CAS Working Group Guidance - Accounting Changes - Income Recognition Method

Today we finish up our series on the CAS Working Group Guidance Papers. These Guidance Papers were issued between 1975 and 1981 by a group of CAS experts with the Department of Defense whose job it was to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply new CAS rules and regulations being promulgated by the CAS Board. This was a very active period for the CAS Board. By 1981, most, perhaps all, of the 19 CAS Standards had been issued and the newness and often times complexities of those standards raised a lot of questions. Although these were issued as "interim" guidance and labeled as such, 20 of the 25 Guidance Papers remain current more than 30 years later. The final Working Group Guidance Paper covers a topic that has no applicability to most Government contractors; what to do when you change your reporting of income from a percent of completion method (PCM) to a completed contract method (CCM).

WG 81-25 - Change in Cost Accounting Practice for State Income and Franchise Taxes as a Result of Change in Method of Reporting Income From Long-Term Contracts

State tax regulations usually permit taxpayers to select one of several acceptable methods of stating the elements that determine taxable income and later, under specified conditions, to change from the initial selection to another acceptable method.

According to CAS Regulation 331.20(h), a "cost accounting practice" is any accounting method or technique which is used for measurement of costs, assignment of costs to cost accounting periods, or allocation of cost to cost objectives. According to CAS 331.20(i), a change to either a disclosed cost accounting practice or an established cost accounting practice is any alteration in a cost accounting practice as defined in (h).

If a contractor changes its method of reporting income for long-term contracts from PCM to CCM, it will impact the years that state income taxes are imposed. Changing from a PCM to a CCM method will result in lower income taxes in the year of the change and the years shortly thereafter. When this occurs, the amount of state tax cost allocated to contracts will generally be lower than the amount projected to be allocated to the contracts at the time they were negotiated.

According to this guidance, a change from PCM to CCM (or, for that matter, vice versa), is a change in cost accounting practice because it alters the mearsurement and assignment of State tax costs. Consequently, if the cost impact is material, the Government will adjust contract prices as required by CAS.

By the way, this would be a legitimate reason for auditors to request copies of state income tax returns - to determine whether a change in the method for recognizing income, has been made.

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 XVIII

We are in 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 accounting changes and the need for equitable adjustments.


WG 79-23 - Administration of Equitable Adjustments for Accounting Changes not Required by New Cost Accounting Standards

CAS 331.50(a)(4)(C) permits the use of equitable adjustment procedures in connection with the cost impact of any accounting change which the contracting officer determines to be desirable and not detrimental to the interest of the Government.

This guidance addresses a number of questions concerning that provision. The most significant question is that of what criteria should be used in determining whether an accounting change is desirable and not detrimental to the interest of the Government? This is an important question as contracting officers must deal with it all of the time when contractors make voluntary accounting changes. Some contractors make accounting changes an annual event.

According to the guidance, the "desirable" encompasses the tests of being appropriate, warranted, equitable, fair or reasonable. The contracting officer's finding shall not be made solely because of the financial impact of the proposed change on the contractor's current CAS-covered contracts. A change may be desirable and not detrimental to the interest of the Government even though costs increase.

Remember, the overriding criteria for allocating indirect costs to intermediate and final cost objectives (as well as shared services that might be direct) is that it result in a fair and reasonable, causal/beneficial allocation. Changes that increase costs to the Government are not necessarily bad. It could be that the previous allocation methodology did not result in an equitable allocation of costs to Government contracts.

Notwithstanding the logic or reasoning behind accounting changes, contractors can expect a high level of Government scrutiny whenever accounting changes are proposed.

CAS Working Group Guidance - Part XVII

We are in 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 CAS 409, Depreciation of Tangible Capital Assets.


WG 78-22 - CAS 409 and the Development of Asset Service Lives


"Part time" usage is not the same as "Standby".


In describing criteria for estimating service lives for tangible capital assets, CAS 409 states that the estimate of the expected actual period of usefulness need not include the additional period tangible capital assets are retained for standby or incidental use where adequate records are maintained which reflect the withdrawal from active use. Supporting records shall be maintained which are adequate to show the age at retirement or, if the contractor so chooses, at withdrawal from active use for a sample of assets for each significant category.


The CAS 409 provision for adjusting service lives to reflect standby or incidental usage provides the contractor an opportunity to prevent having longer lives applied in the depreciation process merely because an asset is not disposed of when withdrawn from active use. To take advantage of this opportunity, the contractor must maintain a record supporting the status of assets.


Standby status exists when the asset is withdrawn from regular usage with no definite plans for continuing its use. The asset is retained merely for possible temporary replacement during repair of a productive asset, emergency, or other unusual usage. Diminishing the usage to a part-time basis does not constitute "standby" status.


Contractors should be required to provide sufficient detail in records of asset lives or other documentation to support that assets retained for standby or incidental use were withdrawn from service. As indicated in CAS 409.50(e)(2), the records may be for a sample of assets for each significant category. These records are required only when asset lives are adjusted for standby or incidental use.

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.

CAS Working Group Guidance - Part XV

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of 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 the CAS Disclosure Statement.

WG 77-20 - Policy for Withdrawing Determination of Adequacy of Disclosure Statement
Government contractors and subcontractors are required, as a condition of contracting, to disclose in writing an adequate description of their cost accounting practices. A Disclosure Statement is considered adequate if it is current, accurate and complete. According to the DoD, there was wide confusion as to the right of the Government to withdraw the determination of adequacy when the disclosed practices where no longer considered adequate.

Questions arose as to whether the ACO has a right to withdraw an adequacy determination that was previously given. Any consideration of the factors bearing on this question would indicate that the contracting officer not only has a right but also a duty to take such action if a Disclosure Statement is determined, at any time, to be inadequate. Failure to do so would relieve the contractor of any requirement to maintain the statement in a current, accurate and complete status after the initial determination of adequacy had been given. This would ultimately render the document completely useless.

There is seldom a problem in determining whether a Disclosure Statement is current or accurate. There is a problem in determining whether it is complete. To be complete the statement must contain a level of detail adequate to fuly discuss the accounting practices which the contractor employs. At the same time there is no need for burdening the statement with minuscle descriptions of accounting procedures that will have no discernible effect on the flow of costs even if they are changed from time to time.

A determination that the level of detail in a Disclosure Statement is adequate, is judgmental and thus the detail should be expected to vary from contractor to contractor or even between cost centers of a particular contractor depending upon the volume or mix of business or complexity of the accounting system. As the volume increases the mix changes or accounting procedures become more complex, the Disclosure Statement would be expected to become more detailed.

Materiality appears to be the key word in determining what level of detail should be required. Thus, accounting procedures which, if changed, would not have a material effect on the flow of costs, either now or in the foreseeable future, should probably not be included in the Disclosure Statement.

Guidance: 
Materiality should be a major factor in deciding the level of detail required to be disclosed. A prime consideration should be whether a change in accounting procedure at the level of detail under consideration would have a material effect on the flow of costs, now or in the near future.

The level of detail needed to adequately describe the accounting practices will vary depending upon volume or mix of work in the plant or cost center, or complexity of the accounting system.

Contractors should be advised immediately when a revision to the Disclosure Statement is considered necessary.

ACO's do have authority to withdraw an adequacy determination previously given for a Disclosure Statement, but action to withdraw the determination should not be taken unless the issue is material and the contractor will not make the revision.

CAS Working Group Guidance - Part XIV

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of 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. For those of you who are getting bored with this series, hang on a little longer - we'll be finished after No. 20.

WG 77-19 - Administration of Leased Facilities Under Cost Accounting Standard 414, Cost of Money as an Element of the Cost of Facilities Capital.

This is another guidance paper on CAS 414, Cost of Money. Back when CAS 414 and later CAS 417 (facilities under construction) were being considered, many in the Government contracting community were opposed to it. They felt like is was stacking profit on top of profit and there were even some contracting officers who refused to consider it in negotiations. That was awhile back and contracting officers carried bigger sticks back then.

This particular guidance deals with leases. CAS 414 provides that the cost of money will be computed on the average net book value of facilities, capital items, including certain leased facilities, for which constructive cost of ownership is allowed in lieu of rental costs under Government procurement regulations.

Two issues surfaced when attempting to implement the standard. The first was whether to recognize cost of money as part of constructive ownership cost in determining whether allowable cost will be based on constructive cost of ownership or rental costs. The second issue was when to include the net book value of leased assets on the CASB-CMF form.

Cost of money is a cost which the contractor would be allowed if he had purchased the property. Therefore, it should be included as an ownership cost in making the determination whether allowable cost will be based on constructive cost of ownership or leasing costs. After that determination, cost of money should be allowed as a separate item under FAR 31.205-11 and not included as a constructive ownership cost in determining allowable cost.

Timing for including net book value of leased assets on the CASB-CMF form involves at least two possibilities, at the beginning of the lease term or at the time when cumulative leasing cost exceed cumulative cost of ownership, commonly referred to as the cross-over point.

Guidance

Cost of money should be included as an ownership cost in making the determination whether allowable cost of leased facilities will be based on constructive cost of ownership or leasing costs.

Where it has been determined that to allow leasing costs is more advantageous to the Government, the value of the leased facilities will not be included in the cost of money as a cost of facilities capital computation.

Leased assets for which a decision has been made to limit reimbursement to constructive cost of ownership will be included on CASB-CMF form at their net book value computed at the effective date of the Standard (long since passed) or at the beginning of the term of the lease whichever is later.

Net book value for the purpose of computing a contractor's cost of facilities capital on leased assets shall be computed based on the asset's fair value at the beginning of the term of the lease less an amount equal to accumulated depreciation from the beginning of the term of the lease computed in a manner as if the contractor had purchased the asset. The cost of money will not be included in the net book value of leased assets as reflected on the CASB-CMF form.

The cost of money related to leased assets will be allocated to benefiting cost objectives as an integral part of the cost of money factors for all capital assets.

Land will be shown on the CASB-CMF form (at its fair value at the beginning of the term of the lease) for each accounting period it is used in regular business operations.

CAS Working Group Guidance - Part XIII

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of 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're going to tackle the longest and most technical of the Working Group papers, WG 77-18.

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

1. The application of cost of money to IR&D/B&P (Independent Research and Development and Bid and Proposal)
2. Impact on CAS Disclosure Statements
3. 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.

CAS Working Group Guidance - Part XII

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of 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.

WG 77-17 - Identification of CAS Contract Universe at a Contractor's Plant

Whenever a contractor makes a change to its disclosed or established accounting practices or is determined to be in noncompliance, FAR requires the contractor submit a cost impact proposal. An integral part of the cost impact proposal is the listing of CAS-covered contracts and subcontracts which will be affected by the change or noncompliance.

The GAO (Government Accountability Office) reported that auditors were spending an inordinate amount of time verifying the completeness and accuracy of the lists submitted by contractors. The GAO recommended that DoD develop a procedure for identifying all the CAS-covered contracts and subcontracts at each contractor's (or subcontractor's) facility.

The CAS clause implicitly requires that contractors are responsible for supplying accurate and complete lists of its CAS covered contracts. However, to preclude any misunderstanding and a consequent loss of time, DoD issued the following guidance:

In order to comply with the requirements of the CAS clause, contractors should be required to maintain a system for identifying accurately and completely all contracts and subcontracts which contain the CAS clause. The ACO (Administrative Contracting Officer) should ensure that the contractor has such a system in place and that it is functioning effectively.

Apparently, accurate record keeping was a problem back in 1977 and from our experience, is still a problem today.

CAS Working Group Guidance - Part XI

Today we resume our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of 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. As we noted in our first blog in this series, these are not the best quality but to our knowledge, are the only ones available on the Internet for free.

WG 77-16 - Applicability of CAS to Letter Contracts

The standard CAS clause require CAS Covered contractors to comply with all Cost Accounting Standards in effect on the date of contract award or the date shown on the signed certificate of current cost or pricing data.

This guidance addresses two questions: i) does CAS apply to letter contracts and if so, when? and ii) what significance does definitization of a letter contract have?

CAS is applicable to letter contracts as of the date of award unless it has been determined that the contract is excluded under one of the exemptions from CAS requirements. Definitization of the contract would not trigger any new Standards since definitization is a contract modification rather than a new contract (see Interim Guidance Paper WG 76-2).

CAS Working Group Guidance - Part X

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.

CAS Working Group Guidance - Part IX

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 # 76-13, Applicability of CAS 405 to Costs Determined to be Unallowable on the Basis of Allocability. To read previous installments in this series, go to the "Labels" section on this page and select "CAS Working Group".  

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.

CAS Working Group Guidance - Part VIII

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 # 76-10, Retroactive Implementation of Cost Accounting Standards When Timely Compliance is Not Feasible. To read previous installments in this series, go to the "Labels" section on this page and select "CAS Working Group".  

WG 77-10 - Retroactive Implementation of Cost Accounting Standards When Timely Compliance is Not Feasible 

There are two significant dates in the implementation of cost accounting standards, the “effective” date and the “applicability” date. The effective date “Designates the point in time when the pricing of all future CAS-covered procurement must reflect the requirements of the newly promulgated standard . . .”; and the applicability date “. . . marks the beginning of the period when the contractor must actually change the accounting and reporting systems to conform to the standard.” The applicability date of most standards is the beginning of the contractor's next accounting period after receipt of a CAS-covered contract following the effective date of the standard.

There have been unusual situations when it is virtually impossible for a contractor to comply with a particular standard at its applicability date because the standard requires a major revision to a segment of the contractor's cost accounting system. In this instance, attempting to forecast the impact of the standard on a negotiated contract to be entered into after the effective date of the standard could be inequitable to either party.

In these situations, a contractor may request a deferral from the ACO. If the contractor can demonstrate to the satisfaction of the ACO, that it is virtually impossible for it to comply with the effective or applicability dates of a standard the ACO is authorized, by this guidance, to establish a specific date for for the contractor to make the necessary changes to its estimating, accounting and reporting systems to be in compliance with the standard.

The Working Group guidance contains some additional specific requirements that contractors and contracting officers must follow when a deferral is granted. Bottom line however, if the ACO grants an extension, contractors won't have to worry about any noncompliances being reported.

CAS Working Group Guidance - Part VII

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 # 76-9, Measurement of Cost Impact on FFP Contracts. Significance of "Effective" and "Applicability" Dates included in CAS. To read previous installments in this series, go to the "Labels" section on this page and select "CAS Working Group".  

76-9 Measurement of Cost Impact on FFP Contracts

CAS has several provisions regarding accounting changes and noncompliances. CAS requires an equitable adjustment whenever accounting system changes result from the issuance of new cost accounting standards. CAS requires that the Government and contractors negotiate the terms and conditions under which a voluntary change to either a disclosed or established cost accounting practice will be made. CAS also provides for recovery with interest of any over payments that have resulted from a contractor's failure to comply with either a CAS Standard or a disclosed practice. CAS does not however, address the mechanics of these computations.

Although there is a certain theoretical purity to the use of original cost estimates for adjusting fixed price contracts for mandatory and voluntary changes, there are several serious impediments to that approach that are intrinsic to fixed price contracting. While the parties to a fixed contract have agreed to a total price, there is often no agreement as to how much of the price represents cost and how much profit and seldom a meeting of the minds on the amount of any individual element of costs. This will be particularly so if the award was based on adequate price competition. Further, many fixed price contracts will have undergone numerous price changes due to engineering modifications and other changes. In such cases, tracking of an individual cost element may prove virtually impossible. There is also the danger that the confusion resulting from the attempt to reconstruct the original data will provide an opportunity to reprice loss portions of contract performance that have elapsed prior to the point of the change.

To overcome these issues, the  Working Group issued the following guidance.

Cost adjustments under either mandatory or voluntary changes should generally be the net difference between the current estimated cost to complete using the old accounting methods and the same estimate reconstructed to reflect the new methods.

CAS Working Group Guidance Papers - Part VI

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 # 76-7, Significance of "Effective" and "Applicability" Dates included in CAS. To read previous installments in this series, go to the "Labels" section on this page and select "CAS Working Group".
   

WG 76-7 - Significance of "Effective" and "Applicability" Dates included in CAS

This particular Working Group Guidance Paper is rather moot until such time as the CAS Board begins to issue new Cost Accounting Standards. It deals with the difference between "effective" dates and "applicability" dates. However, since all existing CAS standards are "effective" and have been for several decades, there is really no reason to make such distinctions.

To facilitate the implementation process, each CAS standard carried its own statement regarding the date it becomes effective and generally, a statement describing the time and conditions under which the standard should be applied to the contractor's accounting system - the applicability date.

The effective date designates the point in time the Government can require compliance with the Standard's provisions. As a matter of policy, the CAS Board generally defers the application of the standard to the contractor's accounting system beyond the effective date. So, for example in CAS 406, Cost Accounting Period, the effective date is April 17, 1992 and the applicability date is the beginning of the contractors next fiscal year after receiving a contract to which the standard was applicable. This deferral is intended to provide affected contractors adequate time to make necessary preparation for compliance and to provide a more convenient time to initiate the required accounting changes.

The guidance given in this "paper" simply alerts procurement officials and auditors that they need to be cognizant of the effective and applicability dates of each CAS standard and ensure that contractors have considered the impact of these standards in proposals and cost impact studies.

CAS Working Group Guidance Papers - Part V

Today we present the fifth installment in our discussion of the CAS Working Group Guidance Papers. Previous installments can be read here:

     Part I - WG 76-2 - Application of CAS to Contract Modifications
     Part II - WG 76-3 - Interim Policy for Application of CAS to Subcontractors
     Part III - WG 76-4 - Determining Increased Costs on FFP Contracts
     Part IV - WG 76-5 - Treatment of Implementation Costs Related to Changes in Accounting Practices

The "Working Group Papers" were published by DoD between 1976 and 1981 to assist its contracting officers in interpreting and applying the rules and regulations being promulgated by the CAS Board during that time. According to DoD, 20 of the 25 "interim" guidance papers are still current. The purpose of this series is to  review those that are still current. Today we will be looking at Working Group Guidance 76-6, Application of CAS Clause to Changes in Contractor's Established Practice where a Disclosure Statement has been Submitted.

WG 76-6 - Application of CAS to Changes in Established Practice Where Disclosure Statement Submitted.

Contractors and subcontractors are required to disclose in writing their cost accounting practices under the criteria set forth in FAR 9903.202-1 (and elsewhere). This is called the "CAS Disclosure Statement". Not every Government contractor is required to submit a disclosure statement however. For contractors that are not required to submit, the Government falls back to their "established practices" when assessing the propriety of their cost accounting practices.

The ACO is required by FAR to make a determination as to whether the disclosure statement adequately describes the contractor's cost accounting practices. In order to be deemed adequate, the disclosure statement submitted by the contractor must be current, accurate, and complete.

A contractor required to submit a disclosure statement may have cost accounting practices which are not specifically covered by Disclosure Statement or there may be other reasons why particular practices were not disclosed. That means the practice is not technically a "disclosed practice". When non-disclosed practices are revised due to either (i) a mandatory change or (ii) a voluntary change, the question arises as whether the contractor is required to revise its Disclosure Statement and submit a contract price adjustment. The CAS clause discusses changes to an "established cost accounting practice" as well as a "disclosed cost accounting practice." When a contractor is required to disclose his practices, he is, in effect, disclosing his established practices and should be disclosing all relevant cost accounting practices. Therefore, a cost accounting practice not disclosed is considered an "established cost accounting practice" whether or not it should have been disclosed in or on the Disclosure Statement.

So, contractors are not going to get off on technicalities. Even non-disclosed accounting practices are subject to cost impact adjustments.

When an ACO makes a determination that the contractor's Disclosure Statement is adequate, it does not necessarily indicate that the ACO is certifying that all cost accounting practices disclosed have  been adequately described and the ACO currently is not aware of any additional practices that should have been disclosed. Subsequently, when it is discovered that a contractor is not following a cost accounting practice that he failed to disclose or a change to that practice is made, the practice will be considered an "established cost accounting practice" and appropriate guidance in ...(FAR)... on changes and noncompliances will be followed.

CAS Working Group Guidance Papers - Part IV

Today we present the fourth installment in our discussion of the CAS Working Group Guidance Papers. Previous installments can be read here:

     Part I - WG 76-2 - Application of CAS to Contract Modifications
     Part II - WG 76-3 - Interim Policy for Application of CAS to Subcontractors
     Part III - WG 76-4 - Determining Increased Costs on FFP Contracts

The "Working Group Papers" were published by DoD between 1976 and 1981 to assist its contracting officers in interpreting and applying the rules and regulations being promulgated by the CAS Board during that time. According to DoD, 20 of the 25 "interim" guidance papers are still current. The purpose of this series is to  review those that are still current. Today we will be looking at Working Group Guidance 76-5, Treatment of Implementation Costs Related to Changes in Cost Accounting Practices.

76-5 - Treatment of Implementation Costs Related to Changes in Cost Accounting Practices

When a cost accounting practice is changed, whether the change is mandatory (issuance of a new cost accounting standard) or voluntary (any change other than mandatory) contractors will invariably incur costs to implement the change. Sometimes these costs are significant, sometimes not. Back in 1976, questions arose as to whether implementation costs associated with such practice changes may be included in cost impact statements, and whether such costs should be charged only to CAS covered contracts. Similar questions arise today.

Since mandatory changes are required because of CAS Board actions, it has been proposed that total implementation costs should be allocated only to CAS covered contracts. In the case of voluntary changes, CAS Board regulations state that there can be no increased cost to the Government. This adds additional significance to the question of whether implementation costs should be included in the cost impact statement. Cost of implementing changes to accounting practices may include the cost of work performed by the contractor's personnel and/or work performed by outside organizations. Such costs are normally included in the contractors' overhead accounts and allocated to appropriate cost objectives.

Given the above scenarios and discussion, the CAS Working Group has advised that implementation costs may be included in cost impact statements only to the extent they are a part of appropriate indirect expense pools, and allocated in accordance with the contractor's normal accounting practices. This principle applies to both voluntary changes and changes resulting from the issuance of Standards. This effectively means that such implementation costs may not be charged direct to any particular contractor or set of contracts.

CAS Working Group Guidance Papers - Part III

Today we present the third installment in our discussion of the CAS Working Group Guidance Papers. Previous installments can be read here:

     Part I - WG 76-2 - Application of CAS to Contract Modifications
     Part II - WG 76-3 - Interim Policy for Application of CAS to Subcontractors

The "Working Group Papers" were published by DoD between 1976 and 1981 to assist its contracting officers in interpreting and applying the rules and regulations being promulgated by the CAS Board during that time. According to DoD, 20 of the 25 "interim" guidance papers are still current. The purpose of this series is to take a look at those that are still current. Today we will be looking at Working Group Guidance 76-4, Determining Increased Costs to the Government for CAS Covered FFP Contracts.

76-4 Determining Increased Costs to the Government for CAS Covered FFP Contracts

One of the toughest things to determine is the cost impact resulting from accounting changes or noncompliances with CAS. One would think it to be simple, but its not. There are too many variables. We'll save this discussion for a later time but for purposes of this post, think about an accounting change that results in fewer costs being charged to FFP (firm-fixed price) contracts. Say, for example, a contractor changes the way it allocates sustaining engineering from a direct charge to an indirect charge. As a result of the change, fewer costs are allocated to a FFP contract under the new method than under the old. Was that increased costs to the Government? You might say "no" because the price was negotiated under the old allocation methodology and the Government received a fair and reasonable price. You might say "yes" because had the change been made prior to negotiations, the contract price would have been less.

This WG Paper noted that opinions have been expressed to the extent that no increased cost can occur unless the contract price of a FFP contract is actually increased. However, DoD noted that this concept cannot adequately protect the Government as was contemplated by PL 31-379, because it provides a situation under which a contractor may overtly or inadvertently adjust accounting procedures so as to cause less costs to be allocated to FFP contracts. The contractor may thus receive a windfall.

To protect the Government in all situations where FFP contracts are involved it is therefore necessary to recognize the phenomenon that occurs when cost allocations are decreased due to accounting changes. The CAS Board did so in 4 CFR 331.70(b). A basic premise of this paragraph is that the amount of such decrease represents the amount of increased costs to the Government. It is logical that this premise be extended to apply to all cases involving FFP contracts.

Accordingly, the WG guidance given in this Paper states that Increased costs to the Government under firm fixed price contracts should be considered to exist when the costs allocated to the contracts are less that would have been allocated if the method of allocation had not been changed.

CAS Working Group Guidance Papers - Application of CAS to Subcontracts

This is the second installment in our periodic series on the CAS Working Group Guidance Papers. To read Part I, go here. The CAS Working Group existed for only about five or six years. The CAS Board was initially a legislative body but DoD (an executive agency) set up the working group to help its contracting officers to understand and interpret CAS standards and regulations. According to the Defense Contract Audit Agency, 20 of the 25 original working group guidance papers are still current. In this periodic series, we will be discussing the ones that are still current. Today we will look at Working Group Guidance Paper No. WG 76-3 issued on October 1, 1976.

WG 76-3 - Policy for Application of CAS to Subcontracts

The CAS clause requires that contractors comply with all cost accounting standards in effect on the date of award of a CAS covered contract. Prime contractors and higher-tier subcontractors are also required to flow down the CAS provisions to their own subcontractors. The question arose as to what CAS Standards apply to the subcontractor(s); the ones in effect on the date the prime was awarded or the ones in effect on the date the subcontract was awarded. The CAS Board stated that subcontractors are required to comply with only those CAS Standards applicable to the prime contractor.

 Back when the CAS Board was issuing Standards, this question came up often. Now however, not so much. It isn't totally obsolete however because although no new CAS Standards have been issued in many years, the existing ones are modified from time to time. Currently, the Board is considering changes to CAS 412 and 413 to comply with the Pension Harmonization Act.

After careful consideration of the CAS Board interpretation and its impact, the Working Group concluded that, in many cases, the administrative effort to implement the CAS Board's interpretation could be considerably greater than that required when subcontracts are subject to all standards in effect at the time the subcontracts are placed. This is evident when the two situations are compared. In the one instance each new subcontract would bring with it all current standards. This would leave no doubt as to the standards applicable to all the contractor's CAS covered work. In the other case, it would be necessary to track back to the prime contract to determine the standards that were effective. Following this, other existing contracts and new awards would have to be reviewed. The results of this would disclose which prime or subcontract included the latest standards, and thus establish the standards applicable to all CAS work.

In view of the above, contracting officers were advised to require their prime contractors to include language in their CAS flow down clauses which requires that subcontractors at all tiers comply with all standards, rules and regulations in effect at the time the subcontract is awarded.

CAS Working Group Guidance Papers - Application of CAS to BOAs

Back in the early days of the Cost Accounting Standards (CAS) Board, the Department of Defense (DoD) established a CAS Steering Committee and Working Group. From 1976 through 1981, this Working Group published 25 guidance papers. Most of these guidance papers, commonly referred to as "Working Group Guidance" and published as "interim" guidance, are still applicable today (37 years is a long time for interim guidance). The Working Group (WG)guidance was issued to interpret CAS Board rules and regulations for implementing in DoD procurement practices. We recall some sort of controversy surrounding WG guidance - the CAS Board, which was a legislative body at that time with the Comptroller General as head, was not always in agreement with DoD's "interpretations". Presently, the CAS Board is tucked under the Office of Federal Procurement Policy, Office of Management and Budget.

According to the Defense Contract Audit Agency's Contract Audit Manual (DCAM), 20 of the 25 WG Guidance papers are still current. Also, according to DCAA, the substance of these interim WG Guidance papers have been incorporated into Chapter 8 of their audit manual. Chapter 8 is the Agency's guidance on Cost Accounting Standards. The full text of the WG guidance can be downloaded here. These aren't the best copies but the only ones we know of that don't require a subscription from West or CCH. You will not find these on the CAS Board's website.

Over the next few days, we will be briefly discussing the 20 WG Guidance Papers that are still deemed to be current. We'll start with WG 76-2 from February 24, 1976. Application of CAS to Contract Modifications.

WG 76-2 - Application of CAS to Contract Modifications and to Orders Placed Under Basic Agreements.

The guidance states that "With respect to contract modifications the general rule is that any modifications made to a contract pursuant to the terms and conditions of the contract will not affect the status of the contract with respect to CAS application. That is, if CAS was applicable to the original contract, it will be applicable to the modification, if CAS was not applicable to the original contract, it will not apply to the modification."

In the case of Basic Agreements, FAR 3-410 specifically states that they are not contracts. The individual contracts or orders are therefore to be individually considered when determining the applicability of CAS. If the CAS dollar threshold is reached and the negotiated contract or order is not otherwise exempt under the CAS rules and Regulations, the contract or order is subject to CAS.