(b) The costs of preparing bids or proposals shall be allocated only as indirect costs. Bidding costs of the current accounting period of both successful and unsucessful bids and proposals normally will be treated as allowable indirect costs, in which event no bidding costs of past accounting periods shall be allowable in the current period to the AEC contract.

(c) The costs of preparing bids or proposals shall include an amount for absorption of their appropriate share of related indirect and administrative costs.

(d) The share of bidding expenses and costs of proposals shall not exceed 1 percent of the direct material (exclusive of capital equipment) and the direct labor costs of the contract work. The expense pools should exclude negotiating and promotional expense, expense properly allocable to research and development, and the expense of salesmen, representatives or agents who do not provide technical services in connection with the bid or proposal. When the specific expense of bids and proposals allocable to the AEC program cannot readily be determined, a statistical proportion of the number of proposals applicable to the AEC program to the total number of proposals may be used unless such a proportion would produce unreasonable results.

[26 F.R. 7583, Aug. 16, 1961]

§ 9-15.5010-14' Compensation for per

sonal services.

(a) General. (1) Compensation for personal services includes all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees to the contractor during the period of contract performance. It inIcludes, but is not limited to, salaries, wages, directors' and executive committee members' fees, bonuses (including stock bonuses), incentive awards, employee stock options, employee insurance, fringe benefits, and contributions to pension, annuity, and management employee incentive compensation plans. It does not include an employer's contributions to incentive compensation plans for the purpose of establishing a reserve for the payment of incentive compensation for services to be per

formed in the future. Except as otherwise specifically provided in this § 9-15.5011-14, such costs are allowable to the extent that the total compensation of individual employees is reasonable for the services rendered and they are not in excess of those costs which are allowable by the Internal Revenue Code and regulations thereunder.

(2) Compensation is reasonable to the extent that the total amount paid or accrued is commensurate with compensation paid under the contractor's established policy and conforms generally to compensation paid by other firms of the same size, in the same industry, or in the same geographic area, for similar services. The contracting officer should make a precontract determination, or in appropriate circumstances prior to renewal or extension of an expiring costtype contract or subcontract a determination, that the prior practice of the company produced reasonable amounts of total compensation to individual employees and obtain agreement that total compensation in excess of those levels would be unallowable unless subsequently approved as reasonable by the contracting officer. He should also obtain agreement that any subsequent change in the plan or in the administration of the plan must have prior approval in order that the test of reasonableness not be left entirely to retrospective audit. Among the conditions which give rise to the need for special consideration and possible limitation as to allowability for contract cost purposes where amounts appear excessive are the following:

(i) Compensation to owners of closely held corporations, partners, sole proprietors, or members of the immediate families thereof, or to persons who are contractually committed to acquire a substantial financial interest in the contractor's enterprise. Determination should be made that such compensation is reasonable for the actual personal services rendered rather than a distribution of profits.

(ii) Any change in a contractor's compensation policy resulting in a substantial increase in the contractor's level of compensation, particularly when it was concurrent with an increase in the ratio of Government contracts to other business, or any change in the treatment of allowability of specific types of compensation due to changes in Government policy.

(iii) The contractor's business is such that his compensation levels are not subject to the restraints normally occurring in the conduct of competitive business.

(3) Compensation in lieu of salary for services rendered by partners and sole proprietors will be allowed to the extent that it is reasonable and does not constitute a distribution of profits.

(4) In addition to the general requirements set forth in (1) through (3) above, certain forms of compensation are subject to further requirements as specified in (b) through (j) below.

(b) Salaries and wages. Salaries and wages for current services include gross compensation paid to employees in the form of cash, products, or services, and are allowable. However, premiums for overtime, extra-pay shifts, and multishift work are allowable to the extent approved by the contracting officer.

(c) Bonuses and incentive compensation paid to employees other than those whose pay is directly reimbursed will not be allowed in construction and operating contracts where home office general and administrative expense is unallowable.

(d) Cash bonuses and incentive compensation. Incentive compensation for management employees, cash bonuses, suggestion awards, safety awards, and incentive compensation based on production, cost reduction or efficient performance, are allowable to the extent that the overall compensation is determined to be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the contractor and the employees before the services were rendered, or pursuant to an established plan followed by the contractor so consistently as to imply, in effect, an agreement to make such payment (but see § 9-15.5006). Bonuses, awards, and incentive compensation when any of them are deferred are allowable to the extent provided in (g) below.

(e) Bonuses and Incentive Compensation Paid in Stock. Costs of bonuses and incentive compensation paid in the stock of the contractor or of an affiliate are allowable to the extent set forth in (c) above (including the incorporation of the principles of paragraph (g) below for deferred bonuses and incentive compensation), subject to the following additional requirements:

(1) Valuation placed on the stock transferred shall be the fair market value

at the time of transfer, determined upon the most objective basis available; and

(2) Accruals for the cost of stock prior to the issuance of such stock to the employees shall be subject to adjustment according to the possibilities that the employees will not receive such stock and their interest in the accruals will be forfeited.

Such costs otherwise allowable are subject to adjustment according to the principles set forth in (g) (3) below. (But see § 9-15.5006).

(f) Stock options. The cost of options to employees to purchase stock of the contractor or of an affiliate is unallowable.

(g) Deferred compensation. (1) As used herein, deferred compensation includes all remuneration, in whatever form, for which the employee is not paid until after the lapse of a stated period of years or the occurrence of other events as provided in the plans, except that it does not include normal end of accounting period accruals. It includes (i) contributions to pension, annuity, stock bonuses, and profit sharing plans, (ii) contributions to disability, withdrawal, insurance, survivorship, and similar benefit plans, and (iii) other deferred compensation, whether paid in cash or in stock.

(2) Deferred compensation is allowable to the extent that (i) except for past service pension and retirement costs, it is for services rendered during the contract period; (ii) it is, together with all other compensation paid to the employee, reasonable in amount; (iii) it is paid pursuant to an agreement entered into in good faith between the contractor and employees before the services are rendered, or pursuant to an established plan followed by the contractor so consistently as to imply, in effect, an agreement to make such payments; and (iv) for a plan which is subject to approval by the Internal Revenue Service, it falls within the criteria and standards of the Internal Revenue Code and the regulations of the Internal Revenue Service. (But see § 9-15.5006).

(3) In determining the cost of deferred compensation allowable under the contract, appropriate adjustments shall be made for credits or gains, including those arising out of both normal and abnormal employee turnover, or any other contingencies that can result in a forfeiture

by employees of such deferred compensation. Adjustments shall be made only for forfeitures which directly or indirectly inure to the benefit of the contractor; forfeitures which inure to the benefit of other employees covered by a deferred compensation plan with no reduction in the contractor's costs will not normally give rise to adjustment in contract costs. Adjustments for normal employee turnover shall be based on the contractor's experience and on foreseeable prospects, and shall be reflected in the amount of cost currently allowable. Such adjustments will be unnecessary to the extent that the contractor can demonstrate that his contributions take into account normal forfeitures. Adjustments for possible future abnormal forfeitures shall be effected according to the following rules:

(i) Abnormal forfeitures that are foreseeable and which can be currently evaluated with reasonable accuracy, by actuarial or other sound computation, shall be reflected by an adjustment of current costs otherwise allowable; and

(ii) Abnormal forfeitures, not within (i) above, may be made the subject of agreement between the Government and

the contractor either as to an equitable adjustment or a method of determining such adjustment.

(4) In determining whether deferred compensation is for services rendered during the contract period or is for future services, consideration shall be given to conditions imposed upon eventual payment, such as, requirements of continued employment, consultation after retirement, and covenants not to compete.

(h) Fringe benefits. Fringe benefits are allowances and services provided by the contractor to his employee as compensation in addition to regular wages and salaries. Costs of fringe benefits, such as pay for vacations, holidays, sick leave, military leave, employee insurance, and supplemental unemployment benefit plans are allowable to the extent required by law, employer-employee agreement, or an established policy of the contractor.

(i) Severance pay. See 9-15.5010-8. (j) Training and education expenses. See § 9-7.5006-9 (d) (8) (v) and § 97.5006-10 (d) (8) (v). [26 F.R. 7583, Aug. 16, 1961]