CAS 417 - Cost of Money - Capital Assets Under Construction

CAS 417 - Cost of Money as an Element of the Cost of Capital Assets Under Construction. CAS 417
is almost like CAS 414 except whereas CAS 414 applies to assets employed, CAS 417 applies to assets under construction, fabrication, or development for contractors' own use. Like CAS 414, it is applicable to all contracts and contractors under FAR 31.205-10 as long as it is measured, assigned, and allocated in accordance with CAS and the costs were specifically identified and proposed in cost proposals relating to the contract under which the cost is to be claimed.

For each capital asset being constructed, fabricated, or developed, a representative investment amount shall be determined each cost accounting period, giving appropriate consideration to the rate at which costs of construction are incurred. The "representative investment" amount can be tricky to estimate on a prospective basis and often, contractors and the Government are at odds in determining a "representative investment". Consideration must be given to the rate of expenditure pattern of this investment. DFARS Subpart 230.71 provides guidance in computing representative investment where a contractor experiences an uneven or irregular expenditure pattern:

(a) The calculation of the representative investment requires consideration of the rate or expenditure pattern of the costs to construct, fabricate, or develop a capital asset.
(b) If a majority of the costs were incurred toward the beginning, middle, or end of the cost accounting period, the contractor shall either—
     (1) Determine a representative investment amount for the cost accounting period by calculating the average of the month-end balances for that cost accounting period; or
     (2) Treat month-end balances as individual representative investment amounts.
(c) If the costs were incurred in a fairly uniform expenditure pattern throughout the construction, fabrication, or development period, the contractor may—
     (1) Determine a representative investment amount for the cost accounting period by averaging the beginning and ending balances of the construction, fabrication, or development cost account for the cost accounting period; or
     (2) Treat month-end balances as individual representative investment amounts.

The standard requires that if substantially all activity necessary to get the asset ready for its intended use is discontinued, cost of money shall not be capitalized for the period of discontinuance. However, when such discontinuance occurs beyond the control and without the fault or negligence of the contractor, the cost of money will continue to be capitalized. However, brief interruptions and delays because of technical construction problems, labor disputes, inclement weather, shortage of material, etc. will not require discontinuance of capitalization of cost of money.

Calculation methodologies and interest rates for CAS 417 are the same as for CAS 414. Refer to our post on CAS 414 for those details.