(a) Approval of Actual Cost required. MARAD must approve the estimated Actual Cost for the Project as a condition for financing. The Applicant must submit this information in the format required in the Application. The estimated cost of the Project may include escalation for the anticipated construction period of the project.

(1) Submission of certain cost information. For a Vessel Project, MARAD may contact the shipyard directly and may require an Applicant to have the shipyard that has contracted to build the Vessel submit additional technical data, backup cost details, and any other evidence. For a Shipyard Project, MARAD may contact the general contractor or manufacturer of the equipment for technical data, backup cost details, and any other evidence.

(2) Costs incurred by written contracts. If any of the Project costs have been incurred by written contracts, such as a shipyard contract, management or operating agreement, the Applicant is required to forward signed copies as part of the Application.

(3) Additional Project costs. A detailed statement must be provided showing any other costs associated with the Project that were not included in paragraph (a)(2) of this section, such as:

(i) Legal and accounting fees;

(ii) Vessel insurance;

(iii) Fees to a Related Party; and

(vi) Other capitalizable fees.

(b) Actual Cost basis. The amount of the MARAD Guarantee may be less than but not more than whichever percentage is applicable under the Act with respect to the Actual Cost of the Vessel or Vessels or Shipyard Project asset(s). Where refinancing existing debt, the number of new Notes issued for the existing debt may not exceed the lesser of:

(1) The amount of outstanding debt being refinanced (whether or not receiving assistance under Title XI); or

(2) Whichever percentage is applicable under the Act with respect to the depreciated Actual Cost of the Vessel, Vessels, or Shipyard Project with respect to which the new Notes are being issued.

(c) Actual Cost items. Actual Cost is comprised essentially of those items that would customarily be capitalized as Project construction costs such as designing, engineering, constructing (including performance bond premiums that MARAD approves), inspecting, outfitting and equipping.

(1) Cost items include those items usually specified in Vessel or Shipyard Project construction contracts, e.g., changes and extras, cost of owner furnished equipment, shoreside spare parts, and MARAD commitment fees and interest on the notes or other borrowings incurred during the construction period (excluding interest paid on subordinated debt considered to be equity), and less income realized from investment of escrow fund deposits during the construction period.

(2) Applicant may include Guarantee Fees determined in accordance with the provisions of section 53714 of the Act as an item of Actual Cost.

(3) In approving an item of Actual Cost, MARAD will consider all pertinent factors.

(d) Items excludible from Actual Cost. Actual Cost may not include the following:

(1) Legal and accounting fees or expenses;

(2) Bank commitment fees or interest other than those specifically allowed;

(3) Fees, commissions, or charges for granting or arranging for financing;

(4) Fees or charges for preparing and filing an Application for MARAD guaranteed financing and supporting documents, for services rendered to obtain approval of the Application, and for preparing and processing documents relating to the Application for MARAD guaranteed financing;

(5) Underwriting fees;

(6) Taxes, user fees, or other governmental charges;

(7) Predelivery Vessel operating expenses, Vessel insurance premiums, and other items that may not be properly capitalized by the owner as costs of the Vessel under GAAP;

(8) The cost of the condition survey required by § 298.15(e) and all work necessary to meet the standards set forth in § 298.15(e);

(9) The cost to the shipowner of a Vessel that is to be Reconstructed, or Reconditioned, e.g., cost of acquisition;

(10) Generally, any amount payable to the shipyard for early delivery of the Vessel; generally, any amount payable to the manufacturer or contractor for early delivery of the equipment to or early completion of a Shipyard Project at a General Shipyard Facility;

(11) Predelivery Shipyard Project expenses that may not be properly capitalized by the General Shipyard Facility as costs of the Shipyard Project under GAAP; and

(12) The cost of major foreign components and other foreign components for which there is no waiver and their assembly when comprising any part of the hull and superstructure of a Vessel.

(e) Substantiation of Actual Cost. (1) Before MARAD will make a distribution from the escrow fund or authorize a draw on a Note, and prior to the final actual cost determination for each Project, a Borrower must submit documents substantiating all claimed costs eligible under paragraph (b) of this section or, alternatively, appropriate certification of such costs by an agent who has received MARAD's approval.

(2) These documents may include copies of invoices, change orders, subcontracts, and where MARAD requires, statements from independent certified or independent licensed public accountants that the costs for which a Borrower seeks payment or reimbursement were actually paid or are payable for the construction of a Vessel or Shipyard Project.

(3) The Borrower must summarize, index and arrange these documents according to cost categories by following the directions contained in the application forms.

(f) Escalation as part of Actual Cost. Escalation clauses in construction contracts are subject to MARAD approval. After a review of the base contract price and the escalation clauses, MARAD may add to the approved base contract price the amount of estimated escalation. MARAD must subsequently approve the amount of escalation cost claimed as a component of Actual Cost.

(g) Monies received with respect to construction. (1) Borrower must give MARAD written notice each time an Applicant, or any person acting on an Applicant's behalf, receives monies due for construction of a Project (described in the Financing Documents) from the shipbuilder, guarantors, sureties, or other Persons.

(2) Unless a payment default has occurred, a Borrower or other recipient must promptly deposit these monies with MARAD to be held by the Depository in accordance with the Financing Documents.

(3) MARAD will determine the extent to which Actual Cost will be reduced by these monies.

(4) In no event may Actual Cost be reduced with respect to payments by the shipyard to a Vessel or Shipyard Project owner of liquidated damages for late delivery of the Vessel or Shipyard Project.

(5) If MARAD has paid the MARAD Guarantee, the Borrower or other recipient must promptly pay these monies, including any liquidated damages, to MARAD for deposit into the appropriate account.

(h) Depreciated Actual Cost. The applicable percentage of the depreciated Actual Cost of the Vessel Project will be determined after a Vessel has been delivered or redelivered.