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Cost Accounting Standards
(Last updated Jan 2013)
In 1990 the Office of Federal Procurement Policy Act was amended. Section 26 was added to the Act and the Cost Accounting Standards Board (CASB) was reconstituted after a ten year hiatus. After nearly two years of deliberation, the Board's first real act was to recodify the Cost Accounting Standards (CAS) rules, contract clauses and solicitation clauses from Chapter 1, 48 CFR Part 30 to 48 CFR Chapter 99. The final rule implementing this change appeared in the Federal Register at 14148 on April 17, 1992.
The final rule addressed only the recodification of those rules which are within the CASB's authority under the Federal Procurement Policy Act of 1988. Thus, the administrative procedures such as those in FAR §§30.202-6 and 7 and FAR SubPart 30.6, which have historically been entrusted to the procuring agencies, were not recodified in 48 CFR Chapter 99.
Since the recodification, numerous other changes have been implemented. The applicability was expanded to educational institutions and the thresholds have been increased several times.
The CAS are one of several regulations governing the accounting methods of government contractors. Another common set of accounting rules is contained within the FAR 31 Cost Principles and Procedures that impose its own unique accounting requirements on contractors along with other accounting principles like Generally Accepted Accounting Principles when they apply.
The CAS are generally said to govern cost allocation, whether direct or indirect, while the FAR 31 rules are said to govern allowability. Since the two sets of rules are generally complimentary, it is easy for contractors to find themselves subject to both sets of regulations.
When contractors are subject to both, the CAS will prevail if their is a conflict in requirements. In the event that contractors are not covered by the CAS and only covered by the FAR 31 rules, contractors will still find themselves subject to some elements of the CAS, since many of their elements, not their entirety however, have been incorporated in the FAR 31 rules.
The CAS apply to contracts themselves and not to contractors. Although there are contract clauses that actually impose the CAS, these clauses are required by statute. Consequently, contracts of prime contractors can be subject to CAS even if the clauses themselves were inadvertently omitted. After all, government employees have only actual authority and when CAS is concerned they have no authority to deviate from the statutorily imposed requirements.
CAS applicability for subcontractors is somewhat different, however. Although prime contracts subject to CAS are required to flowdown CAS requirements in their subcontracts meeting the applicability criteria, the absence of CAS clauses in subcontracts does not automatically result in interpreting them as having the clause. Rather, whether a subcontract is subject to CAS will generally depend on the actual contract language. Thus, a subcontract without a CAS clause could avoid CAS applicability despite its otherwise proper applicability. At the same time, a subcontract that simply imposes CAS requirements without any assessment of the applicability criteria would be subject to whatever standards the clause imposed.
Once a contract is CAS covered, it will always be CAS covered. Similarly, if the contract is not CAS covered, it will never be CAS covered regardless of how many times it is modified or how large are the modifications. The one potential exception to this rule is when the modification is considered an entirely new contract. The Department of Energy was well known for this kind of practice when awarding annual contracts to its laboratory operators. Frequently, each additional year of operation was perfected by issuing a modification to the previous year's contract.
Previously, the CAS applied principally to negotiated National Defense contracts and subcontracts. As a result of the recodification in April 1992, however, the CAS apply to all negotiated contracts and subcontracts. There were exceptions, however. Furthermore those exceptions have been modified several times since 1992 but currently include contracts awarded:
- Using sealed bid procedures;
- That are not in excess of the Truth in Negotiations Act (TINA) threshold;
- Small businesses;
- When the price is set by law or regulation;
- Firm fixed price, fixed price with economic price adjustment other than cost, time and material or labor hour contracts for commercial items;
- As firm fixed price contracts awarded with adequate price competition without the submission of any cost data;
- With foreign governments or their agents or instrumentalities;
- To a foreign concern except for 401 and 402 which remain applicable;
- To a United Kingdom contractor for performance substantially in the United Kingdom provided that the contractor has filed a completed Disclosure Statement with the Ministry of Defense;
- To subcontractors under the NATO PHM Ship Program to be performed by a foreign concern; and
- For performance entirely outside the United States, its territories, and possessions.
In addition, before any of the above exemptions or even the CAS can apply the contractor must be performing at least one CAS covered contract of $7.5 million or more. Unless such a contract exists, the CAS requirements are not "triggered". Thus, the $7.5 million threshold acts as a trigger mechanism for CAS coverage.
As long as the contractor performs the $7.5 million CAS covered contract, all of its negotiated contracts in excess of the Truth in Negotiations Act (TINA) threshold and not otherwise exempt are CAS covered. Once the contractor completes its $7.5 million contract and has no other CAS covered contracts of that magnitude then none of its new awards will be CAS covered, although those previously covered remain so for the remainder of their life.
CAS covered contracts may be either fully-covered or have modified coverage. Full coverage requires the contractor to comply with all 19 standards during the performance of the contract. Modified coverage requires contractors to comply only with Standards:
- 401 - Consistency in Estimating, Accumulating and Reporting Costs,
- 402 - Consistency in Allocating Costs Incurred for the Same Purpose,
- 405 - Accounting for Unallowable Costs, and
- 406 - Cost Accounting Period.
Contracts of $50 million or more are subject to full CAS coverage. Contracts of less than $50 million are also subject to full CAS coverage if the contractor's business unit received $50 million or more in CAS covered contracts during its preceding cost accounting period.
Contractor business units receiving less than $50 million in contract awards in their prior fiscal year may elect modified coverage. This election must be made prior to contract award by marking the block in Section III of the Cost Accounting Standards Notices and Certifications, FAR §9903.201-3. Once the election is made, all subsequent contracts awarded during the fiscal year must have modified coverage unless the contractor receives one CAS covered contract of $50 million or more.
A contract retains its status--full or modified--throughout its life. Consequently, an organization's change in contract coverage awards from modified to full, or vice versa, does not affect the status of existing contracts.
The fact that a contract's CAS status never changes can provide some challenges for an organization that has a mix of contracts with different CAS coverages. The challenge is that the contractor only has one accounting system. Furthermore, it is probably not practical to employ non-compliant practices on non-covered contracts and compliant practices on covered contracts, since the aggregate of the non-covered contracts would have to still mimic the amounts of compliant contracts.
Thus, the consequence of CAS coverage is that all of a contractor's contracts will need to follow the requirements of its highest level of CAS coverage even though there is no real liability for non-covered contracts in the event of a non-compliance. So the administrative consequence of a single CAS covered contract could be quite large even if the liability exposure is relatively small by comparison.
A Disclosure Statement is a written description of a contractor's cost accounting practices and procedures. The description is provided on Standard Form CASB-DS-1. Contractors should be aware that although the form contains many choices from which to choose, they are not all compliant with the CAS. For example, the form permits the selection of cost of sales as the allocation base for General and Administrative expenses; however, such a practice is not compliant with CAS 410, Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives.
A Disclosure Statement is required when a company, together with all its segments, exceeds the $50 million threshold. Thus, while the criteria for CAS coverage are dependent on the business volume for a particular segment, the criteria for Disclosure Statements is company-wide and considers all business segments. Thus, it is possible for organizational segments, barely meeting the CAS threshold, to have a Disclosure Statement requirement if enough of its sister segments also perform CAS covered contract and together they exceed the $50 million Disclosure Statement threshold.
The deadline for submitting disclosures statements is prior to the award of a single CAS covered contract or subcontract of $50 million or more. In the case where several CAS covered contract awards exceeded the $50 million threshold, the statement is due in the cost accounting period (usually fiscal year) following the year when the company, along with all of its segments, received more than $50 million in CAS covered contract awards. Thus, if the $50 million threshold was exceeded in year X, the statement is not required until year Y but in the event of a single covered contract exceeding the $50 million threshold then it is due prior to contract award.
In the case where multiple awards exceeded the $50 million threshold (year X), the statement is required before award of the first CAS covered contract awarded in the immediately following cost accounting period (year Y). If the first CAS covered contract is received within 90 days of the start of the cost accounting period, however, the contractor is not required to submit the Disclosure Statement until the end of the first 90 days of the immediately following accounting period (year Y).
A separate Disclosure Statement is required for each business segment whose costs included in the total price of any CAS covered contract or subcontract exceed the TINA threshold. If in the most recently completed cost accounting period the segment's CAS covered awards are less than 30 percent of total segment sales and less than $10 million, a separate Disclosure Statement need not be submitted. In such cases, a single Disclosure Statement clearly identifying the covered segments can be submitted if the cost accounting practices are identical.
Each corporate or other home office that allocates costs to one or more disclosing segments performing CAS covered contracts must submit Part VIII of the Disclosure Statement along with Part I. Generally, they need not complete the other parts of the form, since these pertain to the operations of the segments to which the home office overhead is allocated but there is a place to indicate whether the subjects covered in Parts V, VI or VII are applicable to the Home Office and incorporated in the statement.
Since the Disclosure Statement threshold is based on contract awards, it is possible for the requirement to come and go even though a contractor continues to receive CAS covered contracts year after year. So, a year filled with large multi-year contract awards could trigger the Disclosure Statement requirement but the requirement could go away in subsequent years as the contractor works down the backlog.
As long as at least one contract in the backlog exceeds the $7.5 million trigger threshold the contractor's awards could be CAS covered unless other exemptions apply. Nonetheless, if the total awards in subsequent years do not exceed the $50 million threshold then there is no Disclosure Statement requirement in those subsequent years.
The consequence of this reality is that once the Disclosure Statement requirement disappears, there is no need to update the statement for practice changes, although cost impact proposals would still be required should a contractor change its practices on CAS covered contracts.
There are often various strategies employed with the preparation of Disclosure Statements. Some organizations advocate developing detailed statements that could also be used by its employees as detailed procedure manuals describing the exact processes and buttons to punch for performing a particular function. Others take a more minimalist approach.
While there are benefits to both philosophies, one must realize that the Disclosure Statement is a controlled document that must be reviewed and approved by the government whenever changes are made even though the changes may be nothing more than editorial revisions, clarifications or changes in procedure that are not cost accounting practices.
It is probably this latter reality that makes a minimalist approach with separate policy and procedure manuals an attractive option. Also, since the Disclosure Statement requirement can come and go, as can even CAS coverage itself, management may prefer the use of policy and procedure manuals over a Disclosure Statement (and the stigma that comes with it) to guide its employees.
The thresholds for CAS coverage and Disclosure Statements are based upon the total potential value of the proposed or awarded CAS covered contract. Therefore, even unobligated amounts and unexercised period options should be considered when assessing the contract's value relative to CAS thresholds. However, unpriced options and ordering agreements should not be included in the computation. Requirements contracts are considered in determining the threshold. Perhaps most troubling is that the full potential value of the contract and not just the basic ordering quantity is used in the calculation.
Contract modifications are not considered awards for purposes of the threshold computation. Furthermore, as indicated previously, a contract retains its status throughout its life and that status will not be changed by any contract modifications.
Consequently, if a contract is not already CAS covered, a modification, no matter how large, will not make that contract or even the just the modification itself subject to the CAS. Similarly, if a contract is already CAS covered then any modification is also subject to the CAS coverage associated with the contract's original award.
When bidding on government contracts, the contractor may be asked to complete a CAS Notices and Certification under FAR 52.230-1. Essentially, the form guides the contractor in disclosing whether it has a Disclosure Statement requirement and what kind of coverage it will select in the event the contractor is under the full coverage threshold and it can choose modified coverage for that particular award.
Interestingly, the form does not solicit whether the CAS are even applicable to the anticipated contract award. While the CAS requirements are arguably self eliminating in any contract containing the various CAS flowdown clauses, contractors should probably make this point clear when completing the Notices and Certification form by selecting option 3 that a Disclosure Statement is not required and not answering the options for full or modified CAS coverage. Instead the contractor can advise that the CAS will not apply and then cite the appropriate exemption such as that it is not performing at least one CAS covered contract of $7.5 million or more.
As stated above, a Disclosure Statement describes a contractor's cost accounting practices. A cost accounting practice is any accounting method or technique used for the measurement, assignment or allocation of cost to cost objectives.
Measurement of costs encompasses the accounting methods or techniques used in defining the components of cost, determining the basis for cost measurement, and establishing criteria for use of alternative cost measurement techniques. Examples for the measurement of cost include:
- the use of historical cost, market value, or present value;
- the use of standard or actual cost; or
- the designation of those items to be included or excluded from tangible capital assets or pension costs.
The determination of amounts paid or a change in amounts paid for a unit of goods and services is not a cost accounting practice.
The assignment of costs refers to a method or technique used in determining the amount of cost to be assigned to individual cost accounting periods. Allocation of cost includes both direct and indirect allocation of costs. Examples of the assignment of costs include:
- requirements for the use of cash basis or accrual basis accounting; or
- methods for depreciating capitalized assets.
The allocation of costs to cost objectives includes the allocation of direct and indirect cost. Examples of accounting practices for allocating costs are methods that determine:
- how costs are accumulated such as into work centers, cost pools, or projects;
- whether costs should be allocated directly or indirectly;
- the composition of a cost pool and its allocation base.
A cost accounting practice change is any alteration in any cost accounting practice whether or not it is described in the Disclosure Statement. There are two exceptions, however. First, the initial adoption of a cost accounting practice for the first time is not a change in accounting practice. Second, the revision of a cost accounting practice for a cost which had previously been immaterial is not a change in accounting practice.
Equally important is that the change in the price of an items is not a cost accounting practice change. So, a change in insurance carriers, for example, that results in a different premium value is not a cost accounting practice change.
With regard to materiality, the CAS provide several criteria for its determination. However, there are no hard and fast guides. For example, the absolute dollar magnitude, regardless of its relationship to the total cost considered, can be material. Direct cost items, if part of an allocation base, may be more material than an indirect item. If the item alters the funding requirements of government contracts versus nongovernment contracts it can be material. Also, the cumulative effect of several immaterial items can make them material when considered as a whole.
As a result of consolidations, contractors may be questioned about the effect of these reorganizations on their cost accounting practices. Certainly, such changes can result in cost accounting practice changes and the need to prepare cost impact proposals and potentially refund money to the government. However, a business reorganization does not automatically result in a cost accounting practice change. Consequently, contractors should be extremely familiar with criteria for cost accounting practices in order to avoid unnecessary paybacks.
Historically, contractors have been able to change their cost accounting practices with minimal interference from government officials. While prior notification was required under FAR, any government objection to the change was limited to adequacy and compliance. Thus, even if the practice change resulted in increased costs being allocated to future government contracts, the change was to be accepted by the government if it satisfied both the test of adequacy and compliance.
Under the recodified rules, however, a contractor's ability to change its cost accounting practices has been significantly impaired. Subsection 9903.201-6, Findings, of the recodified rules now require that the Contracting Officer must also determine that, "The change is desirable and is not detrimental to the interests of the Government."
The purpose of the findings requirement may have been only to draw attention to the requirement that voluntary changes cannot result in increased costs to the government for contracts already negotiated. While the findings language should not prevent a contractor from adopting a change that will increase costs on future government contracts, time may show that it will prohibit the contracting officer from accepting any change that will increase costs to the government on even yet to be awarded contracts. After all, such a circumstance could be interpreted by some as being "detrimental to the interest of the government." As a result, contractors may have to rely on litigation to perfect such changes.
Contractors are required to comply with the requirements of CAS as well as their own Disclosure Statements. Consequently, contractors should be ever vigilant that their actual accounting practices are the same as their disclosed accounting practices. Otherwise, they will be required to compute cost impact proposals for failing to comply with the standards or their Disclosure Statements and refund any monies obtained as a result of their failure. In addition, they could also be liable for making false statements and false claims to the government.
Some of the common areas where contractors have compliance problems are CAS 402 if the determination of a cost's allocation as direct or indirect is determinant on funding, quantity or cost; CAS 404 if self constructed assets are not capitalized or the capitalized cost of self constructed assets does not include allocable overheads and CAS 418 if uncompensated overtime or job shop labor are excluded from the allocation base computation.
In addition, contractors should also be aware that the government's acceptance of a contractor's Disclosure Statement means nothing. Acceptance of the Disclosure Statement does not mean that the contractor's accounting practices are compliant with CAS requirements. FAR ¶30.202- 7(a)(2)(1)(C) requires that contractors should be notified of this fact when they are issued their Disclosure Statement adequacy determination.
While a meaningless approval seems counter intuitive it actually fits quite well. Government employees have only actual authority. Since the CAS are imposed by statute a government employee may not deem (unintentially or otherwise) a non-compliant practice as a compliant practice. The practice is either compliant or it is not and the fact that it has been followed for years and seemingly accepted by government auditors can be meaningless assurance.
Cost impact proposals are discussed in FAR SubPart 30.6, Administration, and can be required in several circumstances. The first situation is where a contractor voluntarily changes its cost accounting practice. The second situation is where a new standard is promulgated and becomes applicable to the contractor. The third situation is where the contractor has not complied with either its disclosed accounting practices or the requirements of the CAS.
Only in the second situation can the cost impact result in the government paying increased costs to the contractor. In all other situations the government is precluded from paying any increased costs to the contractor but the contractor is required to pay back any reduction in costs to the government.
The cost impact is measured as the difference between the allocated costs under one cost accounting practice versus another, such as a compliant practice versus a noncompliant practice. This logic applies to fixed priced contracting, since it is assumed that the negotiated contract price reflects to some extent the consequence of the cost accounting practice.
Although individual contracts will most certainly be affected by changes in accounting practices, the measure of the cost impact is performed at the segment level. Thus, a segment performing only CAS- covered contracts would have no impact since in total the increases would offset the decreases.
Whether individual contract values need to be adjusted is a contract administration matter left to the contractor and the Administrative Contracting Officer. In the case where contractors perform both fixed price and cost type contracts, individual contract adjustments will most likely be necessary.
Contract modifications as a result of scope or quantity can introduce some interesting challenges for CAS covered contracts. When the situation is a contract change that adds quantity to the original order then there likely is no need for a contractor to deviate from their cost accounting practices or CAS requirements. The situation where product is produced and shipped out the door is the activity based assumption on which a contractor's cost structure is typically premised.
When the contract change is a reduction in quantity, a delay or a variety of other consequences resulting from a contract change there could be ample justification to deviate from normal cost accounting practices or CAS requirements. Generally, cost accounting practices apply to similar purpose and like circumstance. Many contract modifications are far removed from the activity based assumptions of a contractor's normal cost structure and cost accounting practices. As a result, the effects of terminations, delays and other contracting events are not a similar purpose or like circumstance requiring application of the contractor's normal cost accounting practices.
Should contractors encounter one of these situations and deviate from their normal cost accounting practices they will also need to make appropriate adjustments in their accounting records to avoid double recovery. For example, in the case of a contract delay the amount of damages calculated by the Eichleay formula are fixed costs. The amount of fixed costs recovered in settlement for a delay will need to be credited to the appropriate cost pools for the year in which the event occurred in order to avoid double recovery.
Clearly, the recodified CAS opens the door to a new frontier as their applicability is extended to all federal contractors and educational institutions. Even though the CASB essentially copied existing regulations, several changes have been made that will surely have significant ramifications.
To a great extent the real consequence of CAS coverage is contractor liability. Since many contractors will escape much of the burden and risk of performing fully-covered contracts as a result of the increased thresholds for full coverage, the increased risk of the CAS will be blunted for all but the largest contractors or smaller contractors performing very large contracts.
Compliance is not the only consideration, however. Contractors subject to the CAS are also performing cost justified contracts. Even if they are fixed priced contracts, CAS covered contracts will be cost justified. As such, the revenue for those contracts is dependent on properly allocating their costs. A naively cautious cost structure can misallocate the cost of those contracts to competitively priced products or services, which could needlessly undermine their profitability and long term viability. So, it is essential that contractors adopt a cost structure that thoughtfully implements the many nuances of the various cost allocation rules and not blindly adopt the claims of government representatives that are not always reflective of the actual requirements.
Despite the squabbling that is likely to follow as a result of expanded coverage, contractors should generally benefit from the recodification. While government officials surely believed that a recodification and expanded coverage would reduce cost system gimmickry by all federal contractors, contractors will surely find the new rules a reliable defense against procuring agencies who are also masters at financial gamesmanship.
When confronted with a Cost Accounting Standards (CAS) issue, the Atlanta Georgia office of Celestial Defense provides three important consulting services to government contractors in general, defense contractors in particular and even the government, if desired. Those services involve expert knowledge of:
- The actual regulatory requirements to better assess compliance and non-compliance issues, including CAS applicability, Disclosure Statements requirements and submissions, cost accounting practice changes, DCAA or other outside audit findings or allegations of CAS non-compliance;
- Completion, submission and acceptance of Disclosure Statements;
- Calculation of cost impact proposals along with their completion, submission and acceptance;
- Experience in implementing prudent methods for compliant cost allocation in diverse situations; and
- Designing cost structures for optimizing the overall performance of cost allocation practices in a specific business environment and then devising implementation strategies that avoid or at least minimize cost impact consequences.