CAS Working Group Guidance Papers - Part III

Today we present the third installment in our discussion of the CAS Working Group Guidance Papers. Previous installments can be read here:

     Part I - WG 76-2 - Application of CAS to Contract Modifications
     Part II - WG 76-3 - Interim Policy for Application of CAS to Subcontractors

The "Working Group Papers" were published by DoD between 1976 and 1981 to assist its contracting officers in interpreting and applying the rules and regulations being promulgated by the CAS Board during that time. According to DoD, 20 of the 25 "interim" guidance papers are still current. The purpose of this series is to take a look at those that are still current. Today we will be looking at Working Group Guidance 76-4, Determining Increased Costs to the Government for CAS Covered FFP Contracts.

76-4 Determining Increased Costs to the Government for CAS Covered FFP Contracts

One of the toughest things to determine is the cost impact resulting from accounting changes or noncompliances with CAS. One would think it to be simple, but its not. There are too many variables. We'll save this discussion for a later time but for purposes of this post, think about an accounting change that results in fewer costs being charged to FFP (firm-fixed price) contracts. Say, for example, a contractor changes the way it allocates sustaining engineering from a direct charge to an indirect charge. As a result of the change, fewer costs are allocated to a FFP contract under the new method than under the old. Was that increased costs to the Government? You might say "no" because the price was negotiated under the old allocation methodology and the Government received a fair and reasonable price. You might say "yes" because had the change been made prior to negotiations, the contract price would have been less.

This WG Paper noted that opinions have been expressed to the extent that no increased cost can occur unless the contract price of a FFP contract is actually increased. However, DoD noted that this concept cannot adequately protect the Government as was contemplated by PL 31-379, because it provides a situation under which a contractor may overtly or inadvertently adjust accounting procedures so as to cause less costs to be allocated to FFP contracts. The contractor may thus receive a windfall.

To protect the Government in all situations where FFP contracts are involved it is therefore necessary to recognize the phenomenon that occurs when cost allocations are decreased due to accounting changes. The CAS Board did so in 4 CFR 331.70(b). A basic premise of this paragraph is that the amount of such decrease represents the amount of increased costs to the Government. It is logical that this premise be extended to apply to all cases involving FFP contracts.

Accordingly, the WG guidance given in this Paper states that Increased costs to the Government under firm fixed price contracts should be considered to exist when the costs allocated to the contracts are less that would have been allocated if the method of allocation had not been changed.