Cost Accounting Standards (CAS) and Accounting Changes

From time to time, Government contractors will need to make changes to their established cost accounting practices. There are many reasons for contractors to change their cost accounting practices. Perhaps they've acquired or spun-off a company, added a product line, consolidated operations, or simply want to improve the causal-beneficial relationship between indirect costs and their respective allocation bases.

Anytime an accounting change occurs, there will be a cost impact to contracts. That should be fairly obvious. Sometimes the cost impact will be significant and sometimes not. ACOs (Administrative Contracting Officers) do not particularly like to see accounting changes because it means more work - they have to review and negotiate cost impact proposals and modify contracts. They will make herculean attempts to declare cost impacts resulting from accounting changes to be immaterial. That way they don't have to exacerbate their already heavy workload. Contract auditors on the other hand are highly suspicious of accounting changes. Auditors worry that accounting changes are made simply to maximize contractor profits. Sometimes auditors' worries are justified. Accounting changes have been used to shift costs from commercial work to Government contracts, from fixed price to flexibly priced contracts, and from contracts in loss positions to contracts with room in the budget.

Contractors may, at anytime, voluntarily change their disclosed or established cost accounting practices (see FAR 30.602-3.(a)(1)). When changes are made, the price of Government contracts may be adjusted. However, increased costs resulting from a voluntary change may be allowed only if the ACO determines that the change is

• Desirable, and
• Not detrimental to the interest of the Government.

CAS covered contractors are required by the CAS clause (see FAR 52.230-5) to notify the ACO and submit a description of any voluntary cost accounting practice changes not less than 60 days before implementing the change. The ACO will review the proposed change for adequacy and compliance (see FAR 30-202-7). If the description of the change meets both tests (adequacy and compliance), the ACO will notify the contractor and request a cost impact proposal.

Once the cost impact proposal is received, the ACO will analyze the proposal and determine whether or not the proposed change will result in increase costs being paid by the Government. Usually, the ACO will request assistance from the contract auditor at this stage. After that analysis is completed, and if the impact is "material", the ACO  will negotiate contract price adjustments on behalf of all Government agencies.

Sometimes contractors do not make the required submissions - either the 60 day notification of the accounting change or the resulting cost impact proposal. This is usually not to their benefit. It allows the Government to estimate the general dollar magnitude of the cost impact and withhold money from billings. Generally, the Government will not be conservative in their general dollar magnitude estimates and contractors can experience sudden drops in their cash flows as a result.