WG 77-18 - Interim Guidance for Implementation of Cost Accounting Standard 414 - Cost of Money as an Element of the Cost of Facilities.
The cost of money is an imputed cost which is identified with the total facilities capital associated with each indirect cost pool, and is allocated to contracts over the same based used to allocate the other expenses included in the cost pool. In other words, the cost of money may be considered to be an indirect expense associated with an individual cost pool but separately identified. Like all indirect expenses, the cost of money is subject to all the same allocation procedures as any other expense which is allocable to the selected allocation based, and each element of such base, whether allowable or unallowable, should bear its prorata share of the cost of money.
The CAS 414 techniques must be used to compute the cost of money in connection with individual price proposals, forward-pricing rate agreements, and with the establishment of final overhead rates. Facilities capital included in the cost of money computation includes tangible and intangible capital assets that generate allowable depreciation or amortization as well as land which is integral to the regular operation of the business unit, and leased property for which constructive costs of ownership are allowed in lieu or rental costs under Government procurement regulations.
CAS 414 (and FAR 31.205-10) do not apply to facilities where compensation for the use of the facilities is based on use rates or allowances. Also, the asset must be used in the regular business activity which eliminates things like land held for speculation or expansion and idle facilities.
With that background, the guidance addresses three distinct issues
- The application of cost of money to IR&D/B&P (Independent Research and Development and Bid and Proposal)
- Impact on CAS Disclosure Statements
- The application of cost of money to price proposals
Application to IR&D/B&P
The cost of money is allocable to IR&D and B&P projects (or final cost objectives) and the total allocable amount should be accounted for separately and not included in the established ceiling. However there must be an understanding that the cost of money allocable to unallowable IR&D and B&P shall be considered unallowable (you have to remember that this was issued in the days when there were caps on the amount of IR&D/B&P that contractors could charge to Government contracts).
Impact on CAS Disclosure Statements
Under CAS 414, the regular method of computing the cost of money is preferred. The alternate method is available if the contracting parties can agree that the results of either method will be substantially the same. Although a contractor should decide which method it will use, and follow it consistently, a change from one to the other should not have a significant monetary impact and contract adjustments should not be required.
The CAS disclosure statement does not expressly require the disclosure of the practices used by the contractor to determine and assign the cost of money. However, the cost of money calculation is a significant accounting matter, and an adequate description of the practices involved are virtually mandatory to ensure an understanding of the accounting methods relating to this cost element.
Application to price proposals
The fundamental concept of using current, accurate, and complete data in pricing proposals applies equally to data used to compute proposed cost of money. Thus historical or forecasted costs used in pricing cost of money in proposals must represent the best available information.
The Standard provides that where the cost of money is to be determined on a prospective bases, the cost of money rate shall be based on the latest available rate published by the Secretary of the Treasury. Ordinarily "based on" should be interpreted to mean "the same as". However, the guidance points out that there may be circumstances when it would be better to use a rate other than the latest semi-annual rate.
The guidance paper offers four points. First, if a contractor does not propose cost of money, the contracting officer should specify in the contract terms that cost of money will not be allowable as an element of cost under the contract. Secondly, when there is no increase in cost paid or to be paid as a result of a noncompliance with CAS 414, a determination of noncompliance need not be issued. Thirdly, a careful review should be made before the historical method is accepted for pricing future work, because the historical method may result in a cost of money factor substantially higher than that which will actually be experienced. Finally, when a new interest rate is determined prior to or during negotiations, the contracting officer should consider recomputing the cost of money amount before finalizing negotiations.
If any of these apply to your situation, you should go back and read the "discussion" section of working group guidance for a more complete understanding of DoD's concerns in this area.