CAS Board Published Final Rule on Exemption from CAS

The Cost Accounting Standards Board (CASB) published a final rule yesterday revising the exemption for contracts and subcontracts for the acquisition of commercial items. This final rule clarifies the types of contracts that are exempt from the application of CAS when acquiring commercial items. It becomes effective on August 16, 2018.

The new rule is designed to remove inconsistencies between the list of contract types recognized for use in acquiring commercial items in the CAS administration rules (48 CFR 9903.201-1(b)(6)) with the contract types reflected in FAR (48 CFR 12.207).

For example, FAR 12.207 allows the use of firm fixed price contracts in conjunction with award fee incentives or performance or delivery incentives known as FPI contracts when the award fee or incentive is based solely on factors other than costs. However, the CAS exemption does not expressly recognize FPI contracts on the enumerated list of exempt contracts.

Under the new rule, the CAS Board simply replaced the existing exemption language with a reference to the FAR reference covering contracts available for commercial items.

Old provision: Firm fixed-priced, fixed-price with economic price adjustments (provided that price adjustment is not based on actual costs incurred), time-and-materials, and labor hour contracts and subcontracts for the acquisition of commercial items.

New provision: Contracts and subcontracts authorized in 48 CFR 12.207 for the acquisition of commercial items.

Read more about the new rule including public comments and the Board's responses thereto here.

Section 809 Panel Issues Report No. 2 - Cost Accounting Standards

The Section 809 Panel (officially the Advisory Panel on Streamlining and Codifying Acquisition Regulations) has issued Vol. 2 of its three volume report. This report builds on the Panel's commitment to making "actionable" recommendations and providing the language necessary to implement those recommendations. Volume 2 contains recommendations addressing the acquisition workforce, commercial source selection, the Cost Accounting Standards Board, and service contracting. Volume 3 is schedule to be released later this year.

We thought that the Panel would recommend that the moribund Cost Accounting Standards Board be abolished. It hasn't done anything significant since 2011. We were wrong. The Panel want to revitalize the Board, move it our from under OFPP (Office of Federal Procurement Policy) and make it an independent board with adequate staffing and funding. The report summarizes:

The Cost Accounting Standards Board (CASB) and cost accounting standards (CAS) need to be restructured to provide necessary guidance and minimize the burden for government and contractors. The CASB should be reinvigorated by extracting it from the Office of Federal Procurement Policy and making it an independent Executive branch organization. The CAS program requirements should be modified to include raising the thresholds for full CAS coverage and the disclosure statement and adding guidance for CAS applicability to hybrid contracts and indefinite delivery contract vehicles.  

The report concludes that the CAS Board's current configuration within OFPP is ineffective at proficing for application of CAS to federal government contracts. CASB has only rarely met in recent y ears, and member positions often go unfilled for long periods. Meanwhile, changes to Government contracting require ongoing updates to the standards and resolution of question s about CAS applicability. Because CASB has not been responsive to these changes, contractors are overly burdened by the need for added layers of compliance to many rules that have not kept pace with new business models. CASB needs to be reinvigorated as an independent organization and removed from OFPP.

How long has this conditions existed? The panel says its been going on for 30 years. "For the past 30 years, CASB has failed to address urgent issues in a timely way." The most pressing problem with the current CASB formulation is the administration of the Board at the OFPP, partly due to a lack of leadership and subject matter expertise. The OFPP administrator position changes frequently and is often vacant, leaving the role in the hands of an acting administrator, most often a career civil servant versed in procurement policy, but without the requisite authority or experience in accounting and contract management to push forward needed CAS reforms (the current OFPP administrator position has been vacant since January 2016).

The Panel made several recommendations including the placement under GSA (rather than OFPP), a permanent staff, independent of any other agency, mandatory meetings, among a few others. The Board should consist of five members; a chair with extensive experience in administering and managing as a senior government official of major CAS-covered contracts, two members from the Government (not auditors or investigators), one member from a government contractor and one member from the accounting profession.

The full report is available here.

What is a Cost Accounting Practice?

One frequent argument between contractors and contracting officers and/or contract auditors is whether "something" a contractor want to do accounting-wise, represents a change in a cost accounting practice. It is an important question because if the contractor is CAS (Cost Accounting Standards) covered, a change in a cost accounting practice will require contracting officer approval (pre-approval if everyone is doing their jobs correctly) and the contractor may owe the Government some money if the cost accounting change results in increased cost to the Government.

Before there can be a change to a cost accounting practice, there has to be a cost accounting practice. And here's where disputes arise. To the Government, everything having to do with accounting, estimating, accumulating, and reporting costs is an accounting practice. To the contractor, not so much. A lot of disputes can be avoided however if the parties read the regulations. Fortunately, the Cost Accounting Standards Rules and Regulations provide a definition of "cost accounting practice".

According to the Cost Accounting Standards Board (CASB), a "cost accounting practice" is any disclosed or established accounting method or technique which is used for allocation of costs to cost objectives, assignment of cost to cost accounting periods, or measurement of costs (see 48 CFR 9903.302-1). So, let's parse that definition.  Note the three-pronged test. The accounting method or technique must be

• used for allocation of cost to cost objectives.
• used for assignment of cost to cost accounting period
• used for measurement of cost

Measurement of cost in this context encompasses accounting methods and techniques used in defining the components of costs, determining the basis for cost measurement, and establishing criteria for use of alternative cost measurement techniques. Examples include the use of either historical cost, market value or present value, the use of standard cost or actual cost, the designation of those items of cost which must be included or excluded from tangible capital assets or pension costs, etc.

Therefore, if a disclosed or established accounting method or technique is not used for allocation of costs, for assignment of costs or measurement of costs, it is not a cost accounting practice. If it is not a cost accounting practice, a change in the method or technique then, is not a change to a cost accounting practice.

Cost Impact Proposals - Cost Accounting Standards

Under the FAR (Federal Acquisition Regulations) CAS (Cost Accounting Standards) clause (FAR 52.230-2), there are requirements for contractors to prepare and submit cost impact proposals is there are any increased costs to the Government resulting from (i) a failure to comply with CAS or (ii) a failure to follow consistently its disclosed cost accounting practices in estimating, accumulating, and reporting costs on CAS-covered contracts (and subcontracts). Additionally, cost impact proposals are required when a change from one accounting practice to another is required to comply with a cost accounting standard that subsequently becomes applicable to a contract or is necessary for the contractor to remain in compliance. Fourthly, cost impact proposals are required when a contractor wishes to change its methods for accumulating costs (voluntary accounting change). Some of those voluntary changes are fine. The CFAO (Cognizant Federal Agency Official) (usually the administrative contracting officer) may determine that an accounting change from one compliant practice to another is desirable and not detrimental to the Government. However, if the CFAO has not deemed the change desirable, the contractor may owe the Government some money if the change results in increased costs to the Government.

The purpose of this advisory is to alert contractors to the fact that if they fail to submit required cost impact proposals or fail to submit timely cost impact proposals, the Government is going to do it for you. And that is usually not a good thing.

FAR 52.230-6 provides that if the contractor fails to submit a cost impact proposal, the CFAO (Cognizant Federal Agency Official), with the assistance of the contract auditor (e.g. DCAA), shall estimate the cost impact on contracts and subcontracts containing the CAS clause. So realistically, the CFAO isn't going to have the information needed to estimate a cost impact so he/she will be relying upon DCAA to do it. But the auditor will not have all the information necessary to accurately estimate a cost impact so the auditor's estimates are sometimes nothing more than SWAGs.

The auditor will base his/her estimate on readily available data. The objective in such an exercise is not to relieve a contractor of its responsibility for preparing a required cost impact proposal, but to provide sufficient information upon which the CFAO can base a decision to withhold payment. Once the CFAO has made the decision to withhold payment, the burden of proof rests with the contractor to demonstrate, through a detailed analysis, the cost impact on each CAS-covered contract.

How much is the withhold? FAR provides that the CFAO can withhold up to 10 percent of each payment request until the cost impact has been recovered. That amount can seriously disrupt a contractor's cash flows.

If you owe the Government a cost impact, don't let it get to the point where the Government is going to estimate it for you.

Cost Accounting Standards - Revision to Existing Exemption

There are ten categories of contracts and subcontracts that are exempt from all CAS (Cost Accounting Standards) requirements. Some of the more common ones include sealed bids, contracts under $700 thousand, and contracts to small businesses. One category, often referred to as the "b15 exemption", exempts Firm fixed price contracts or subcontracts awarded on the basis of adequate price competition without submission of cost or pricing data.

The CAS Board is now proposing to amend the wording of this exemption to include the term "certified" before the phrase "cost or pricing data". The Board believes that a clarification is required because of the Government's emerging use of "data other than certified cost or pricing data" to negotiate contracts is causing some confusion. "Data other than certified costs or pricing data could still be construed as cost or pricing data, just not certified. Thus, some contractors and contracting officers have inappropriately excluded such contracts from CAS requirements.

When the exemption was first drafted in 2000, there was no category called "data other than cost or pricing data" so that the CAS Board believed that "certified" was presumed in the definition.

CAS Board Abandons Proposed Revision to CAS 416

The Cost Accounting Standards (CAS) Board published a notification in the Federal Register this morning of its decision to discontinue the rule making on the development of an amendment to CAS 416, Accounting for Insurance Costs, regarding the use of the term "catastrophic losses".

This process began in the Clinton administration. Back in 2000, DoD requested that the CAS Board consider whether the word "catastrophic" should be replaced with a term such as "significant" or "very large" in order to more close align the Standard with was was intended by its original promulgators and eliminate confusion between CAS and FAR. Five years later, the CAS Board published an SDP (Staff Discussion Paper) addressing the issue.

Only two respondents bothered to comment of the SDP. One of those two recommended the Board drop the issue. Neither one provided data or other information describing disputes or other problems arising from the use of the term "catastrophic".

Ultimately, the CAS Board determined that since CAS 416 has been in effect for over 30 years and there has never been an issue regarding the use or definition of "catastrophic", there was no need to amend the Standard.

CAS Threshold Raised

Not all contracts are covered by CAS (Cost Accounting Standards). There are a number of exemptions available that exclude certain contracts from CAS coverage. For example, contracts that are awarded based on sealed bidding are exempt. So are contracts awarded to small businesses. Another exemption is for contracts (and subcontracts) of $650,000 or less. There are ten different exemptions in all.

Today, the OFPP (Officer of Federal Procurement Policy) Cost Accounting Standards Board (CASB) issued an interim rule that revises the threshold for the application of CAS from $650 thousand to the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation. The TINA threshold for obtaining cost or pricing data was recently adjusted for inflation to $700 thousand in the Federal Acquisition Regulation (FAR). Until now, the CAS threshold was a stated dollar amount in the Code of Federal Regulations. The wording of the interim rule, "... in excess of the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation..." will cause future changes to the CAS applicability threshold to self-execute upon any changes to the TINA threshold as they are implemented by FAR.

This change will preclude repeated rulemakings that only update the stated dollar amounts to maintain consistency with TINA. In the future, changes to the TINA threshold will automatically change the CAS applicability threshold.

Cost Accounting Standards

Tomorrow we will begin an irregular series of posts to cover the essential requirements of the nineteen CAS Standards. In the next couple of months, we should be able to cover them all. The Cost Accounting Standards are promulgations designed to promote fair and consistent cost accounting practices among Government contractors. While many contractors are exempt from CAS, many of the CAS Standards have been incorporated into FAR by reference or in substance making them applicable to everyone. As we go through these standards, we will identify which ones have been incorporated in whole or in part into FAR.

We will not be covering the standards in consecutive order but rather, will group them by subject. For example, CAS 404 dealing with capitalization practices and CAS 409 dealing with depreciation of those capitalized assets are related and will be addressed separately, but consecutively. Both of these standards, by the way, have also been incorporated into FAR. Some standards are applicable to very few contractors. For example, CAS 413 and 416 deal primarily with defined benefit pension plans. Back in the 70's when these standards were adopted, defined benefit pension plans were popular. Now they're not and except for "grandfathered" employees, most contractors have adopted some form of defined contribution plan.


Some contracts are exempt from CAS. CAS applies only to negotiated contracts. Sealed bids, awards based on adequate price competition without submission of cost or pricing data, contracts in which the price is set by law or regulation, and commercial items are all exempt. Additionally, contracts under $700 thousand, contracts awarded to small businesses (as defined by SBA) and contracts executed and performed outside of the United States are also exempt.

There are two levels of CAS coverage, full and modified. The thresholds for full and modified coverage are $50 million and $7.5 million respectively in CAS covered contracts. Modified CAS coverage requires compliance with CAS Standards 401, 402, 405, and 406. Full CAS coverage requires compliance with all 19 CAS Standards.

Next: CAS 401 - Consistency in Estimating, Accumulating and Reporting Costs