CAS 410 - What Are Special Allocations?

Cost Accounting Standard (CAS) 410 provides criteria for allocating general and administrative (G&A) costs to final cost objectives (e.g. contracts) and provides guidelines for the type of expenses that should be included in the G&A expense pool. For a more detailed look at this standard, read our prior posting on the subject.

One of the key considerations in allocating G&A expenses is determining the most appropriate allocation base - one that will achieve a causal/beneficial relationship between the final cost objectives and the costs to be allocated to those final cost objectives. Commonly used allocation bases include the total cost input (TCI) allocation base, the value-added allocation base, and the single (cost) element allocation base. The decision on appropriate allocation base should be carefully considered because it will impact the recovery of costs under Government contracts. But sometimes, a single allocation base just won't do and that's why CAS has the 'J' clause.

The so-called 'J' clause (named because its found in CAS 9904.410-50(j)) follows:

Where a particular final cost objective in relation to other final cost objectives receives significantly more or less benefit from G&A expense than would be reflected by the allocation of such expenses using a base determined pursuant to paragraph (d) of this subsection, the business unit shall account for this particular final cost objective by a special allocation from the G&A expense pool to the particular final cost ojbective commensurate with the benefits received. The amount of a special allocation to any such final cost objective shall be excluded from the G&A expense pool ... and the particular final cost objective's cost input data shall be excluded from the base used to allocate this pool.

These 'J' clause allocations are used a lot be larger contractors and not so much by smaller contractors. Part of the reason is that larger contractors have the knowledge and sophisticated accounting and job costing system to satisfy the Government (auditors) that special allocations are necessary in order to achieve a fair and equitable allocation of costs. In our opinion, the special allocation should be used a lot more than it is.

Auditors are naturally suspicious whenever they see a 'J' clause allocation. Some contractors have abused the clause for various reasons; perhaps to "buy-in" on a certain contract. DCAA's audit guidance on this subject reflects these known risk areas:

For a given final cost objective to qualify for special treatment, a significant difference in its beneficial or causal relationship to G&A expense, as compared with the relationship of other final cost objectives to G&A expenses, should be apparent and supported. Because G&A expense, by definition, is for the general management and administration of the business unit as a whole, special allocations should generally be limited to unusual circumstances outside the normal operations and activities of the business. The special allocation should be identified to a particular final cost objective. A need for special allocation to a class of contracts or type of situation would indicate that the allocation base being used is not representative of the total activity of the business unit during a typical cost accounting period. 

Contractors (and prospective contractors) should at least consider whether a special allocation (or a 'J' clause allocation) would improve the allocation of costs to contracts and other final cost objectives.

CAS Working Group Guidance - Part XIX

We are coming to the end of our series on the CAS Working Group Guidance Papers. By tomorrow we will have covered all twenty of the current "interim" guidance papers. Between 1975 and 1981, DoD convened a group of so-called CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss a particular issue related to CAS 410, the propriety of allocation G&A to facilities contracts.

WG 79-24 - Allocation of Business Unit General and Administrative (G&A) Expense to Facilities Contracts

Contractors' normal operations consist of the production of goods and services, such as aircraft or weapons systems. Contractors may, however, also receive Government facilities contracts which require the acquisition of significant amounts of facilities. These purchases are made at the direction of the Government and, in some cases, no profit is granted to the contractor for making the acquisitions.

CAS 410 provides that the cost input based used to allocate the G&A expense pool shall include all significant elements of that cost input which represents the total activity of the business unit. Specific criteria are provided for three bases for allocating G&A expense; total cost input, value-added, and single element. The standard also permits a special allocation of G&A expense to a particular final cost objective, if that objective receives significantly more or less benefit from G&A expense than would be reflected by the allocation of such expense using the contractor's normal allocation base. The special allocation provides a means for accounting for aberrations of normal business activity that could involve more than one final cost objective.

Facilities acquisition contracts may be one of these "aberrations". Normally, they do not require the same level of contractor risk and associated management attention as contracts which provide for the delivery of regular goods and services. As a result, a full allocation of a contractor's management or G&A expense to such contracts would generally not be equitable. An exception to this would be the rare circumstance when the preponderance of the contractor's activity is acquiring facilities as a service for the Government.

The guidance offered here is that when it is determined that facilities acquisition contracts will not receive an appropriate allocation of G&A expense by participating in the contractor's selected G&AS expense allocation base, a special G&A expense allocation under the provisions of CAS 410.50(j) shall be required.

Although this guidance applies specifically to facilities contracts, it is equally applicable to any activity that meets the "special allocation" requirement of CAS 410. We've seen many cases over the years where special allocations of G&A expenses are required in order to achieve equity in allocating G&A expenses.

CAS Working Group Guidance - Part XVI

Today begins the final week of our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of so-called CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss several issues related to CAS 410.

WG 78-21 - Implementation of CAS 410, Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives.

This Guidance Paper, using a question and answer format, deals with eleven separate issues that arose during the development of contractor implementation proposals. Following is a brief explanation of each topic. If any of these pertain to your situation, we recommend you read the full six-page guidance memo. By the way, this guidance memo makes a reference to WG 77-11. Be careful how you use 77-11; it is one of the Working Group Guidance Papers that DoD considers no longer current.

1. It is not appropriate to include functional costs, such as program management, procurement in the G&A pool unless the costs are insignificant.
2. Regardless of examples given in CAS or in prefatory/promulgation comments, the fundamental requirement of CAS 410 is to distribute costs on a causal/beneficial relationship. If any allocation results in an inequity, contractors must determine a separate allocation base for those costs.
3. CAS 410 states that the cost input based may be total cost input (TCI), value-added, or single element. The TCI allocation base is preferred. When circumstances exist where TCI is not an appropriate measure of total activity, other bases should be considered.
4. Interdivisional transfers should be included in the TCI base, unless it would result in an equitable distribution of G&A costs.
5. Several examples are provided where the use of a value-added allocation base is more appropriate than a TCI base.
6. If using a value-added cost input base, only exclude the direct materials and subcontracts. Do not exclude indirect materials and subcontracts.
7. A single-element cost input base may be used when a contractor can demonstrate that it best represents the total activity of a business unit and produces equitable results.
8. The "special allocation" described in CAS 410.50(j) only applies in situations where a particular final cost objective is an exception to the contractor's normal operation.
9. A "special allocation" under CAS 410.50(j) must be described in the Disclosure Statement.
10. Allocations of home office centralized service functions, staff management of specific activities of segments, and central payments or accruals must identify the allocation base and the components of the expense pool.
11. Facilities contracts must be included in the total cost input base unless an allocation inequity occurs.