(iv)  Step Four: Estimate the nonrecurring costs incurred but not recovered.

(A)  Your objective is to make this estimate represent the contractor's situation as of the specific time at which the contract would be canceled. Consequently, you should:

(1)  Estimate the nonrecurring costs the contractor will have incurred by that point in time;

(2)  Estimate the portion of those nonrecurring costs that will be recovered by the price being paid for the end items that will not be canceled; and

(3)  Subtract (2) from (1).

(B)  Steps Four A through Four E, below, explain how to do this.

(1)  Step Four A: Review the definition of "nonrecurring costs." "Nonrecurring costs" means those costs, which are generally incurred on a one-time basis and include such costs as plant or equipment relocation, plant rearrangement, special tooling and special test equipment, preproduction engineering, initial spoilage and rework, and specialized work force training. (This definition is from FAR 17.103.)

(2)  Step Four B: Itemize the nonrecurring costs you expect the contractor to incur in performing the multi-year contract. Prepare a worksheet like the one in Figure 6.B. Complete the first four columns to accomplish this Step Four B.

 (i)  In Column 1, list all activities you expect the contractor to undertake that will generate nonrecurring costs. Each multi-year contract will involve a unique list of such activities. Examples: Acquiring Special Test Equipment for testing engine thrust; Rearranging Production Area B; Installing Special Test Equipment; Training Team A in special welding technique.

 (ii)  In Column 2, enter the total estimated cost of each activity listed.

 (iii)  In Column 3, enter the month and year you expect the contractor to initiate the activity. "Initiate" means issuing the purchase order to buy the equipment or contract for its installation; actually beginning in-house efforts such as conducting training; and so on. When the activity is "initiated," the contractor has made a commitment to buy or do something such that some cost will be incurred, even if the purchase is canceled or the activity is not completed.

 (iv)  In Column 4, enter the month and year you expect the contractor to complete the activity. For this purpose, "completed," means taking delivery of the purchased equipment; finishing installation; verifying that all employees trained can perform the required technique satisfactorily; and so on. When the activity is "completed," the contractor will have either incurred or will be committed to incur the total estimated cost of that activity.

[Access Figure 6.B - Anticipated Nonrecurring Costs – DOC]

(3)  Step Four C: Estimate the portion of the nonrecurring costs that the contractor will have incurred prior to contract cancellation.

(i)  Your estimate(s) should be based on the other information in your worksheet, as well as any insight you have into how the activity will be accomplished. For example, in some cases you may expect costs to be incurred at a steady rate between the initiation and completion of the activity. In other cases, a particularly costly effort may occur shortly after initiation of the activity, which could mean that a significant portion of the total estimated cost would be incurred early.

(ii)  Enter your estimate(s) in Column 5 through Column 9, as necessary. (For example, if you are estimating the cancellation ceiling for the cancellation that could occur at the end of Year 3 of the multi-year contract, you will have entries in Columns 5, 6, and 7 and leave Columns 8 and 9 blank.)

(4)  Step Four D: Describe how you expect the contractor to recover these nonrecurring costs.

(i)  The Total Estimated Cost of the activities on your worksheet may be recovered in a variety of ways. Some activities may be separately priced and paid for. However, the cost of most of the activities on your worksheet will probably be amortized over the entire multi-year quantity of end items, so that the unit price of each end item bears a portion of the nonrecurring cost. In these cases, the contractor will recover the nonrecurring costs as the Government pays for end items.

(ii)  You should combine available data and rational assumptions to estimate how much of the nonrecurring costs the contractor will recover prior to contract cancellation. Document these estimates in Column 10 through Column 14, as necessary.

(5)  Step Four E: Compute the amount of nonrecurring costs that you estimate will be incurred but not recovered.

(i)  Using the entries on your worksheet, perform the following calculation:

(ii)  The result of this subtraction is the amount of nonrecurring costs that you estimate will be incurred but not recovered by the time cancellation would occur. This dollar amount represents your best estimate of what the contractor would have to include in its cancellation claim in order to cover all incurred nonrecurring costs. Enter this estimate in Figure 6.A. This is the first building block of the cancellation-ceiling estimate.