[Code of Federal Regulations]
[Title 48, Volume 1]
[Revised as of October 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR31.203]

[Page 577-578]
 
            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM
 
                CHAPTER 1--FEDERAL ACQUISITION REGULATION
 
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES--Table of Contents
 
          Subpart 31.2--Contracts With Commercial Organizations
 
Sec. 31.203  Indirect costs.

    (a) 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 shall 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.
    (b) Indirect costs shall 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 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.
    (c) Once an appropriate base for distributing indirect costs has 
been accepted, it shall 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.
    (d) The contractor's method of allocating indirect costs shall be in 
accordance with standards promulgated by the CAS Board, if applicable to 
the contract; otherwise, the method shall be in accordance with 
generally accepted accounting principles which are consistently applied. 
The method may require examination when--
    (1) Substantial differences occur between the cost patterns of work 
under the contract and the contractor's other work;

[[Page 578]]

    (2) 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
    (3) 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.
    (e) 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 48 CFR 9904.406 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 (1) 
for contracts in which performance involves only a minor portion of the 
fiscal year, or (2) 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.
    (f) Special care should be exercised in applying the principles of 
paragraphs (b), (c), and (d) above 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.

[48 FR 42301, Sept. 19, 1983, as amended at 57 FR 39590, Aug. 31, 1992]