Cost Accounting Standards - Public Contracting Institute€¦ · Regulatory Scope and Applicability...

Cost Accounting Standards

Disclosure Statements and Cost Impact Issues

November 10, 2015

Agenda

• Regulatory Scope and Authority

• Cost Accounting Standards (“CAS”) Requirements

• CAS Disclosure Statements (“CAS DS”)

• Submission

• Best Practices

• Cost Impact/Price Adjustment Issues

• Causes and Types of Cost Impacts

• Relevant Concepts

• Cost Impact Proposals

• Recent Developments

November 10, 2015 2

Regulatory Scope and Applicability

• CAS

• 48 C.F.R. Parts 9900-9905

• Establishes cost accounting requirements for certain contracts

• Addresses measurement, assignment, and allocation of costs

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

• Not pricing

• Applies to negotiated prime contracts and subcontracts in excess of

Truth in Negotiations Act (“TINA”) threshold

• Governed by Cost Accounting Standards Board (“CASB”)

November 10, 2015 3


• Fundamental Requirements

• Disclose practices (when applicable)

• Follow consistently established cost accounting practices

• Not just disclosed practices

• May change prospectively or retroactively within same fiscal year with

Administrative Contracting Officer (“ACO”) approval

• Cost impact/price adjustment liability

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

• Type of CAS coverage

• Cost impact/price adjustment liability

4November 10, 2015


• CAS Significance

• Can impact a contractor’s profitability

• Involves significant compliance costs

• Price reductions for “increased costs” to government for

noncompliance

• Permits government recovery under fixed-price contracts

• Restricts possible accounting practices and ability to change between

accounting practices

November 10, 2015 5


• Two types of CAS Coverage: Full and Modified

• Full CAS Coverage

• Comply with all 19 Cost Accounting Standards

• Disclosure statement required

• Modified CAS Coverage

• Comply with CAS 401, 402, 405, and 406

• Many other CAS are incorporated through FAR cost principles

• May require filing of a disclosure statement

November 10, 2015 6


• Full vs. Modified CAS coverage – Applicability

• Full

• Single CAS-covered contract of $50M or more; or

• Business unit receives $50M or more CAS-covered prime and/or

subcontract awards during prior period

• Modified

• CAS-covered contract greater than $7.5M (trigger) or contracts in

excess of TINA threshold (post-trigger) but less than $50M; AND

• Business unit receives less than $50M in CAS-covered awards during

preceding period

November 10, 2015 7


• CAS Exemptions

• Sealed bid contracts

• Negotiated contracts not in excess of the TINA threshold

• Small business

• Commercial items (FFP, T&M, LH)

• Price set by law or regulation

• Contracts less than $7.5M, so long as business unit is not already

performing a CAS-covered contract

• FFP contracts awarded on the basis of adequate price competition

without submission of cost or pricing data

November 10, 2015 8

CAS Disclosure Statements

• Disclosure Statement

• What is it?

• A written summary of a contractor’s cost accounting practices set

forth at 48 C.F.R. § 9903.202-9

• Disclosure Statement Form, CASB DS-1

• Who must file?

• Business unit receiving award - $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 the TINA

threshold unless contract exempted or low amount of CAS business

• Home office allocating material costs to disclosing segments

November 10, 2015 9


• Why are disclosure statements important?

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

• Any deviation from disclosed practices may create contractor liability

• Lack of a disclosure statement may preclude contract award

10November 10, 2015


• 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

November 10, 2015 11


• 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)

• Contracting Officer (“CO”) “shall not award a CAS-covered contract until the

Cognizant Federal Agency Official (“CFAO”) 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”

12November 10, 2015


• 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 Part 31

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

• Any FAR Part 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; pre-award determination of adequacy not

required while review pending

13November 10, 2015


• Additional Subcontract Considerations

• Higher-tier contractor may be financially responsible for

subcontractor’s CAS violations

• Must flow down relevant CAS clauses necessary to implement

specific application of CAS coverage

• When applicable, must state CAS coverage status in body of

subcontract and notify CO of subcontract award within 30 days

• Notify CO of subcontractor CAS adjustments required or

noncompliances

14November 10, 2015


• Best Practices for Developing and Submitting Disclosure Statements

• A disclosure statement should contain a contractor’s methods or

techniques for allocating, assigning, and measuring costs

• DCAA likely to view anything contained in a disclosure statement as an

accounting “method or technique”

• Appropriate level of detail

• Lesser details: greater flexibility but lesser protections, more potential

for disagreement/confusion

• Greater details: less flexibility but greater protections, potentially less

government disagreement/confusion

• Be wary of DCAA demands for revisions or resubmissions


Cost Impact/Price Adjustment Issues

• Affected contracts

• Includes CAS-covered contracts priced and/or costs accumulated and

reported under contract based on a noncompliance or contracts

impacted by changed practice

• Does not include contracts priced and accounted for using a changed

practice

• Donley v. Lockheed Martin Corp., 608 F.3d 1348, 1354–55 (Fed. Cir. 2010)



• Causes and types of cost impacts

• Changes from one compliant practice to another

• Required – new or changed CAS, results in equitable adjustment

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

in long run), results in equitable adjustment

• Unilateral – contractor choice and liability for “increased costs”

• Noncompliances with CAS requirements; liability for “increased costs”

• Failure to follow established practices, even if not disclosed,

consistently

• Noncompliance with a CAS requirement



• Relevant concepts

• Increased costs - Amount the government pays more than it should

have because:

• Estimated costs for fixed price contracts should have been lower

• Accumulated costs on flexibly priced contracts should have been

lower

• Decreased costs - Amount the government pays less than it should

have because:

• Estimated costs for fixed price contracts should have been higher

• Accumulated costs for flexibly priced contracts should have been

higher



• Increased costs to the Government, in the aggregate

• The amount by which increased costs exceed decreased costs

• Considering all contract types impacted

• Certain netting permitted

• 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 – Prohibited 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)

• Under contracts entered into before April 8, 2005, contractors may

offset the cost impact of simultaneous cost accounting changes with

cost savings.

• Offset prohibition does not violate CAS restriction on Government

recovery of costs pursuant to CAS greater than increased costs, in

the aggregate on relevant CAS-covered contracts

20November 10, 2015


• Changes – Notice and Proposal Preparation (FAR § 30.604)

• Notice required 60 days in advance of change Submit rational to

support immaterial required or desirable change

• Any change not deemed immaterial, required or desirable is processed

as unilateral change

• Failure to timely submit notice of change authorizes CFAO to treat

changed practice as noncompliance

21November 10, 2015


• 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 see

e.g. 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)

22November 10, 2015


• Noncompliance – 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 correction 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

23November 10, 2015


• Cost Impact Proposals

• Generally:

• 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



• 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

• An other method that provides a reasonable approximation of the

total increase/decrease in cost for all affected contracts and

subcontracts



• Two Types of Cost Impact Proposals

• 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


Recent Developments

• Substantial CFAO discretion to determine when a change is desirable

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

¶ 36,024 (May 7, 2015)

• 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

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

36,024 (May 7, 2015)

• 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


Recent Developments

• The “Continuing Claim” Doctrine

• Recognizes each in a series of events (such as billings) as claims

assessed at the time of occurrence

• Fluor Corp., ASBCA No. 57852, 14-1 BCA ¶ 34,472 (Dec. 5,2013)

• Applies continuing claim doctrine as CAS noncompliance

• Separate SOLs for each billing

• CAS claims potentially distinguishable from cost-allowability claims

28November 10, 2015

Questions?

Steven M. Masiello

Partner

Government Contracts

D +1 303 634 4355

E [email protected]

https://www.linkedin.com/pub/steven-

masiello/7/64a/3b0

Joshua D. Prentice

Associate

Government Contracts

D +1 303 634 4327

E [email protected]

https://www.linkedin.com/in/joshuaprentice

29November 10, 2015

Dentons US LLP

1400 Wewatta Street

Suite 700

Denver, CO 80202-5548

United States

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Cost Accounting Standards - Public Contracting Institute€¦ · Regulatory Scope and Applicability...

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Transcript of Cost Accounting Standards - Public Contracting Institute€¦ · Regulatory Scope and Applicability...