We've been working our way through what is commonly referred to as the CAS Working Group Guidance. Between 1975 and 1981, DoD convened a group of CAS "experts" to come up with practical solutions to some issues that contracting officers were facing in trying to interpret and apply the rules and regulations being promulgated by the CAS board during that time. During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 are still current. Today we will be discussing Working Group Guidance # 76-15, Influence of CAS Regulations on Contract Terminations. To read previous installments in this series, go to the "Labels" section on this page and select "CAS Working Group".
77-15 Influence of CAS Regulations on Contract Terminations
The Department of Defense believed that with the passage of time, more and more contracts being terminated will be CAS-covered contracts. Questions arose as to whether there is a conflict between DOD's normal termination cost practices described in FAR Part 49 and CAS Board Regulation, particularly Standards 401, 402, and 406.
CAS 401 generally requires that costs be accumulated and reported in the same way that they have been estimated. Since the cost estimates leading up to the signing of a contract are ordinarily predicated upon the contract being performed to completion, many of the costs contained in the termination claim are likely to be arranged in ways that are quite different from the cost presentation contained in the original estimate.
Under the requirements of CAS 402 “like costs” in “like circumstances” must be consistently classified as either direct only or indirect only. Under FAR, termination claims will often include costs such as settlement expenses, unexpired lease costs, etc. as direct charges while those costs or functions would have been charged as indirect costs if the contract had run its course.
DOD's view is that terminations and normal accounting practices are not "like circumstances". Normal termination procedures violate neither CAS 401 or 402. The termination of a contract creates a situation that is totally unlike the completion of a contract. It is not reasonable or logical to extend the requirement for consistency with an estimate to an event which was never anticipated in the estimate. The circumstances usually associated with a termination also mitigate the requirements of CAS 402 since the “like circumstances” referred to in the Standard are generally lacking.
As for CAS 406, Accounting Period, DoD once had a policy that allowed contractors to utilize a partial year rate if the costs involved were insignificant. It is now DoD's policy that CAS covered contractors are prohibited from using a short accounting period. Thus, a contract terminated early in an accounting period may use an estimate of overhead for the remainder of the year that, together with the incurred historical costs represent a full fiscal year.