unallowable but exceptions may be recognized in special circumstances (e.g., in the event of unreasonably long separations when the established company policy provides for such calls and visits). Costs incident to (d) of this subdivision are unallowable, except for realtors' commissions incurred in the sale of a transferred employee's home.

(ii) Moving expenditures may include transportation of the employee and members of his household (including house pets), meals and lodging en route to the new location, packing, transportation of household and other effects, storage, and insurance. Such costs are allowable to the extent they are reasonable and allocable.

(iii) Post-moving expenditures may include:

(a) Removing carpets and drapes at the previous location and reinstalling at the new location;

(b) Disconnecting and reconnecting appliances and television;

(c) Prepaid fees on unexpired medical and dental plans, food locker contracts, and other miscellaneous but normal out-of-pocket expenses.

These expenses, exclusive of cleaning carpets or drapes, are allowable to the extent they are reasonable and allocable but only if they are incurred by existing employees rather than newly hired workers.

(7) Evaluation of the proposed application of a given company plan may result in the delineation of three questionable categories of expenses: (i) those which are clearly unallowable; (ii) those which may be normally allowable but are not appropriate for reimbursement under the specific circumstances; and (iii) those considered allowable but as

to which the amount of reimbursement claimed may be excessive. Such an evaluation may indicate the desirability of establishing a ceiling to limit the amount of expenses in each category which will be reimbursed to the contractor. The ceiling may, as appropriate, be established indirectly by limitations on specific actions.

(8) Contractors shall be required to refund payments made by the Government in reimbursement for employee relocation costs if employment is terminated voluntarily by the employee or by virtue of discharge for cause within 12 months after appointment or transfer. § 18-15.205-34 Rental costs (including sale and leaseback of facilities).

(a) Rental costs of land, building, and equipment and other personal property are allowable if the rates are reasonable in light of such factors as rental costs of comparable facilities and market conditions in the area, the type, life expectancy, condition, and value of the facilities leased, options available, and other provisions of the rental agreement. Application of these factors, in situations where rentals are extensively used, may involve, among other considerations, comparison of rental costs with the amount which the contractor would have received had he owned the facilities.

(b) Charges in the nature of rent between plants, divisions, or organizations under common control are allowable to the extent such charges do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, and maintenance; Provided, That no part of such costs shall duplicate any other allowed costs.

(c) Unless otherwise specifically provided in the contract, rental costs specified in sale and leaseback agreements, incurred by contractors through selling plant facilities to investment organizations, such as insurance companies, or to private investors, and concurrently leasing back the same facilities, are allowable only to the extent that such rentals do not exceed the amount which the contractor would have received had he retained legal title to the facilities.

(d) The allowability of rental costs under unexpired leases in connection with terminations is treated in § 18

15.205-42(e).

§ 18-15.205-35 Research and develop

ment costs.

(a) Basic research, for the purpose of § 18-15.2, is that type of research which is directed toward increase of knowledge in science. In such research, the primary aim of the investigator is a fuller knowledge or understanding of the subject under study, rather than any practical application thereof. Applied research, for the purpose of this § 18-15.2, consists of that type of effort which (1) normally follows basic research, but may not be severable from the related basic research; (2) attempts to determine and expand the potentialities of new scientific discoveries or improvements in technology, materials, processes, methods, devices, and techniques; and (3) attempts to "advance the state of the art.” Applied research does not include any such efforts when their principal aim is the design, development, or test of specific articles or services to be offered for sale, which are within the definition of the term development as hereinafter provided.

(b) Development is the systematic use of scientific knowledge which is directed toward the production of, or improvements in, useful products to meet specific performance requirements, but exclusive of manufacturing and production engineering.

(c) A contractor's independent research and development is that research and development which is not sponsored by a contract, grant, or other arrangement.

(d) An unsolicited proposal is a written offer to perform work which does not result from a formal written request for proposals issued by NASA.

(e) Except under a contract for research awarded in response to an unsolicited proposal, a contractor's costs of independent research as defined in paragraphs (a) and (c) of this section shall be allowable as indirect costs (subject to the provisions of § 18–15.205–35): Provided, They are allocated to all work of the contractor. A contractor's costs of independent research are unallowable under any contract for research awarded in response to an unsolicited proposal (see paragraph (j) of this section).

(f) Except under a contract for research awarded in response to an un

solicted proposal, costs of a contractor's independent development, as defined in paragraphs (b) and (c) of this section (and subject to the provisions of this section § 18-15.205-35), are allowable to the extent that such development is related to the product lines for which the Government has contracts: Provided, The costs are reasonable in amount and are allocated as indirect costs to all work of the contractor on such product lines. In cases where a contractor's normal course of business does not involve production work, the cost of independent development is allowable (except under a contract for research awarded in response to an unsolicited proposal) to the extent that such development is related and allocated as an indirect cost to the field of effort of Government research and development contracts. A contractor's costs of independent development are unallowable under any contract for research awarded in response to an unsolicited proposal (see paragraph (j) of this section).

(g) Independent research and development costs shall include an amount for the absorption of their appropriate share of indirect and administrative costs, unless the contractor, in accordance with his accounting practices consistently applied, treats such costs otherwise.

(h) Research and development costs (including amounts capitalized), regardless of their nature, which were incurred in accounting periods prior to the award of a particular contract, are unallowable except where allowable as precontract costs (see § 18-15.205-30).

(i) The reasonableness of expenditures for independent research and development when otherwise allowable in accordance with the provisions of § 1815.205-35 should be determined in light of all pertinent considerations, such as previous contractor research and development activity, cost of past programs, and changes in science and technology. Such expenditures should be pursuant to a broad planned program, which is reasonable in scope and well managed. Such expenditures (especially for development) should be scrutinized with great care in connection with contractors whose work is predominantly or substantially with the Government. Advance agreements as described in § 18-15.107 are particularly important in this situa

tion. In recognition that cost sharing of the contractor's independent research and development program may provide motivation for more efficient accomplishment of such program, it is desirable in some cases that the Government bear less than an allocable share of the total cost of the program. Under these circumstances, the following are among the approaches which may be used as the basis for agreement:

(1) Review of the contractor's proposed independent research and development program and agreement to accept the allocable costs of specific projects;

(2) Agreement on a maximum dollar limitation of costs, an allocable portion of which will be accepted by the Government; and

(3) An agreement to accept the allocable share of a percentage of the contractor's planned research and development program.

(j) Independent research and development costs are not allowable in research contracts which (1) result from unsolicited proposals and (2) are placed with commercial organizations or nonprofit institutions (other than educational institutions). Each contract awarded on the basis of an unsolicited proposal shall be considered as a contract for research unless otherwise stated in the contract that the contract is for development work or work other than research.

§ 18-15.205-36

Royalties and other costs for use of patents.

(a) Royalties on a patent or amortization of the cost of acquiring by purchase a patent or rights thereto, necessary for the proper performance of the contract and applicable to contract products or processes, are allowable unless:

(1) The Government has a license or the right to free use of the patent;

(2) The patent has been adjudicated to be invalid, or has been administratively determined to be invalid;

(3) The patent is considered to be unenforceable; or

(4) The patent has expired.

(b) Special care should be exercised in determining reasonableness where the royalties may have been arrived at as a result of less than arm's-length bargaining; e.g.:

(1) Royalties paid to persons, including corporations, affiliated with the contractor;

(2) Royalties paid to unaffiliated parties, including corporations, under an agreement entered into in contemplation that a Government contract would be awarded; or

(3) Royalties paid under an agreement entered into after the award of the contract.

(c) In any case involving a patent formerly owned by the contractor, the amount of royalty allowed should not exceed the cost which would have been allowed had the contractor retained title thereto.

(d) See § 18-15.107 regarding advance understandings.

§ 18–15.205–37 Selling costs.

(a) Sellings costs arise in the marketing of the contractor's products and include costs of sales promotions, negotiation, liaison between Government representatives and contractor's personnel, and other related activities.

(b) Selling costs are allowable to the extent they are reasonable and are allocable to Government business (but see 88 18-15.107 and 18-15.205-1). Allocability of selling costs will be determined in the light of reasonable benefit to the Government arising from such activities as technical, consulting, demonstration, and other services which are for purposes such as application or adaptation of the contractor's products to Government use.

(c) Notwithstanding paragraph (b) of this section, salesmen's or agents' compensation, fees, commissions, percentages, or brokerage fees, which are contingent upon the award of contracts, are allowable only when paid to bona fide employees or bona fide established commercial or selling agencies maintained by the contractor for the purpose of securing business.

(a) Severance pay, also commonly referred to as dismissal wages, is a payment in addition to regular salaries and wages by contractors to workers whose employment is being terminated. Costs of severance pay are allowable only to the extent that, in each case, it is required by (1) law, (2) employer-employee agreement, (3) established policy that constitutes, in effect, an implied agreement on the contractor's part, or (4) circumstance of the particular employment.

(b) Cost of severance payments is divided into two categories, as follows:

(1) Actual normal turnover severance payments shall be allocated to all work performed in the contractor's plant; or, where the contractor provides for accrual of pay for normal severances, such method will be acceptable if the amount of the accrual is reasonable in light of payments actually made for normal severances over a representative past period, and if amounts accrued are allocated to all work performed in the contractor's plant; and

(2) Abnormal or mass severance pay is of such a conjectural nature that measurement of costs by means of an accrual will not achieve equity to both parties. Thus accruals for this purpose are not allowable. However, the Government recognizes its obligation to participate, to the extent of its fair share, in any specific payment. Thus, allowability will be considered on a case-bycase basis in the event of occurrence. § 18-15.205-40 Special tooling costs.

The term "special tooling" means all jigs, dies, fixtures, molds, patterns, special taps, special gauges, special test equipment, other special equipment and manufacturing aids, and replacements thereof, acquired or manufactured by the contractor for use in the performance of a contract, which are of such a specialized nature that, without substantial modification or alteration, their use is limited to the production of such supplies

or parts thereof, or the performance of such services, as are peculiar to the needs of the Government. The term does not include (a) items of tooling or equipment acquired by the contractor prior to the contract, replacements thereof, whether or not altered or adapted for use in the performance of the contract, (b) consumable small tools, or (c) general or special machine tools, or similar capital items. The cost of special tooling, when it is acquired for and its usefulness is limited to one or more Government contracts, is allowable and shall be allocated to the specific Government contract or contracts for which acquired. Taxes. § 18-15.205-41

(a) Taxes are charges levied by Federal, State, or local governments. They do not include fines and penalties except as otherwise provided herein. In general, taxes (including State and local income taxes) which the contractor is required to pay and which are paid or accrued in accordance with generally accepted accounting principles are allowable, except for:

(1) Federal income and excess profits taxes;

(2) Taxes in connection with financing, refinancing, or refunding operations (see § 18-15.205-17);

(3) Taxes from which exemptions are available to the contractor directly or available to the contractor based on an exemption afforded the Government except when the contracting officer determines that the administrative burden incident to obtaining the exemption outweighs the corresponding benefits accruing to the Government;

(4) Special assessments on land which represent capital improvements; and

(5) Taxes on any category of property which is used solely in connection with work other than on Government contracts. (Taxes on property used solely in connection with either non-Government or Government work should be considered directly applicable to the respective category of work unless the amounts involved are insignificant or comparable results would otherwise be obtained; e.g., taxes on contractorowned work in process which is used solely in connection with non-Government work should be allocated to such work, and taxes on contractor-owned

(b) Taxes otherwise allowable under paragraph (a) of this section, but upon which a claim of illegality or erroneous assessment exists, are allowable: Provided, That the contractor prior to payment of such taxes:

(1) Promptly requests instructions from the contracting officer concerning such taxes; and

(2) Takes all action directed by the contracting officer arising out of subparagraph (i) of this paragraph or an independent decision of the Government as to the existence of a claim of illegality or erroneous assessment, including cooperation with and for the benefit of the Government to (i) determine the legality of such assessment or (ii) secure a refund of such taxes.

Reasonable costs of any such action undertaken by the contractor at the direction or with the concurrence of the contracting officer are allowable. Interest and penalties incurred by a contractor by reason of the nonpayment of any tax at the direction of the contracting officer or by reason of the failure of the contracting officer to assure timely direction after prompt request therefor, are also allowable.

(c) Any refund of taxes, interest, or penalties, and any payment to the contractor of interest thereon, attributable to taxes, interest, or penalties which were allowed as contract costs, shall be credited or paid to the Government in the manner directed by the Government: Provided, Any interest actually paid or credited to a contractor incident to a refund of tax, interest, or penalty shall be paid or credited to the Government only to the extent that such interest accrued over the period during which the contractor had been reimbursed by the Government for the taxes, interest, or penalties.

(a) Common items: The cost of items reasonably usable on the contractor's other work shall not be allowable unless the contractor submits evidence that he could not retain such items at cost without sustaining a loss. In deciding whether such items are reasonably usable on other work of the contractor, the contracting officer should consider the contractor's plans and orders for current and scheduled production. Contemporaneous purchases of common items by the contractor shall be regarded as evidence that such items are reasonably usable on the contractor's other work. Any acceptance of common items as allocable to the terminated portion of the contract should be limited to the extent that the quantities of such items on hand, in transit, and on order are in excess of the reasonable quantitative requirements of other work.

(b) Costs continuing after termination. If, in a particular case, despite all reasonable efforts by the contractor, certain costs cannot be discontinued imtermination, such costs are generally almediately after the effective date of lowable within the limitations set forth in this Subpart, except that any such costs continuing after termination due to the negligent or willful failure of the contractor to discontinue such costs shall be considered unallowable.

(c) Initial costs, including starting load and preparatory costs, are allowable, subject to the conditions in sub

paragraphs (1) through (6) of this paragraph.

(1) Starting load costs are costs of a nonrecurring nature arising in the early stages of production and not fully absorbed because of the termination. Such costs may include the cost of labor and material, and related overhead attributable to such factors as:

(i) Excessive spoilage resulting from inexperienced labor;

(ii) Idle time and subnormal production occasioned by testing and changing methods of processing;

(iii) Employee training; and

(iv) Unfamiliarity or lack of experience with the product, materials, manufacturing processes, and techniques.