Costs,” interest is allowable.

(4) Advance agreements may be negotiated with a particular contractor for a single contract, a group of contracts, or all the contracts of a contracting office, an agency, Procurement Guidance – 4/2025 9 or several agencies.

(5) The cognizant CO, or other designated administrative CO, negotiates advance agreements. When the negotiation authority is delegated, the administrative CO coordinates the proposed agreement with the cognizant CO before executing the advance agreement.

(6) Before negotiating an advance agreement, the Government negotiator must:

(a) Determine if other contracting offices inside FAA or in other agencies have a significant unliquidated dollar balance in contracts with the same contractor;

(b) Inform any such office or agency of the matters under consideration for negotiation; and

(c) As appropriate, invite the office or agency and the responsible audit agency to participate in pre-negotiation discussions and in subsequent negotiations.

(7) Upon completion of the negotiation, the sponsor shall prepare and distribute to other interested agencies and offices, including the audit agency, copies of the executed agreement and negotiation memorandum.

(8) Examples of costs for which advance agreements may be particularly important are:

(a) Compensation for personal services, including but not limited to allowances for off-site pay, incentive pay, location allowances, hardship pay, cost of living differential, and termination of defined benefit pension plans;

(b) Use charges for fully depreciated assets;

(c) Deferred maintenance costs;

(d) Precontract costs;

(e) Independent research and development and bid and proposal costs;

(f) Royalties and other costs for use of patents;

(g) Selling and distribution costs;

(h) Travel and relocation costs, as related to special or mass personnel movements, as related to travel via contractor-owned, -leased, or -chartered aircraft; or as related to maximum per diem rates;

(i) Costs of idle facilities and idle capacity;

(j) Severance pay to employees on support service contracts;

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(k) Plant reconversion;

(l) Professional services (e.g., legal, accounting, and engineering);

(m) General and administrative costs (e.g., corporate, division, or branch allocations) attributable to the general management, supervision, and conduct of the contractor's business as a whole. These costs are particularly significant in construction, job-site, architect-engineer, facilities, and Government-owned contractor operated (GOCO) plant contracts;

(n) Costs of construction plant and equipment;

(o) Costs of public relations and advertising;

and

(p) Training and education costs.

j. Indirect Cost Rate Certification and Penalties on Unallowable Costs.

Certain contracts require certification of the indirect cost rates proposed for final payment purposes. If unallowable costs are included in final indirect cost settlement proposals, penalties may be assessed.

2 Contracts with Commercial Organizations Revised 10/2014

a. Composition of Total Cost.

(1) The total cost of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any allocable cost of money pursuant to Attachment 2. Cost (7). In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used, including standard costs properly adjusted for applicable variances.

(2) Although the total cost of a contract includes all costs properly allocable to the contract, allowable costs to the Government are limited to those allocable costs that are allowable pursuant to this Procurement Guidance Section T3.3.2.

b. Determining Allowability.

(1) The factors to be considered in determining whether a cost is allowable include:

(a) Reasonableness.

(b) Allocability.

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(c) Standards promulgated by the Cost Accounting Standards (CAS)

Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the particular circumstances.

(d) Terms of the contract.

(e) Any limitations set forth in this Section 2. “Contracts with Commercial

Organizations.”

(2) Certain cost principles in this Section 2. “Contracts with Commercial

Organizations” incorporate the measurement, assignment, and allocability rules of selected CAS and limit the allowability of costs to the amounts determined using the criteria in those selected CAS. Only those CAS or portions of standards specifically made applicable by the cost principles in this Procurement Guidance Section T3.3.2 are mandatory, unless the contract is CAS-covered. Business units that are not otherwise subject to these standards under a CAS clause are subject to the selected standards only for the purpose of determining allowability of costs on Government contracts. Including the selected standards in the cost principles does not subject the business unit to any other CAS rules and regulations. The applicability of the CAS rules and regulations is determined by the CAS clause, if any, in the contract and the requirements of the standards themselves.

(3) When contractor accounting practices are inconsistent with the cost principles in this Section 2. “Contracts with Commercial Organizations,” costs resulting from such inconsistent practices must not be allowed in excess of the amount that would have resulted from using practices consistent with this section.

(4) A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The CO may disallow all or part of a claimed cost which is inadequately supported.

c. Determining Reasonableness.

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person conducting competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness must be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the CO or the CO's representative, the burden of proof must be upon the contractor to establish that such cost is reasonable. What is reasonable depends upon a variety of considerations and circumstances, including:

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor's business or the contract performance;

(2) Generally accepted sound business practices, arm's-length bargaining, and

Federal and State laws and regulations;

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(3) The contractor's responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor's established practices.

d. Determining Allocability.

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to allowability and reasonableness, a cost is allocable to a Government contract if it:

(1) Is incurred specifically for the contract;

(2) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or

(3) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.

e. Credits.

The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor must be credited to the

Government either as a cost reduction or by cash refund. See Attachment 2, Cost (4) for rules governing refund or credit to the Government associated with pension adjustments and asset reversions.

f. Accounting for Unallowable Costs.

(1) Costs that are expressly unallowable or mutually agreed to be unallowable, including mutually agreed to be unallowable directly associated costs, must be identified and excluded from any billing, claim, or proposal applicable to a

Government contract. A directly associated cost is any cost which is generated solely as a result of incurring another cost, and which would not have been incurred had the other cost not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable.

(2) Costs which specifically become designated as unallowable or as unallowable directly associated costs of unallowable costs as a result of a written decision furnished by a CO must be identified if included in or used in computing any billing, claim, or proposal applicable to a Government contract. This identification requirement applies also to any costs incurred for the same purpose under like circumstances as the costs specifically identified as unallowable under either this subparagraph f.(2) or subparagraph f.(1) above.

(3) The practices for accounting for and presentation of unallowable costs will be those as described in 48 CFR 9904.405, Accounting for Unallowable Costs.

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(4) Statistical sampling is an acceptable practice for contractors to follow in accounting for and presenting unallowable costs provided all of the following criteria are met:

(a) The statistical sampling results in an unbiased sample that is a reasonable representation of the sampling universe.

(b) Any large dollar value or high risk transaction is separately reviewed for unallowable costs and excluded from the sampling process.

(c) The statistical sampling permits audit verification.

(5) Use of statistical sampling methods for identifying and segregating unallowable costs should be the subject of an advance agreement under paragraph i. “Advance

Agreements” between the contractor and CO. The advance agreement should specify the basic characteristics of the sampling process. The CO must request input from the cognizant auditor before entering into any such agreements.

(6) In the absence of an advance agreement, if an initial review of the facts results in a challenge of the statistical sampling methods by the CO or CO’s representative, the burden of proof must be on the contractor to establish that such a method meets the criteria in subparagraph f.(4) above.

(7) If a directly associated cost is included in a cost pool which is allocated over a base that includes the unallowable cost with which it is associated, the directly associated cost must remain in the cost pool. Since the unallowable costs will attract their allocable share of costs from the cost pool, no further action is required to assure disallowance of the directly associated costs. In all other cases, the directly associated costs, if material in amount, must be purged from the cost pool as unallowable costs.

(8) In determining the materiality of a directly associated cost, consideration should be given to the significance of:

(a) The actual dollar amount;

(b) The cumulative effect of all directly associated costs in a cost pool; or

(c) The ultimate effect on the cost of Government contracts.

(9) Salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material in accordance with subparagraph f.(8) above (except when such salary expenses are, themselves, unallowable). The time spent in proscribed activities should be compared to total time spent on company activities to determine if the costs are material. Time spent by employees outside the normal working hours should not be considered except when it is evident that an employee engages so frequently in company activities during periods outside normal working hours as to indicate that such activities are a part of the employee's regular duties.

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(10) When a selected item of cost under Attachment 2, ”Selected Costs" provides that directly associated costs be unallowable, it is intended that such directly associated costs be unallowable only if determined to be material in amount in accordance with the criteria provided in above subparagraphs f.(8) and 2.f.(9), except in those situations where allowance of any of the directly associated costs involved would be considered to be contrary to public policy.

g. Construction and Architect-engineer Contracts.

Specific principles and procedures for evaluating and determining costs in connection with contracts and subcontracts for construction, and architect-engineer contracts related to construction projects, are in paragraph 1.e. "Construction and Architect-Engineer

Contracts."

h. Direct Costs

(1) A direct cost is any cost that can be identified specifically with a particular final cost objective. No final cost objective must have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Costs identified specifically with the contract are direct costs of the contract and are to be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

(2) For reasons of practicality, any direct cost of minor dollar amount may be treated as an indirect cost if the accounting treatment is consistently applied to all final cost objectives and produces substantially the same results as treating the cost as a direct cost.

i. Indirect Costs

(1) An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost. After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to the several cost objectives. An indirect cost must not be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective.

(2) Indirect costs must be accumulated by logical cost groupings with due consideration of the reasons for incurring such costs. Each grouping should be determined so as to permit distribution of the grouping on the basis of the benefits accruing to the several cost objectives. Commonly, manufacturing overhead, selling expenses, and general and administrative (G&A) expenses are separately grouped.

Similarly, the particular case may require subdivision of these groupings, e.g., building occupancy costs might be separable from those of personnel administration within the

Procurement Guidance – 4/2025 15 manufacturing overhead group. This necessitates selecting a distribution base common to all cost objectives to which the grouping is to be allocated. The base should be selected so as to permit allocation of the grouping on the basis of the benefits accruing to the several cost objectives. When substantially the same results can be achieved through less precise methods, the number and composition of cost groupings should be governed by practical considerations and should not unduly complicate the allocation.

(3) Once an appropriate base for distributing indirect costs has been accepted, it must not be fragmented by removing individual elements. All items properly includable in an indirect cost base should bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost input base is used for the distribution of G&A costs, all items that would properly be part of the cost input base, whether allowable or unallowable, shall be included in the base and bear their pro rata share of G&A costs.

(4) The contractor's method of allocating indirect costs must be in accordance with standards promulgated by the CAS Board, if applicable to the contract; otherwise, the method must be in accordance with generally accepted accounting principles which are consistently applied. The method may require examination when:

(a) Substantial differences occur between the cost patterns of work under the contract and the contractor's other work;

(b) Significant changes occur in the nature of the business, the extent of subcontracting, fixed-asset improvement programs, inventories, the volume of sales and production, manufacturing processes, the contractor's products, or other relevant circumstances; or

(c) Indirect cost groupings developed for a contractor's primary location are applied to offsite locations. Separate cost groupings for costs allocable to offsite locations may be necessary to permit equitable distribution of costs on the basis of the benefits accruing to the several cost objectives.

(d) A base period for allocating indirect costs is the cost accounting period during which such costs are incurred and accumulated for distribution to work performed in that period. The criteria and guidance in Section 2. "Contracts with Commercial Organizations" for selecting the cost accounting periods to be used in allocating indirect costs are incorporated herein for application to contracts subject to full CAS coverage. For contracts subject to modified CAS coverage and for non-CAS-covered contracts, the base period for allocating indirect costs will normally be the contractor's fiscal year. But a shorter period may be appropriate in the following instances:

(i) For contracts in which performance involves only a minor portion of the fiscal year; or

(ii) When it is general practice in the industry to use a shorter period. When a contract is performed over an extended period, as many base periods shall be used as are required to represent the period of contract performance.

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(5) Special care should be exercised in applying the principles of above subparagraphs i.(2), i.(3), and i.(4) (b), (c), and (d) when Government-owned contractor-operated (GOCO) plants are involved. The distribution of corporate, division, or branch office G&A expenses to such plants operating with little or no dependence on corporate administrative activities may require more precise cost groupings, detailed accounts screening, and carefully developed distribution bases.

j. Application of Principles and Procedures

(1) Costs must be allowed to the extent they are reasonable, allocable, and determined to be allowable under this Procurement Guidance Section T3.3.2. These criteria apply to all of the selected items that follow in Attachment 2 “Selected Costs,” even if particular guidance is provided for certain items for emphasis or clarity.

(2) For the following subcontract types, costs incurred as reimbursements or payments to a subcontractor are allowable to the extent the reimbursements or payments are for costs incurred by the subcontractor that are consistent with this Procurement Guidance

Section T3.3.2:

(a) Cost-reimbursement.

(b) Fixed-price incentive.

(c) Price redeterminable (i.e., fixed-price contracts with prospective price redetermination and fixed-ceiling-price contracts with retroactive price redetermination).

(3) The requirements of above subparagraph j.(2)(a) apply to any tier above the first firm- fixed-price subcontract or fixed-price subcontract with economic price adjustment provisions.

(4) Costs incurred as payments under firm-fixed-price subcontracts or fixed-price subcontracts with economic price adjustment provisions or modifications thereto, when cost analysis was performed, must be allowable only to the extent that the price was negotiated in accordance with the above paragraph 1.b. "Fixed-price Contracts."

(5) The above paragraph 1.e "Construction and Architect-engineer Contracts" does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable. The determination of allowability must be based on the principles and standards in this subpart and the treatment of similar or related selected items. When more than one subparagraph in 1.e "Construction and

Architect-Engineer Contracts" is relevant to a contractor cost, the cost must be apportioned among the applicable subparagraphs, and the determination of allowability of each portion must be based on the guidance contained in the applicable subparagraph. When a cost, to which more than one subparagraph in 1. e

"Construction and Architect-Engineer Contracts” is relevant, cannot be apportioned, the determination of allowability must be based on the guidance contained in the topics that most specifically deals with, or best captures the essential nature of, the

Procurement Guidance – 4/2025 17 cost at issue.

3 Contracts with Educational Institutions Revised 4/2017

a. Purpose. This Subsection provides the principles for determining cost of research and development, training, and other work performed by educational institutions under contracts with the Government.

b. General. OMB Uniform Guidance provides principles for determining the costs applicable to research and development, training, and other work performed by educational institutions under contracts with the Government.

c. Requirements.

(1) Contracts that refer to this Section 3. “Contracts with Educational Institutions” for determining allowable costs under contracts with educational institutions must be deemed to refer to, and must have the allowability of costs determined by the CO in accordance with, the revision of OMB Uniform Guidance in effect on the date of the contract.

(2) FAA should not place additional restrictions on individual items of cost.

4 Contracts with State, Local, and Federally Recognized Indian Tribal Governments

Revised 4/2017

a. Purpose. This Subsection provides the principles for determining allowable cost of contracts and subcontracts with State, local, and federally recognized Indian tribal governments.

b. General. OMB Uniform Guidance sets forth the principles for determining the allowable costs of contracts and subcontracts with State, local, and federally recognized Indian tribal governments. These principles are for cost determination and are not intended to identify the circumstances or dictate the extent of Federal and State or local participation in financing a particular contract.

(1) Contracts that refer to this Section 4. "Contracts with State, Local, and Federally

Recognized Indian Tribal Governments" for determining allowable costs under contracts with State, local and Indian tribal governments must be deemed to refer to, and must have the allowability of costs determined by the CO in accordance with, the revision of OMB Uniform Guidance which is in effect on the date of the contract.

(2) FAA should not place additional restrictions on individual items of cost. However, the following costs are unallowable:

(a) Costs of entertainment, including amusement, diversion, and social

Procurement Guidance – 4/2025 18 activities, and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities).

(b) Costs incurred to influence (directly or indirectly) legislative action on any matter pending before Congress, a State legislature, or a legislative body of a political subdivision of a State.

(c) Costs incurred in defense of any civil or criminal fraud proceeding or similar proceeding (including filing of any false certification) brought by the

United States where the contractor is found liable or has pleaded nolo contendere to a charge of fraud or similar proceeding (including filing of a false certification).

(d) Payments of fines and penalties resulting from violations of, or failure to comply with, Federal, state, local, or foreign laws and regulations, except when incurred as a result of compliance with specific terms and conditions of the contract or specific written instructions from the contracting officer authorizing in advance such payments.

(e) Costs of any membership in any social, dining, or country club or organization.

(f) Costs of alcoholic beverages.

(g) Contributions or donations, regardless of the recipient.

(h) Costs of advertising designed to promote the contractor or its products.

(i) Costs of promotional items and memorabilia, including models, gifts, and souvenirs.

(j) Costs for travel by commercial aircraft which exceed the amount of the standard commercial fare.

(k) Costs incurred in making any payment (commonly known as a "golden parachute payment") which is in an amount in excess of the normal severance pay paid by the contractor to an employee upon termination of employment;

and is paid to the employee contingent upon, and following, a change in management control over, or ownership of, the contractor or a substantial portion of the contractor's assets.

(l) Costs of commercial insurance that protects against the costs of the contractor for correction of the contractor's own defects in materials or workmanship.

(m) Costs of severance pay paid by the contractor to foreign nationals employed by the contractor under a service contract performed outside the

United States, to the extent that the amount of the severance pay paid in any case exceeds the amount paid in the industry involved under the customary or

Procurement Guidance – 4/2025 19 prevailing practice for firms in that industry providing similar services in the

United States.

(n) Costs of severance pay paid by the contractor to a foreign national employed by the contractor under a service contract performed in a foreign country if the termination of the employment of the foreign national is the result of the closing of, or curtailment of activities at, a United States facility in that country at the request of the government of that country.

(o) Costs incurred by a contractor in connection with any criminal, civil, or administrative proceedings commenced by the United States or a State.

5 Contracts with Nonprofit Organizations Revised 4/2017

a. Purpose. This Subsection provides the principles for determining cost applicable to work performed by nonprofit organizations under contracts with the Government. A nonprofit organization, for purpose of identification, is defined as a business entity organized and operated exclusively for charitable, scientific, or educational purposes, of which no part of the net earnings inure to the benefit of any private shareholder or individual, of which no substantial part of the activities is carrying on propaganda or otherwise attempting to influence legislation or participating in any political campaign on behalf of any candidate for public office, and which are exempt from Federal income taxation under section 501 of the Internal

Revenue Code.

b. General. OMB Uniform Guidance sets forth principles for determining the costs applicable to work performed by nonprofit organizations under contracts (also applies to grants and other agreements) with the Government.

(1) Contracts which determine allowable costs pursuant to this Section 5.

"Contracts With Nonprofit Organizations" must be deemed to refer to, and must have the allowability of costs determined by the CO in accordance with, the revision of OMB Uniform Guidance in effect on the date of the contract.

(2) FAA should not place additional restrictions on individual items of cost.

However, the costs cited in subparagraph c.(2) "Requirements" of the above Section

4. “Contracts with State, Local, and Federally Recognized Indian Tribal

Governments” are unallowable.

B Clauses view contract clauses

C Forms https://conwrite.faa.gov/

Procurement Guidance – 4/2025 20 view procurement forms

D Appendix Added 7/2007

1 Appendix - Summary of Selected Costs Revised 1/2012

Selected Cost Title Selected

Cost

Number

Allowable Unallowable Exception

Restriction

Applies

Alcoholic Beverages Cost 47 X

Asset Valuations Resulting from Business Combinations

Cost 48 X X

Bad Debts Cost 2 X

Bonding Costs Cost 3 X X

Compensation for

Personal Services

Cost 4 X X

Contingencies Cost 5 X X

Contributions or Donations

Cost 6 X

Cost of Money Cost 7 X X

Depreciation Cost 8 X X

Economic Planning Costs Cost 9 X

Employee Morale, Health, Welfare, Food Service, and

Dormitory Costs and

Credits

Cost 10 X X

Entertainment Costs Cost 11 X

Fines, Penalties, and Mischarging

Costs

Cost 12 X X

Gains and Losses on Disposition or

Impairment of

Depreciable Property or

Other Capital Assets

Cost 13 X X

Goodwill Cost 46 X http://fast.faa.gov/PPG_Procurement_Forms.cfm

Procurement Guidance – 4/2025 21

Idle Facilities and Idle Capacity

Costs

Cost 14 X X

Independent Research and

Development and Bid and

Proposal

Costs

Cost 15 X X

Insurance and Indemnification

Cost 16 X X

Interest and Other Financial Costs

Cost 17 X X

Labor Relations Costs Cost 18 X X

Legal and Other Proceedings

Cost 44 X X

Lobbying and Political Activity

Costs

Cost 19 X X

Losses on Other Contracts Cost 20 X

Manufacturing and Production

Engineering Costs

Cost 22 X

Material Costs Cost 23 X

Organization Costs Cost 24 X

Other Business Expenses Cost 25 X

Patent Costs Cost 27 X X

Plant Protection Costs Cost 26 X

Plant Reconversion Costs Cost 28 X X

Precontract Costs Cost 29 X

Professional and Consultant Service

Costs

Cost 30 X X

Public Relations and Advertising

Costs

Cost 1 X X

Recruitment Costs Cost 31 X X

Relocation Costs Cost 32 X X

Rental Costs Cost 33 X

Procurement Guidance – 4/2025 22

Research and Development Costs

Cost 45 X X

Royalties and Other Costs for Use of Patents

Cost 34 X X

Selling Costs Cost 35 X X

Service and Warranty Costs

Cost 36 X

Special Tooling and Special Test

Equipment Costs

Cost 37 X

Taxes Cost 38 X X

Termination Costs Cost 39 X X

Trade, Business, Technical and

Professional Activity

Costs

Cost 40 X

Training and Education Costs

Cost 41 X X

Travel Costs Cost 43 X X

2 Appendix - Selected Costs Revised 1/2024

This Appendix 2 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable. The determination of allowability must be based on the principles and standards in AMS Procurement Guidance T3.2.2 and the treatment of similar or related selected items.

(1) Public Relations and Advertising Costs.

(a) “Public relations” means all functions and activities dedicated to:

(1) Maintaining, protecting, and enhancing the image of a concern or its products;

or

(2) Maintaining or promoting reciprocal understanding and favorable relations with the public at large, or any segment of the public. The term public relations includes activities associated with areas such as advertising, customer relations, etc.

(b)…