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Full CAS-Coverage

Disclosure Statements, Cost Impacts and Allocation of Direct and Indirect, Home Office, G&A and Selected Costs

• Introduction

• Basic Requirements

• Consistency

• Cost Allocation

• Additional Selected CAS Requirements

• Administrative Requirements

• Disclosure Statements

• Changes and Noncompliances

• Cost Impact Proposals

• Recent Developments

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Agenda

• CAS (48 C.F.R. Pt. 99): establishes cost accounting requirements

• Addresses measurement, assignment and allocation of costs

• Not allowability (but may be incorporated into FAR provisions)

• Not pricing

• Applies

• To prime contracts and subcontracts in excess of $750K

• Negotiated contracts (e.g., not sealed bid)

• Exemptions listed at 48 C.F.R.§ 9903.201-1

• Significance

• Compliance costs

• Restricts possible accounting practices and ability to change practices

• Price reductions for noncompliance; permits recovery under CAS-covered

fixed-price contracts

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Introduction

Introduction (cont.)

• Fundamental requirements

• Disclose practices (when applicable)

• Follow consistently disclosed and established cost accounting practices

• Not just disclosed practices

• May change prospectively or retroactively within same fiscal year with ACO approval

• Cost impact/price adjustment liability

• Comply with CAS in effect or as later modified (as applicable)

• Full vs. Modified CAS

• Full: comply with all 19 Cost Accounting Standards and submit DS

• Modified: comply with CAS 401, 402, 405 and 406 and may have to submit DS

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• Consistency

• CAS 401: Consistency in Cost Accounting Practices

• Contractors must be consistent in accounting method related to estimating, accumulating and

reporting costs

• Goal is to create reliable cost estimates used in pricing proposals

• Must accumulate and report actual costs at the same or greater level of detail than when estimating

costs for proposals

• CAS 402: Consistency in Cost Treatment

• All costs incurred for the same purpose, in like circumstances, must be treated consistently as either

direct or indirect costs

• DS description of practices should be clear and consistent with CAS/FAR and established

accounting practices

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Basic Requirements

• Allocation of Costs

• Cost allocation means "to assign an item of cost, or a group of items of cost, to

one or more cost objectives"

• CAS Board Statement of Objectives, Policies and Concepts hierarchy of

allocation concepts

• "As an ideal, each item should be assigned to the cost objective that was intended to benefit from

the resource represented by the cost or, alternatively, that caused incurrence of the cost."

• Preference for direct allocation

• Fundamental Requirement: costs are allocated on causal or beneficial basis

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Basic Requirements

• Allocation of Costs (cont.)

• CAS 418

• Defines direct and indirect costs

• Indirect costs are accumulated in homogeneous cost pools and allocated over certain specified

bases

• Pool is homogenous if: (1) all costs have same causal or beneficial relationship to the base or (2)

resulting allocation is not different from separate allocations

• CAS 410

• G&A costs are accumulated in a single pool and allocated over a base representative of total activity

• Total cost input vs. value added

• CAS 403

• Home office costs are directly allocated to segments if possible (preferred)

• Pooled and allocated based on causal/beneficial relationship

• Residual costs allocated using "three factor formula"

• Employees of the organization

• Business volume

• Capital invested in the organization

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Basic Requirements

• Additional Select CAS Requirements

• Accounting for Unallowable Costs (CAS 405)

• Fiscal year (CAS 406)

• Tangible Assets/depreciation costs (404 and 409)

• Pension costs (CAS 412 and 413)

• Insurance (CAS 416)

• IR&D (CAS 420)

• Standard costs (CAS 407)

• Compensated personal absences (CAS 408) • See DOL Sick Leave Final Rule (81 FR 67598)

• Material costs (CAS 411)

• Cost of money (CAS 414 and 417)

• Deferred compensation (CAS 415)

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Basic Requirements

• Disclosure Statements

• What it is?

• A written summary of a contractor’s cost accounting practices set forth at 48 C.F.R.§ 9903.202-9

• Who must file?

• Business unit receiving award of $50M or more

• Company, together with segments, receiving net awards in prior year of $50M or more

• Segments of the company allocating costs greater than TINA threshold, unless exempted or low

amount of CAS business

• Home office allocating material amount of costs to disclosing segments

• Significance?

• Serves as the baseline of a contractor’s cost accounting practices

• Any deviation from disclosed practices may create contractor liability

• Lack of an “adequate” disclosure statement may preclude contract award

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Administrative Requirements

• Disclosure Statements (cont.)

• Elements of a Disclosure Statement

• General Information

• Direct Costs

• Direct vs. Indirect Costs

• Indirect Costs

• Depreciation and Capitalization Practices

• Other Costs and Credits

• Deferred Compensation and Insurance Cost

• Home Office Expenses

• Privileged and Confidential Information (48 C.F.R. § 9903.202-4)

• If contractor notifies CO that CAS DS contains trade secrets and confidential commercial or financial

information, CAS DS shall not be released outside government

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• CAS Notices and Certification (FAR§52.230-1)

• Applies to any contract in excess of $750K, unless exempt

• Contractor must certify submission of CAS DS (or exemption) as a condition of contracting

• Concurrent submission

• Previously submitted

• Monetary exemption

• Interim exception

• Contract Eligibility (FAR§30.206-6)

• CO “shall not award a CAS-covered contract until the Cognizant Federal Agency Official has made

a written determination that the required Disclosure Statement is adequate”

• Award without adequacy determination may be made if agency head authorizes “to protect

Government’s interest”

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• Determinations (FAR§30.202-7)

• Adequacy

• Auditor to ascertain whether CAS DS is “current, accurate, and complete”

• CFAO shall (generally, within 30 days) notify contractor, relevant procurement agency and auditor of adequacy

determination, BUT determination does NOT mean:

• All practices disclosed

• Approval of disclosed practices

• Compliance

• Auditor to ascertain whether disclosed practices comply with CAS and FAR Pt. 31

• CFAO shall (after notification of adequacy) determine CAS compliance or noncompliance

• Any FAR Pt. 31 noncompliance shall be separately processed

• Subcontractor Disclosure Statements (FAR§30.202-8; 48 C.F.R.§9903.202-8) • Higher-tier contractor is responsible for administering CAS

• Subcontractor may submit CAS DS to its cognizant ACO

• Pe-award determination of adequacy not required while review pending

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• Best Practices for Developing and Submitting Disclosure Statements

• Disclosure statement should contain a contractor’s methods or techniques for allocating, assigning,

and measuring costs

• Appropriate level of detail

• Lesser details – greater flexibility, but more potential for disagreement/confusion

• Greater details – less flexibility, but potentially less government disagreement/confusion

• DCAA likely to view anything contained in a DS as an accounting “method or technique”

• Be wary of DCAA demands for revisions or resubmissions

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• Cost Accounting Practice Changes

• Unilateral: contractor choice, results in potential liability for “increased costs”

• Required: new or changed practice, results in equitable adjustment

• Desirable: ACO agrees to government’s benefit (e.g., cost reductions in long

run), results in equitable adjustment

• Determine if change is necessary

• Do not accept at face value every government assertion that a change has occurred or when a

change is necessary

• Do your own analysis; assess the cost impact before implementing a change

• COs and DCAA often conclude a change has occurred or is necessary when it is not

• Work with the CFAO and customer to determine if a change is desirable

• Contractors should change cost accounting practices sparingly


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• Cost Accounting Practice Changes (cont.)

• Change in cost accounting practice versus other events

• Only an alteration to cost accounting practice (i.e. method or technique used to assign, measure or

allocate) may trigger cost impact liability

• Modifications or errors in displaying offered price information, for example, do not impact

assignment, measurement or allocation (Texas Instruments Inc., ASBCA No. 23678, 87-3 BCA ¶

20,195 (Sept. 28, 1987))

• Initial adoption of a cost accounting practice when a cost is first incurred, or a function created, is

not a change; similarly, partial or total elimination of cost or function, is not a change (48

C.F.R.§9903.302-2)

• Changes directly associated with external restructuring do not trigger change liability (48

C.F.R.§9903.201-8)

• Notice of proposed change (FAR§30.603)

• Submit a description of change to CFAO at least 60 days before implementation

• Submit rationale to support materiality determination

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• Noncompliances

• Failure to follow established cost accounting practices, even if not disclosed, or

otherwise comply with CAS, can result in liability for "increased costs"

• Notice and Proposal Preparation (FAR§30.605)

• CFAO issues notice of potential noncompliance within 15 days of audit report receipt

• Contractor permitted response within 60 days to agree, support reasons for disagreement, or

establish immateriality

• CFAO determines compliance or noncompliance

• If noncompliance, CFAO initiates cost impact/price adjustment process and directs corrective

actions

• Contractor required to submit description of corrective action and cost impact proposal

• Failure to correct noncompliance or submit cost impact proposal may result in withhold of up to 10% on CAS-

covered contract billings or unilateral price adjustment

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• Managing Changes/Noncompliances

• FAR§ 52.230-3(a)(4) and 52.230-6(k) permit the government to adjust contract

prices if change or CAS noncompliance results in “any aggregate increased

costs paid” by the government

• Increased costs = government pays more than it should have because:

• Estimated costs for fixed-price contracts should have been lower

• Accumulated costs under flexibly-priced contracts should have been lower

• Affected contracts = CAS covered contracts actually impacted

• Includes both fixed-price and flexibly-priced contracts priced based on a noncompliance

• Does not include:

• Contracts priced and accounted for using a compliant practice

• Contracts priced using a practice of which government was aware

• Required/desirable changes: equitable adjustment (both downward and

upward) potentially available to contractors

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• Managing Changes/Noncompliances (cont.)

• Combining Cost Impacts/Offsets

• Offsetting increased costs with decreased costs from different/multiple changes or noncompliances

• CAS and relevant contract clauses silent

• FAR§30.606 prohibits offsetting, unless only combining increased costs

• Offset prohibitions permit “cherry picking” and potential government windfall

• Raytheon Co., Space & Airborne Sys., ASBCA Nos. 57801, et al.,15-1 BCA ¶ 36,024 (May 7, 2015)

• For agreements executed after Apr. 8, 2005, FAR§30.606 validly disallows such offsets

• FAR§30.606 does not allow the government to double-recover for costs added to flexibly-priced contracts and

subtracted from fixed-price contracts

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• Cost Impact Proposals

• Show estimated increased or decreased costs

• For each affected CAS-covered contract and subcontract

• By contract type

• By agency

• Requires knowing what contracts were CAS covered and the basis of the

pricing

• Best practice to maintain a current list of contracts that are subject to full or modified CAS coverage

or exempt from CAS

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• Two Types of Cost Impact Proposals

• General Dollar Magnitude (“GDM”)

• Should contain, at a minimum:

• Estimate of the aggregate impact on CAS-covered contracts by contract type and by various

departments/agencies

• May use a variety of methods to determine the increase/decrease

• Representative sample of affected CAS-covered contracts/subcontracts

• Change in indirect rates multiplied by total estimated base

• Any other method that provides a reasonable approximation of the total increase/decrease in cost for all affected

contracts and subcontracts

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• Two Types of Cost Impact Proposals (cont.)

• Detailed Cost Impact (“DCI”)

• Should contain data at the contract/subcontract level, including:

• Fixed price

• Target/estimated cost

• Accumulated cost to date

• Estimate to complete

• Target profit or fee

• Sharing ratio

• Ceiling price

• Period of performance

• Profit or fee impact

• Total increased(/decreased) cost to the government

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Recent Developments

• Raytheon Co., Space & Airborne Sys., ASBCA Nos. 57801, et al., 15-1

BCA ¶ 36,024 (May 7, 2015)

• Substantial CFAO discretion to determine when a change is desirable • May be based solely upon increased costs to Government

• Contractor must show CO’s failure to consider the other desirability factors listed in FAR §

30.603-2 resulted in a prejudicial violation of that regulation

• Government May Not Double Recover “Increased Costs” for change • Government may recover increased costs allocated to flexibly-priced contracts, but it may not

recover those same costs when they are removed from the allocation to fixed-price contracts

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Christopher W. Myers

Partner

Government Contracts Department

303.634.4332

[email protected]

Presenters

Gale R. Monahan

• Managing Associate

Government Contracts Department

• 303.634.4311

[email protected]

Thank you

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full cas-coverage - home - public contracting institute€¦ · 08.04.2005 · full cas-coverage...

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