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construction, reconditioning or reconstruction of a ship or ships) the Administration will ordinarily designate an auditor or auditors to be stationed at the shipyard of the contractor during performance of the contract.

(c) In the case of contracts or subcontracts for materials or commodities of a general commercial character not especially designed or manufactured for the particular purpose of becoming a part of the ship or for materials or commodities with respect to which there is an established or readily ascertainable open market price, the Administration may in its discretion accept, subject to the right of audit, the notarized statement of a responsible oficer or independent public accountants in the form prescribed by the Administration setting forth the total contract or subcontract price, the total cost of performance thereof, the total amount of overhead charged to such cost, the net profit and the percentage such net profit bears to the contract or subcontract price, and certifying that the profit so reported is the true profit as reflected by the books of the contractor or subcontractor and was determined in accordance with generally accepted accounting practice and with the principles of profit determination prescribed in this part.

(d) In the case of other contracts and subcontracts (those involving items especially manufactured for the particular purpose of becoming a part of a ship) the Administration will ordinarily either station an auditor or auditors at the contractor's or subcontractor's plant or, in its discretion, provide for periodic visits by its auditors.

(e) All accounts, books, documents, memoranda, minutes, and records of every kind of the contractor or subcontractor involving the cost of performing a contract or subcontract are subject to inspection and audit by the Administration. The authority of the Administration's auditors in this connection shall be respected. & 285.6 Final accounting.

Upon final accounting with respect to profit under any contract or subcontract, the Administration will examine the no

tarized report of profit of the contractor or subcontractor, together with reports of audit and any other related data. If the Administration's determination of profit shall differ from that reported by the contractor or subcontractor, the Administration will furnish notice of the Administration's proposed findings and the contractor or subcontractor shall be heard with respect thereto, provided it so requests within sixty days after such notice. $ 285.7 Grievances.

Any contractor or subcontractor being aggrieved with respect to any matters in connection with the audit of its accounts or the determination of profit under its contract or subcontract shall be entitled to a hearing under such procedure as the Administration shall deem appropriate. $ 285.8 Hearings.

Hearings under the regulations in this part shall be before the Administrator, or such person or persons as the Administrator may designate.

DEFINITIONS § 285.11 Definitions.

The following meanings shall be given to the words and terms employed in this part:

(a) Act. “Act" means the Merchant Marine Act, 1936 (49 Stat. 1985), as amended.

(b) Administration. “Administration" means the Maritime Administration, Department of Commerce, or its duly authorized representative or representatives.

(c) Board. "Board” means the Federal Maritime Board or its duly authorized representative or representatives.

(d) Contract. “Contract" means any agreement of the Board or Administration the terms of which make the regulations in this part applicable.

(e) Contractor. "Contractor" means any party entering into a contract with the Board or Administration.

(f) Subcontract. “Subcontract” means an agreement (purchase order, requisition, or other form of agreement) between a contractor or a subcontractor and any third party covering construction, reconditioning, or reconstruction of a vessel or portion thereof or for the manufacture or furnishing of any materials, supplies, goods or other personal property or the rendering of any services

* The accounts, books, documents, memoranda, minutes and records referred to herein shall be retained two years after the final determination and acceptance of payment by the Maritime Administration.


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directly for such construction, recondi- shall be deemed to be a single subcontioning or reconstruction.

tract. (g) Subcontractor. "Subcontractor" (19 F. R. 5399, Aug. 25, 1954) means any party entering into a subcon

$ 285.24 Same article or articles. tract with a contractor or another subcontractor.

The term "same article or articles" as (G. O. 30, Rev., 17 F. R. 7594, Aug. 20, 1952,

used in this part, shall include articles of as amended by Amdt. 1, 19 F. R. 5399, Aug. like general description when supplied by 25, 1954; 19 F. R. 5368, Sept. 10, 1954)

a single subcontractor, as for example, SUBCONTRACTS

steel, whether plates, shapes, or forms,

fans without regard to construction or § 285.21 Contract requirement.

capacity, valves without regard to type A contractor or subcontractor shall ob

or size, furniture without regard to kind ligate subcontractors to the Administra

of furniture. tion or Board as required by the contract,

(19 F. R. 5399, Aug. 25, 1954) particularly with respect to the profit- 8 285.25 Designated scientific equiplimiting provisions therein.

ment. (G. O. 30, Rev. 17 F. R. 7594, Aug. 20, 1952, as

Subcontracts for equipment desigamended by Amdt. 1, 19 F. R. 5399, Aug. 25, 1954)

nated by the Administration or Board

as scientific equipment used for com§ 285.22 Failure to effect contract re- munication and navigation are not subquirements.

ject to profit-limiting provisions. A desIn the event a contractor or sub- ignation of equipment furnished under & contractor fails to secure the agree

particular contract or subcontract shall ment of a subcontractor of such con

not be construed as designation under tractor or subcontractor to the recapture any other contract or subcontract unless, of profits provisions or the agreement with respect to designations still in effect, referred to in § 285.23, such contractor or

the Administration or Board shall consubcontractor shall pay to the Adminis

cur in a claim that equipment being tration as damages for such failure, a

furnished under the subsequent contract sum equal to the excess profits, as de- or subcontract is of the nature, kind and termined by the Administration, under

utility entitling said equipment to exthe subcontract, from which the re- emption under a designation previously ferred to recapture provisions were made by the Administration or Board. omitted or a sum equal to the excess

$ 285.26 A.B.S. inspection, intangibles, profit, as determined by the Administra

and professional fees. tion, of the subcontracts which are deemed to be a single subcontract under

Subcontracts for American Bureau of the provisions referred to in § 285.23;

Shipping inspection, or for such intangiProvided, That if the Administration is,

bles as insurance, surety and the like, or by reason of such failure to include the

subcontracts for expert or professional recapture provisions or the provisions

services (including the furnishing of

technical information or data) are not referred to in § 285.23, unable to audit the subcontractor's books to determine

subject to profit-limiting provisions. the excess profit under such subcontract § 285.27 Availability to Administration. or subcontracts the damages to be paid

Contractors and subcontractors shall the Administration, as provided above,

make available to the Administration all shall be a sum equal to fifteen percent

subcontracts, purchase orders, or other (15%) of the adjusted price of such subcontract or subcontracts.

agreements, and shall furnish copies of

such instruments when requested. (19 F. R. 5399, Aug. 25, 1954)

(G. O. 30, Rev., 17 F. R. 7594, Aug. 20, 1952, as & 285.23 Series of subcontracts.

amended by Amdt. 1, 19 F. R. 5399, Aug. 25,

1954) All subcontracts of a subcontractor for the same article or articles for the per

BOOKS AND RECORDS formance of the contract, shall be deemed to be a single subcontract sub

§ 285.31 Manner of keeping books. ject to the recapture of profits provi- Contractors and subcontractors subsions of the contract; every subcontract ject to the provisions of this part should shall include the agreement of the sub- keep their books in a consistent manner contractor that all such subcontracts conforming to generally accepted accounting practice. In cases where a di- ments as are necessary to conform to versified line of operations, commodities, the regulations in this part. products or services is carried on or dealt

$ 285.34 Improper and inadequate acin, the books should clearly distinguish

counting. between such several lines.

Should it be found that improper or § 285.32 Submission of accounting data

inadequate accounting methods have to Administration.

been or are being followed, the Adminis(a) A contractor upon entering into a tration may require the contractor or contract should submit promptly to the subcontractor to restate its accounts or Administration a full statement of cur- otherwise satisfactorily account for the rent accounting principles and methods profit under its contract or subcontract unless previously submitted, together so as to accord with generally accepted with a copy of related forms, manual of accounting practice and the regulations accounting procedure, and classification in this part. of accounts and any revisions thereof.

$ 285.35 Failure to maintain adequato Approval of a contractor's accounting

cost records. methods shall not preclude the Administration's action with respect to any steps

If a contractor or subcontractor shall which may later be found necessary for

be found not to have kept its books and the proper determination of profit con

records in such manner that a proper sistent with the principles prescribed in determination of profit in accordance this part.

with generally accepted accounting prac(b) During the progress of a contract tice and the regulations in this part can for ship construction, the contractor

be made therefrom or shall have failed shall submit copies of such monthly

to retain any books or records essential financial and cost statements as are nor- to compliance with the provisions of the mally prepared for its own use. Ordi- act or of the regulations in this part, the narily these will include a Trial Balance,

Administration will allow as cost of perBalance Sheet (including exhibits sup

formance only such charges as are shown porting major items), Profit and Loss

by the contractor or subcontractor on Statement, Cost Statement of the ves- evidence satisfactory to the Administrasels by hulls and contracts, and Overhead tion to have been properly incurred in the Statements detailed according to the performance of such contract or subconcontractor's classification of accounts. A

tract, and the profit shall be deemed breakdown should be made of accounts

to be the difference between the contract such as taxes, insurance, and the like, price as defined in the applicable conwhich include several types of items un

tract or subcontract and the total of der one general designation. In in- such charges.' stances where the Administration has

(G. O. 30, Rev. 17 F. R. 7594, Aug. 20, 1952, assigned a Resident Auditor, statements as amended by 21 F. R. 8108, Oct. 23, 1956] should be routed to him; otherwise, they

COMPLETION DATES should be mailed to Maritime Administration, Department of Commerce.

§ 285.41 Contract completion date. Washington 25, D. C.

The date of completion of a contract (c) Other contractors and all subcon- for the construction, reconditioning or tractors shall submit financial state

reconstruction of a vessel or vessels for ments and supporting data upon request

the purpose of fixing the taxable year for of the Administration.

accounting for profit or loss shall be the

date of delivery and acceptance of the § 285.33 Basis for reporting profits. last vessel thereunder. The date of com

A contractor or subcontractor having pletion of other contracts for the purin effect system of determining costs pose of fixing the taxable

for conforming to generally accepted ac- accounting for profit or loss shall be the counting practice, fully responsive to the date of delivery of the last material or particular conditions prevailing at its performance of the last service required shipyard or plant and in its business, consistently followed, and yielding ade

1 The books and records referred to in this quate accounting information for the

section shall be kept for a period of two

years after the contractor or subcontractor purposes of this part may base its report

has made payment of excess profits as deof profit thereon subject to such adjust- termined by the Maritime Administration. under any provision of the contract accounts shall be taken into account to except the guarantee clause.

the extent that the propriety of such

adjustments is established to the satis§ 285.42 Subcontract completion date.

faction of the Administration. In deterThe date of completion of a subcon- mining any question as to the propriety tract for the purpose of fixing the taxable of prices at which materials purchased year for accounting for profit or loss shall specifically for the performance of a conbe the date of delivery of the last mate- tract or subcontract are charged as rerial or performance of the last service lated to a reasonable market price, the required under any provision of the sub- market prices prevailing at the time of contract except the guarantee clause. commitment for purchase shall govern.

In any cases where the contractor's or DETERMINATION OF PROFIT

subcontractor's accounts do not cause $ 285.51 Profit or loss defined.

transportation charges to follow cost of (a) Profit under a particular contract

materials, the method of allocating such or subcontract is the excess of the ad

charges, whether through overhead or justed contract price over the total al

otherwise, must be equitable and conlowed cost of performance.

sistently followed.

(2) Direct labor. (i) Direct labor gen(b) Loss under particular contract

erally covers the wages and other comor subcontract is the excess of the total

pensation of employees whose time can allowed cost of performance over the

be definitely and accurately measured as adjusted contract price.

a direct charge to contracts or subcon$ 285.52 Cost of performing a contract tracts. or subcontract.

(ii) It is preferable that direct labor (a) Cost of performing a contract or

be taken into account upon the basis of

the subcontract shall consist, for the purpose

individual rates actually paid. of this part (see $ $ 285.61 and 285.62 for

Where a contractor or subcontractor folrequired forms) of four general classifi

lows consistently a method of accounting cations as follows: Direct material, direct

for direct labor on a productive hour labor, other direct charges and overhead.

basis at average rates or employs other

approximations to reduce clerical work, (1) Direct material. (i) Direct mate

such method may be allowed provided rial shall include the cost of all items

it shall be shown to the satisfaction of purchased, supplied, manufactured or

the Administration that substantial acfabricated, which enter directly into the

curacy is attained thereby. Compensaend product or which are used or con

tion paid to leading men, quartermen sumed directly in connection with the

and foremen whose time can be accumanufacturing, fabricating, processing, rately allocated to specific work may, and furnishing or converting of such product.

preferably should be accounted for as It is suggested that all material intended

direct labor, but an arbitrary allocation for vessel construction should if at all

of supervisory pay roll or of any part possible be charged directly to the vessel

thereof to “direct labor" will be allowed construction contracts involved.

only if and to the extent that it is shown (ii) The prices at which materials are

to the satisfaction of the Administration charged shall be fair, just, and not in

to be conducive to an accurate deterexcess of a reasonable market price.

mination of cost. Overtime, production Prices paid to any supplier associated or

bonuses, premiums and other labor inaffiliated with the contractor or subcon

centive payments to employees whose tractor will be scrutinized in this con

time is accounted for as direct labor are nection. All materials, including fittings,

preferably to be included as direct labor parts, auxiliaries, etc., must be taken

but if charged in whole or in part to into account at prices not in excess of the

overhead the method of taking such net cost thereof (as to requirement with charges into account must be such that respect to accounting for discounts, see no part of such charges incurred by rea$ 285.53 (m)), but materials purchased son of other work is inequitably borne by for and drawn from general stores may the contracts or subcontracts. be priced by any recognized method of (3) Direct charges-other. (i) Direct pricing stores withdrawals conforming charges-other usually include costs of to generally accepted accounting practice builder's risk insurance, performance and consistently followed. The net effect and payment bonds, royalties, outside of any adjustments related to inventory professional services, inspection, draft

ing and engineering, mold loft patterns, (d) Distribution of various classes of wood staging and shoring, repair and factory overhead otherwise than upon maintenance of metal staging, launching, the basis of direct labor may be accepted docking, trials, cleaning, general mate- if it be shown to the satisfaction of the rial handling, temporary lights, freight Administration that a substantially on direct material, and spoilage and equitable distribution is effected. other similar items.

(e) The use of machine-hour rates or (ii) Costs of builder's risk insurance, of standard or specification manufacturperformance and payment bonds, royal- ing costs properly determined is acceptties, outside professional services, inspec

able. tion, etc., which are incurred on account

(f) A differential distribution of overof a contract or subcontract may be

head to various classes of work, as for charged directly thereto: Provided, That example, the use of a variety of fixed such method is consistently followed and percentages suitably determined by pethat no similar charges on account of riodic cost-engineering survey or by other other work are made through overhead acceptable means, so that each class of in such manner as to prorate any part

work bears its apropriate overhead rate thereof inequitably to a contract or may be accepted if it be shown to the subcontract.

satisfaction of the Administration that a (4) Overhead. (i) Overhead com- substantially equitable distribution is prises all indirect construction costs, thereby effected. including administrative and general ex-- (g) In cases where, by the use of prependitures, indirect labor and material,

determined rates (departmental, madepreciation, etc., which are not directly chine-hour, differential, etc.) or otherchargeable to contracts or subcontracts. wise, the actual total of all indirect

(ii) The following provisions apply to charges incurred in or allocable to a parthe distribution of overhead in deter- ticular month or other relatively brief mining profit under this part:

accounting period is not exactly ab(a) All charges which are not directly sorbed, the under- or over absorption allocable to particular contracts or sub- must be completely distributed currently contracts, and constituting what is either ratably or by such other means as broadly regarded and herein referred to will effect an accurate and equitable alloas “overhead”, shall be distributed over cation. The equalizing of seasonal exall operations in such manner as will penses, such as heating, is permissible if approximate as closely as practicable a consistent policy is maintained in such an accurate determination of cost. To connection. that end the method of distributing over

(h) In passing upon the general achead must conform to generally accepted ceptability of the contractors' or subconaccounting practice, and where more

tractors' principles and methods of than one class of work is being performed

accounting, the Administration will inmust be such that no class of work is

quire particularly into the method of caused bo bear appreciably any part of

overhead distribution and no change

should be made therein during progress the indirect expense which should

of work without prior notice to the properly be borne by some other class of

Administration. work.

(b) Representative items of cost. (6) The distribution of the various

Representative items of cost are sumclasses of overhead equally over all or

marized in this paragraph under three substantially all varieties of production

general categories consisting of those work will not ordinarily be accepted as

ordinarily allowable, those subject to in accordance with generally accepted

qualification or disallowance, and those accounting practice unless it shall be

unallowable in the determination of reshown to the satisfaction of the Admin

capturable profit. Further clarification istration that such method results, under

is contained in the explanatory text in prevailing conditions, in a substantially

the paragraphs under $ 285.53. accurate determination of cost.

(1) Items ordinarily allowable. (c) The practice of determining separate departmental rates for overhead

See sections distribution applicable to the corre

Bidding Expenses.

285.53 (d) Bonds.

285.53 (e) sponding direct labor charges is accept


285.53 (1) able.


286.53 ()

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