WG 77-13 - Applicability of CAS 405 to Costs Determined to be Unallowable on the Basis of Allocability
CAS 405 requires that contractors set up policies and procedures to identify unallowable costs and exclude them from proposals and billings to the Government. Specifically, CAS 405.40(a) provides that:
“Costs expressly unallowable or mutually agreed to be unallowable including costs mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract.”
An unallowable cost is defined in paragraph 405.30(a)(4) as:
“Any cost which, under the provisions of any pertinent law, regulation, or contract, cannot be included in prices, cost reimbursements, or settlements under a Government contract to which it is allocable.”It has been suggested that the last five words of paragraph 405.30(a)(4), “. . . to which it is allocable.” can be interpreted to mean that CAS 405 does not apply to costs determined unallowable by the Government on the basis of allocability, and thus a contractor is not required to identify such unallowables.
It is the intent of the Cost Accounting Standards Board that CAS 405 apply to all costs determined unallowable, including those so determined on the basis of allocability. This intent is consistent with the standard's purpose as stated in paragraph 405.20 of the standard. Thus, the definition of an “unallowable cost” applies to any cost which a contractor assigns to Government contracts which is determined to be unallowable for whatever reason; i.e. law, regulation, contract terms, or allocability.
Going one step further, assume that a contractor proposes a cost on a contract and it is questioned solely on the basis of allocability. The contractor has two options: (1) he can agree with the Government that the cost is not properly allocable and, therefore, unallowable, or (2) he can claim that the cost is allocable and, therefore, allowable. In the first case the cost is unallowable by mutual agreement and in accordance with CAS 405.40(a) must be identified. In the second instance, if both parties hold their ground and the cost becomes the subject of a dispute, then in accordance with CAS 405.40(b) it becomes designated as unallowable and must be identified if used in computing any billing claim for the contractor to claim that the cost is allocable while simultaneously claiming that he does not have to identify it per CAS 405 because it is not allocable.
According to this Working Group guidance, contractors should be required to identify all unallowable claimed costs in accordance with CAS 405, including costs determined unallowable by the Government on the basis of allocability. If a contractor refuses to identify unallowable costs, including those determined not allocable, the contractor is in noncompliance with CAS.