(viii)  Step Eight: Assess the Impact Cancellation Could Have on the Cost of End Items Already Purchased.

(A)  Cancellation of a multi-year contract can affect the cost of non-canceled end items. For example, assume the contemplated multi-year contract is for missiles, as follows:

(B)  The cost of each missile depends in part on allocating overhead to 15,000 missiles. If the contract is canceled after FY 2, the contractor's business base shrinks by 9,000 missiles, or 60 percent. The overhead allocated to the 6,000 missiles that were sold to the Government may not be sufficient, given the cancellation, to cover the true cost of those end items.

(C)  This cost impact may be considerable. You should estimate this impact, but you should not automatically include the entire amount in your cancellation-ceiling estimate. For example, a component of overhead is the nonrecurring costs you have already provided for in Steps Four and Five. You should not provide for those costs twice. Most of the recurring costs you provided for in Steps Six and Seven are probably direct costs, but if any of those costs are treated by the contractor as indirect, then they too are a component of overhead. You should not provide for those costs twice, either.

(D)  This is a complex estimating task. The degree of complexity depends on the contractor's accounting system, and how well it lends itself to segregating costs in this way. If the contemplated multi-year procurement will be competitive and you cannot gear this "impact" estimate to a particular accounting system, you must base your estimate on assumptions. Be sure to document the assumptions for future reference.

(E)  Enter your estimate in Figure 6.A. This is the fifth and last building block of your cancellation ceiling estimate prior to offsets.