Annexes for Chapter 10 - Cost and profit

Annex 10.1: Research and development contracts with universities and colleges

Effective date: 2023-04-20

1. Research and development work carried out by universities or colleges is priced at direct costs plus a contribution to overhead. This contribution is a maximum take-out rate of 65 percent of direct payroll costs for on-campus work, and 30 percent of direct payroll costs for off-campus work. In addition, a contribution equivalent to 2 percent of applicable and acceptable travel and living expenses must be made.
2. Contract Cost Principles 1031-2 must not be called up in the contract, and post-contract audits of overhead charges must not be carried out. Direct costs must be subject to cost verification or audit.
3. Allowable direct costs are:
   1. Direct Payroll Costs
      1. professional salaries
      2. clerical salaries
      3. technicians' wages
      4. fellowships - daily rate of personnel working directly on a contract
      5. fringe benefits including:
         1. unemployment insurance
         2. workers' compensation
         3. Canada or Quebec Pension Plan
      6. university pension plan (current service only)
      7. university portion of medical plans
      8. sick leave

      Annual salaries must be prorated over annual working days, taking into account statutory holidays and annual vacation.

   2. Materials and Supplies
      1. stationery
      2. postage
      3. materials issued from stores
      4. materials, parts and components purchased specially for the contract at "laid-down cost"
      5. long distance telephone charges
      6. telecommunications
      7. freight and express
      8. publication charges as agreed in contract
   3. Direct expenses - those costs which can be specifically identified and measured as having been used or to be used in the performance of the contract, and which are so identified and measured by the institution's cost accounting system. These expenses may include such items as:
      1. travel expenses
      2. consultant services
      3. apparatus and equipment acquisition. (This must remain Canada's property and be subject to GCSurplus procedures)
      4. other costs as agreed and negotiated, including charges for computer time
4. Consultants are to be considered in three separate categories:
   1. in-house standard rate of pay: the 65 percent overhead is applicable;
   2. external type consultant, which is in-house personnel working additional hours at increased rates, but using university equipment: direct charge without overhead;
   3. outside consultant: direct charge without overhead.
5. Manufactured equipment is to be considered as a "make" or "buy" decision for the contracting officer. If it is a "buy", it must be a direct charge, and be Canada's property: a decision regarding disposal must be made later. If it is a "make", the university would be allowed the cost of parts and labour as laid out in the bid, including the 65 percent overhead, with ownership and disposal the same as for a buy. This should be a separate item under the contract.
6. Allowable overhead costs are:
   1. maximum of 65 percent applicable to Direct Payroll Costs for on-campus work;
   2. maximum of 30 percent applied to Direct Payroll Costs for off-campus work;
   3. an administration charge of 2 percent on travel and living expenses incurred directly against the contract is allowed.
7. Costs incurred by the university or college that have no direct bearing on the research activity are not acceptable as direct charges against Canada research contracts. These include:
   1. university annual reports
   2. contingency reserves
   3. convention expenses - unless applicable to specific contract
   4. post service lump-sum payments
   5. termination allowances not earned during the course of the contract
   6. admissions department
   7. grants - unless for services rendered for a specific contract
   8. finance charges (bank, debenture, bond interest, etc.)
8. Additional special facility charges must not be included in the price, since these are accounted for in the contribution to overhead.
9. Charges for use of a computer centre must be directed to a contract at a predetermined rate per hour, including general overhead, and computed at a break-even level for the centre. These charges must be in line with normal policies of the university for internal use.
10. Departments and agencies of the United States (U.S.) Government negotiate directly with Canadian universities and colleges towards research and development contracts. Public Works and Government Services Canada may be asked for assistance in developing an appropriate overhead rate. The Price Support Directorate (PSD) may provide support, on request, to develop overhead rates from the latest certified financial statements of the university or college, with indirect costs prorated over the direct cost base in conformity with the costing principles set out in the applicable U.S. Government policy on the subject. The PSD can be contacted by email at: TPSGC.PASoutiendesprix-APPriceSupport.PWGSC@tpsgc-pwgsc.gc.ca.

Annex 10.1.1: Examples to determine the fixed capital employed

Effective date: 2024-02-16

The information previously found in this Annex has been removed. You may find references to this information in the Supply Manual Archive (accessible only on the Government of Canada network).

Please refer to Section 5.2 Profit Principles of the Practitioner's Guide for Procurement Pricing for examples to determine the fixed capital employed.

Annex 10.2: Non-competitive contracts with non-profit organizations, excluding universities and colleges

Effective date: 2023-04-20

1. Non-profit organizations incur financing charges for working capital, over and above normal operating costs as determined in accordance with the Contract Cost Principles 1031-2. They are also subject to business and contractual risk, though less than profit-oriented organizations.
2. The price is based on costs incurred, computed using the Contract Cost Principles 1031-2 plus an allowance in lieu of profit.
3. For financing charges on working capital employed, the allowance depends on the method of payment:
   1. if there is a provision for progress payments or milestone payments: 1.5 percent of costs incurred;
   2. if there is no provision for progress payments or milestone payments: 3 percent of costs incurred.
4. For general business risk, the profit is based on contract costs:
   1. direct materials, subcontracts and direct charges: up to 1 percent of such costs;
   2. direct labour and overhead: up to 2 percent of such costs.
5. The profit that may be included in recognition of contractual risk depends upon the basis of payment selected for the contract or part thereof:
   1. fixed price: up to 4 percent of costs incurred;
   2. fixed time/unit rate with ceiling price: up to 3 percent of costs incurred;
   3. cost reimbursable with ceiling price: up to 3 percent of costs incurred;
   4. fixed time/unit rate with no ceiling price: up to 2 percent of costs incurred;
   5. cost reimbursable with no ceiling price: 0 percent.

Annex 10.3: Non-competitive acquisitions of manufactured products and repair and overhaul services, from agency and resale outlets

Effective date: 2023-04-20

1. The procedures detailed in Annex 10.3.1 Non-competitive requirements of commercial goods and/or services to Annex 10.3.3 Price analysis for agency and resale outlets provide for the establishment of fair and reasonable prices, when the competitive process cannot be used for:
   1. acquisitions from Canadian agency and resale outlets; and
   2. acquisitions of manufactured products and repair and overhaul services, from Canadian suppliers, except Canadian agency and resale outlets.
2. The two chief types of agency and resale outlets encountered when purchasing for Canada are:
   1. those engaged in manufacturing, which also act as agency or resale outlets representing other manufacturers (type 1); and
   2. those not engaged in any form of manufacturing, which act solely as agents, distributors, wholesalers, jobbers or retailers. They may conduct the functions of purchasing, receiving, storing, shipping and accounting (type 2).
3. A type 1 agency and resale outlet would contribute to the manufacturing of the good being procured by adding or assembling certain parts for example, versus a type 2 agency and resale outlet does not contribute to any of the manufacturing and only the administrative aspects of moving the goods to the final purchaser.
4. There are key differences between these two types of acquisitions in the determination of what costs are allowed, and how profits are determined. The procedures also differ depending on whether the good or service is commercial or non-commercial.

Annex 10.3.1: Non-competitive requirements of commercial goods and/or services

Effective date: 2023-04-20

1. The contracting officer must negotiate a fair price on the basis of at least one of the following criteria:
   1. recent prices paid;
   2. latest published price lists or catalogues;
   3. prices paid by others, such as other governments, Crown corporations, hospitals, universities and large private sector corporations or companies.
2. If a supportable commercial price is available, sufficient price support must be obtained and validated prior to accepting the commercial price. See Section 5.0.2 Commercial Pricing of the Practitioner’s Guide for Procurement Pricing for more information.
3. It is recommended that contracting officers also ensure that the “Audit” clauses from the SACC Section 3 General Conditions are used. For example, as appropriate, the “General conditions: Higher Complexity - Goods, SACC 2030, section 33”, “General conditions: Higher Complexity - Services, SACC 2035, section 31” and “General conditions: Research and Development, SACC 2040, section 42” are recommended. The “Audit” clauses included in the General Conditions detail the contractor’s obligations related to audit (i.e., the contractor must retain evidence for all amounts claimed in a contract) and protects Canada’s right to audit (i.e. Canada’s right to audit all claimed amounts, calculated in accordance with the Basis of Payment).

Annex 10.3.2: Non-competitive requirements of non-commercial goods and/or services

Effective date: 2023-04-20

1. For non-competitive requirements of non-commercial goods and/or services valued at $50,000 or less, a fair price may be negotiated in accordance with the guidelines for commercial goods and/or services given above, provided the data required to follow this guideline is available.

   
   For acquisitions from agency and resale outlets only, if the data is not available, then the guideline presented in Annex 10.3 Non-competitive acquisitions of manufactured products and repair and overhaul services, from agency and resale outlets, subsections b and c should be followed.

2. The contracting officer must request the bidder to submit an itemized breakdown of the price quoted. In the case of agency and resale outlets, the contracting officer will analyze the price breakdown in accordance with Annex 10.3.3 Price analysis for agency and resale outlets. The depth of the analysis required will depend on the value of the requirement and the quality and completeness of the support data provided by the bidder. The cost of performing the analysis versus the potential benefit in the form of cost savings on the requirement should be taken into account.
   
   For more details on the bases of payment, see 4.70.20 Basis of payment. A fixed price basis of payment is generally used for contracts with agency and resale outlets.
3. It is recommended that contracting officers also ensure that the “Audit” clauses from the SACC Section 3 General Conditions are used. For example, as appropriate, the “General conditions: Higher Complexity - Goods, SACC 2030, section 33”, “General conditions: Higher Complexity - Services, SACC 2035, section 31” and “General conditions: Research and Development, SACC 2040, section 42” are recommended. The “Audit” clauses included in the General Conditions detail the contractor’s obligations related to audit (i.e. the contractor must retain evidence for all amounts claimed in a contract) and protects Canada’s right to audit (i.e. Canada’s right to audit all claimed amounts, calculated in accordance with the Basis of Payment).

Annex 10.3.3: Price analysis for agency and resale outlets

Effective date: 2023-04-20

1. The following should be considered when analyzing the price breakdown:
   1. Laid-down costs
      Ensure that the necessary support for the price of the good/service quoted by the principal is provided by the bidder and that all trade discounts have been deducted. The applicability and amount of any added costs for transportation, foreign exchange, customs duty and brokerage should be verified. Transfer prices representing fair market value, constitute laid-down cost for the purposes of price analysis and profit calculations.
   2. Cost of necessary services and overhead
      Establishment of the cost of necessary services rendered by the bidder is dependent upon requirements, the type of organization the bidder operates, and the degree of sophistication in the bidder's cost accounting system.
      Types of services that may be considered for costing purposes:
      1. purchasing;
      2. internal handling including unpacking, incoming inspection, inhibiting, warehousing, and re-packing for delivery to one or more destinations, but excluding costs related to the bidder's own manufacturing or other related costs;
      3. general and administrative expenses applicable to the activity required.

      After-sales activity, such as on-site installation and test should be taken into account in establishing the overall price structure.

      An examination of the overhead costs allocated to the particular buy should be made to ensure that the allocation represents a reasonable and justifiable distribution of overhead costs in accordance with the Contract Cost Principles 1031-2.

      If Canada's requirements can be met by direct shipment from the principal, the bidder's charges are normally confined to the costs of purchasing and invoicing, and in such cases, a special direct shipment rate of overhead should be developed. The negotiated rates established in accordance with the foregoing are generally applied as a percentage additive to the laid-down costs.

   3. Profit
      Agency and Resale Outlet (type 1)

      A reasonable rate of profit is allowed on the total of laid-down costs and the cost of services required by Canada. The rate must be commensurate with the risk, the volume of resale business to Canada and other circumstances. For example, if the services required include the maintenance of an inventory, a higher rate of profit is permitted.

      Agency and Resale Outlet (type 2)

      The profit amounts should be calculated by application of the following:

      1. Profit on laid-down costs:
         Recognizing the cost of financing and risks associated with the maintenance of stocks, the maximum rates of profit applied to laid-down costs vary in accordance with the method of supply as follows:
         1. supplied from stocks maintained and financed by the bidder: up to 4 percent.
         2. supplied from stocks held by the bidder on consignment from the principal: up to 3 percent.
         3. supplied by the principal through the bidder, only when ordered by Canada: up to 3 percent.
         4. supplied by the principal in direct shipment to Canada: up to 2 percent.
      2. Profit on cost of necessary services and overhead:

         Recognizing the associated general business risk, the rates of profit applied to the cost of necessary services and overhead may vary in accordance with the services provided and are:

         1. where the services include those of purchasing and invoicing only: up to 7.5 percent.
         2. where the services include other than purchasing and invoicing: up to 10 percent.

Annex 10.4: Technology Partnership Canada royalty amount for cost rate negotiations

Effective by: 2023-04-20

Background

Technology Partnership Canada (TPC) has contributed sums per TPC Project Agreements which carry provisions for the possible repayment of these contributions per Royalty repayment terms in these accords.

In most cases, these royalty repayment terms are tied to the sale of the potential product/project that TPC contributed the funds for. The term and repayment percentage varies per the understanding.

Issue

In the agreements that were reviewed, the royalty payments to TPC to be made by the firm, in most instances, exceed the original contribution amount providing that the project has viable sales of the development project.

The annual rate negotiation with a firm will be faced with a potential royalty repayment cost in the overhead rate calculation in the year that the repayment is required and made to TPC.

Cost recovery position for annual rate negotiation negotiations

For annual rate negotiation purposes, the recovery amount allowed on contracts shall be limited to the original TPC contribution per the agreement. The amount in excess of the original contribution shall be considered a separate element outside the rate negotiations and will not be an allowable contract cost.

The amount of the recovery shall be determined by the original TPC agreement. For contributions that are product specific, a product development recovery rate will be established. For non-product specific agreements, the recovery will be made through a General and Administrative Overhead and shall be recovered over a reasonable amount of time.

References

• Directive on Accounting Standards
• Policy on Transfer Payments
• 1031-2, Contract Cost Principles, of the Standard Acquisition Clauses and Conditions Manual
• CICA 3290 Contingencies

Annex 10.5: Cost Interpretation Bulletins 01 to 19

Effective by: 2010-01-11

Annex 10.5.1: Cost Interpretation Bulletin - Number 01 Excess facilities

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.1 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.2: Cost Interpretation Bulletin - Number 02 Depreciation

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.2 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.3: Cost Interpretation Bulletin - Number 03 Lease costs

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.3 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.4: Cost Interpretation Bulletin - Number 04 Travel costs

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.4 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.5: Cost Interpretation Bulletin - Number 05 Head office expense

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.5 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.6: Cost Interpretation Bulletin - Number 06 Pension costs

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.6 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.7: Cost Interpretation Bulletin - Number 07 Research and development expenses

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.7 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.8: Cost Interpretation Bulletin - Number 08 Bid and proposal expenses

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.8 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.9: Cost Interpretation Bulletin - Number 09 Selling and marketing expenses

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.9 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.10: Cost Interpretation Bulletin - Number 10 Severance payments

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.10 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.11: Cost Interpretation Bulletin - Number 11 Pension plan refunds

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.11 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.12: Cost Interpretation Bulletin - Number 12 Company funded costs

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.12 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.13: Cost Interpretation Bulletin - Number 13 Executive compensation

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.13 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.14: Cost Interpretation Bulletin - Number 14 Mobile repair party requirements

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.14 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.15: Cost Interpretation Bulletin - Number 15 Environmental costs

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.15 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.16: Cost Interpretation Bulletin - Number 16 Take-out rates

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.16 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.17: Cost Interpretation Bulletin - Number 17 Government Supplied Materiel

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.17 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.18: Cost Interpretation Bulletin - Number 18 Incentive remuneration profit sharing plans

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.18 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.5.19: Cost Interpretation Bulletin - Number 19 Purchased labour - personnel procured from outside sources

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.5.19 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.6: Cost Notifications 01 to 02

Effective by: 2010-01-11

Annex 10.6.1: Cost Notification 01 - Technology partnership Canada royalty amount for cost rate negotiations

Effective by: 2024-02-16

With the promulgation of Policy Notification 156: Cost and profit, the content of this section was reviewed and incorporated to Annex 10.4.

For reference purposes, annex 10.6.1 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.

Annex 10.6.2: Cost Notification 02 - Goodwill

Effective by: 2024-02-16

This annex has been removed as part of Policy Notification 156: Cost and profit. Please refer to Annex 2: Costing Standard of the Practitioner’s Guide for Procurement Pricing.

For reference purposes, annex 10.6.2 is available in the Supply Manual Archive (accessible only on the Government of Canada network), Version 2023-1.