counting practice. In cases where a diversified line of operations, commodities, products or services is carried on or dealt in, the books should clearly distinguish between such several lines.

§ 285.32

Submission of accounting data to Administration.

(a) A contractor upon entering into a contract should submit promptly to the Administration a full statement of current accounting principles and methods unless previously submitted, together with a copy of related forms, manual of accounting procedure, and classification of accounts and any revisions thereof. Approval of a contractor's accounting methods shall not preclude the Administration's action with respect to any steps which may later be found necessary for the proper determination of profit consistent with the principles prescribed in this part.

(b) During the progress of a contract for ship construction, the contractor shall submit copies of such monthly financial and cost statements as are normally prepared for its own use. Ordinarily these will include a Trial Balance, Balance Sheet (including exhibits supporting major items), Profit and Loss Statement, Cost Statement of the vessels by hulls and contracts, and Overhead Statements detailed according to the contractor's classification of accounts. A breakdown should be made of accounts such as taxes, insurance, and the like, which include several types of items under one general designation. In instances where the Administration has assigned a Resident Auditor, statements should be routed to him; otherwise, they should be mailed to Maritime Administration, Department of Commerce. Washington 25, D. C.

(c) Other contractors and all subcontractors shall submit financial statements and supporting data upon request of the Administration.

§ 285.33 Basis for reporting profits.

A contractor or subcontractor having in effect a system of determining costs conforming to generally accepted accounting practice, fully responsive to the particular conditions prevailing at its shipyard or plant and in its business, consistently followed, and yielding adequate accounting information for the purposes of this part may base its report of profit thereon subject to such adjust

§ 285.35

Failure to maintain adequate cost records.

If a contractor or subcontractor shall be found not to have kept its books and records in such manner that a proper determination of profit in accordance with generally accepted accounting practice and the regulations in this part can be made therefrom or shall have failed to retain any books or records essential to compliance with the provisions of the act or of the regulations in this part, the Administration will allow as cost of performance only such charges as are shown by the contractor or subcontractor on evidence satisfactory to the Administration to have been properly incurred in the performance of such contract or subcontract, and the profit shall be deemed to be the difference between the contract price as defined in the applicable contract or subcontract and the total of such charges.1

[G. O. 30, Rev. 17 F. R. 7594, Aug. 20, 1952. as amended by 21 F. R. 8108, Oct. 23, 1956]

COMPLETION DATES

§ 285.41 Contract completion date.

The date of completion of a contract for the construction, reconditioning or reconstruction of a vessel or vessels for the purpose of fixing the taxable year for accounting for profit or loss shall be the date of delivery and acceptance of the last vessel thereunder. The date of completion of other contracts for the purpose of fixing the taxable year for accounting for profit or loss shall be the date of delivery of the last material or performance of the last service required

1 The books and records referred to in this section shall be kept for a period of two years after the contractor or subcontractor has made payment of excess profits as determined by the Maritime Administration.

under any provision of the contract except the guarantee clause.

§ 285.42 Subcontract completion date. The date of completion of a subcontract for the purpose of fixing the taxable year for accounting for profit or loss shall be the date of delivery of the last material or performance of the last service required under any provision of the subcontract except the guarantee clause.

DETERMINATION OF PROFIT

§ 285.51 Profit or loss defined.

(a) Profit under a particular contract or subcontract is the excess of the adjusted contract price over the total allowed cost of performance.

(b) Loss under a particular contract or subcontract is the excess of the total allowed cost of performance over the adjusted contract price.

§ 285.52

Cost of performing a contract or subcontract.

(a) Cost of performing a contract or subcontract shall consist, for the purpose of this part (see §§ 285.61 and 285.62 for required forms) of four general classifications as follows: Direct material, direct labor, other direct charges and overhead.

(1) Direct material. (i) Direct material shall include the cost of all items purchased, supplied, manufactured or fabricated, which enter directly into the end product or which are used or consumed directly in connection with the manufacturing, fabricating, processing, furnishing or converting of such product. It is suggested that all material intended for vessel construction should if at all possible be charged directly to the vessel construction contracts involved.

(ii) The prices at which materials are charged shall be fair, just, and not in excess of a reasonable market price. Prices paid to any supplier associated or affiliated with the contractor or subcontractor will be scrutinized in this connection. All materials, including fittings, parts, auxiliaries, etc., must be taken into account at prices not in excess of the net cost thereof (as to requirement with respect to accounting for discounts, see § 285.53 (m)), but materials purchased for and drawn from general stores may be priced by any recognized method of pricing stores withdrawals conforming to generally accepted accounting practice and consistently followed. The net effect of any adjustments related to inventory

accounts shall be taken into account to the extent that the propriety of such adjustments is established to the satisfaction of the Administration. In determining any question as to the propriety of prices at which materials purchased specifically for the performance of a contract or subcontract are charged as related to a reasonable market price, the market prices prevailing at the time of commitment for purchase shall govern. In any cases where the contractor's or subcontractor's accounts do not cause transportation charges to follow cost of materials, the method of allocating such charges, whether through overhead or otherwise, must be equitable and consistently followed.

(2) Direct labor. (i) Direct labor generally covers the wages and other compensation of employees whose time can be definitely and accurately measured as a direct charge to contracts or subcontracts.

(ii) It is preferable that direct labor be taken into account upon the basis of the individual rates actually paid. Where a contractor or subcontractor follows consistently a method of accounting for direct labor on a productive hour basis at average rates or employs other approximations to reduce clerical work, such method may be allowed provided it shall be shown to the satisfaction of the Administration that substantial accuracy is attained thereby. Compensation paid to leading men, quartermen and foremen whose time can be accurately allocated to specific work may, and preferably should be accounted for as direct labor, but an arbitrary allocation of supervisory pay roll or of any part thereof to "direct labor" will be allowed only if and to the extent that it is shown to the satisfaction of the Administration to be conducive to an accurate determination of cost. Overtime, production bonuses, premiums and other labor incentive payments to employees whose time is accounted for as direct labor are preferably to be included as direct labor but if charged in whole or in part to overhead the method of taking such charges into account must be such that no part of such charges incurred by reason of other work is inequitably borne by the contracts or subcontracts.

(3) Direct charges-other. (i) Direct charges-other usually include costs of builder's risk insurance, performance and payment bonds, royalties, outside professional services, inspection, draft

ing and engineering, mold loft patterns, wood staging and shoring, repair and maintenance of metal staging, launching, docking, trials, cleaning, general material handling, temporary lights, freight on direct material, and spoilage and other similar items.

(ii) Costs of builder's risk insurance, performance and payment bonds, royalties, outside professional services, inspection, etc., which are incurred on account of a contract or subcontract may be charged directly thereto: Provided, That such method is consistently followed and that no similar charges on account of other work are made through overhead in such manner as to prorate any part thereof inequitably to a contract or subcontract.

(4) Overhead. (i) Overhead comprises all indirect construction costs, including administrative and general expenditures, indirect labor and material, depreciation, etc., which are not directly chargeable to contracts or subcontracts.

(ii) The following provisions apply to the distribution of overhead in determining profit under this part:

(a) All charges which are not directly allocable to particular contracts or subcontracts, and constituting what is broadly regarded and herein referred to as "overhead", shall be distributed over all operations in such manner as will approximate as closely as practicable an accurate determination of cost. To that end the method of distributing overhead must conform to generally accepted accounting practice, and where more than one class of work is being performed must be such that no class of work is caused bo bear appreciably any part of the indirect expense which should properly be borne by some other class of work.

(b) The distribution of the various classes of overhead equally over all or substantially all varieties of production work will not ordinarily be accepted as in accordance with generally accepted accounting practice unless it shall be shown to the satisfaction of the Administration that such method results, under prevailing conditions, in a substantially accurate determination of cost.

(c) The practice of determining separate departmental rates for overhead distribution applicable to the corresponding direct labor charges is acceptable.

(d) Distribution of various classes of factory overhead otherwise than upon the basis of direct labor may be accepted if it be shown to the satisfaction of the Administration that a substantially equitable distribution is effected.

(e) The use of machine-hour rates or of standard or specification manufacturing costs properly determined is acceptable.

(f) A differential distribution of overhead to various classes of work, as for example, the use of a variety of fixed percentages suitably determined by periodic cost-engineering survey or by other acceptable means, so that each class of work bears its apropriate overhead rate may be accepted if it be shown to the satisfaction of the Administration that a substantially equitable distribution is thereby effected.

(g) In cases where, by the use of predetermined rates (departmental, machine-hour, differential, etc.) or otherwise, the actual total of all indirect charges incurred in or allocable to a particular month or other relatively brief accounting period is not exactly absorbed, the under- or over absorption must be completely distributed currently either ratably or by such other means as will effect an accurate and equitable allocation. The equalizing of seasonal expenses, such as heating, is permissible if a consistent policy is maintained in such connection.

(h) In passing upon the general acceptability of the contractors' or subcontractors' principles and methods of accounting, the Administration will inquire particularly into the method of overhead distribution and no change should be made therein during progress of work without prior notice to the Administration.

(b) Representative items of cost. Representative items of cost are summarized in this paragraph under three general categories consisting of those ordinarily allowable, those subject to qualification or disallowance, and those unallowable in the determination of recapturable profit. Further clarification is contained in the explanatory text in the paragraphs under § 285.53. (1) Items ordinarily allowable.

§ 285.53 Alphabetical list of representative items of cost.

In connection with specific items, there are offered the following descriptive and explanatory comments:

(a) Advertising expenses. The Administration's general policy in regard to advertising for the purpose of effecting sales, as distinguished from institutional advertising in trade or technical journals, is described as follows:

(1) As a general rule a contractor's cost of advertising is not allowable on the reasoning that advertising is not required in order to do business with the Government. However, certain kinds of advertising of an industrial or institutional character, placed in trade or technical journals, not primarily with the object of selling particular products but essentially for the purpose of offering financial support to such trade or technical journals, because they are of value for the dissemination of trade and technical information for the industry, are not really an advertising expense to effect sales so much as an operating expense incurred as a matter of policy for the benefit of the business and the industry. Thus the reasonable cost of such advertising placed in trade publications as relates to the particular business may be allowed.

(2) The reasonable cost of advertising consistent with the normal and usual practice of a subcontractor may be allowed in determining the cost of performing a subcontract.

(3) The cost of advertising to obtain employees ordinarily is allowable as a part of personnel expense distributable to contracts and subcontracts unless determined to be excessive.

(4) Reasonable expenses of non-elaborate publications issued for the purpose of morale, production, protection, or welfare of a contractor's or subcontractor's employees, which are in the scope of a plant publication are allowable costs.

(b) Amortization of asset appreciation. Amortization of asset depreciation shall not be taken into account in determining the cost of performing contracts or subcontracts.

(c) Bad debts. (1) Bad debts may be defined as uncollectible or worthless notes or accounts receivable arising from sales of products or other transactions entered into for the purpose of profit. Such items or expenses related thereto

are not allowable in contract or subcontract performance costs.

(2) Advances in reasonable amounts made to employees in connection with allowances for traveling expenses which have not been recovered are not regarded as bad debts, but as ordinary business losses allowable in cost directly, if practicable, or through distributable overhead.

(d) Bidding expenses. Reasonable preliminary expenses incident to preparation of bids inclusive of other necessary costs such as legal, accounting and other professional fees and traveling expenses, are allowable costs through distributable overhead; such expenditures as a direct charge to a contract or subcontract will be allowed only when approved by the Administration.

(e) Bonds. Premiums for performance and payment bonds required by a contract or subcontract are allowable.

(f) Bonuses. Payments to employees in pursuance of a regularly established and properly administered incentive bonus system may, subject to the limitations in paragraphs (oo) and (vv) of this section, be allowed in costs provided the aggregate compensation paid to each individual is reasonable and appropriate to services actually rendered in the regular course of business.

(g) Capital gains and losses. Capital gains and losses except as provided under the heading "Depreciation of Plant Facilities" in § 285.53 (k) of this part shall not be taken into account in determining recapturable profit.

(h) Castings. Castings made in the contractor's or subcontractor's own foundry may be charged upon fixed price per pound or other arbitrary basis provided that the scale of prices takes account, when appropriate, of differences in size and kind of castings, and that proper adjustments on such charges are made for the actual cost of castings as determined by reasonably frequent inventories of foundry materials or by other adequate foundry cost methods. The method of pricing foundry raw materials, particularly such higher cost materials as copper, spelter, aluminum, etc., must be consistent with the principles prescribed herein for the pricing of materials generally.

(i) Central office expenses. Whenever a contractor or subcontractor operates through a central or home office, expense of administration thereof shall be referred to the Administration for

determination as to allowability in contract or subcontract performance costs.

(j) Damages. Damages payable by a contractor to the Board or the Administration, whether such payment be effected directly or by deduction from sums otherwise payable by the Board or Administration to the contractor, shall not be allowed.

(k) Depreciation of plant facilities. (1) Depreciation of buildings, machinery, equipment, and other plant facilities will be allowed as a cost in the determination of profit in general upon the basis of the schedule of rates of depreciation in current use by the contractor or subcontractor and taking into consideration the rates used by the Treasury Department for income tax purposes, including reasonable amortization of emergency facilities if covered by certificates of necessity, subject, however, to the approval of the Administration.

(2) In the case of buildings, machinery, equipment and other plant facilities subject to depreciation which are used in and are necessary for performance of a contract or subcontract and which during the performance or upon the completion of the contract or subcontract are demolished, dismantled, sold as used machinery or equipment or as scrap or, in the absence of a market therefor, are abandoned, in such manner and under such circumstances as shall establish the fact to the satisfaction of the Administration that such demolition, dismantlement, sale or abandonment is in good faith and not with a view to continued use in the contractor's or subcontractor's business, the depreciation chargeable against operations on account thereof may be redetermined upon the basis of the facts as to useful life and residual value as thus established, and the proportion of such depreciation as so redetermined applicable to contracts or subcontracts with respect to which a final determination of profit shall not theretofore have been made shall be allowed in determining the profit thereunder.

(1) Directors' fees. Fees and traveling expenses in connection with authorized meetings of Boards of Directors are allowable as distributable overhead: Provided, That such fees and expenses are reasonable, and are in accordance with contractors' or subcontractors' usual procedure, subject to the limitation provided in paragraph (oo) of this section.