cost accounting standards - public contracting institute€¦ · regulatory scope and applicability...
TRANSCRIPT
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
Regulatory Scope and Applicability
• 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
Regulatory Scope and Applicability
• 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
Regulatory Scope and Applicability
• 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
Regulatory Scope and Applicability
• 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
Regulatory Scope and Applicability
• 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
CAS Disclosure Statements
• 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
CAS Disclosure Statements
• 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 Disclosure Statements
• 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
CAS Disclosure Statements
• 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
CAS Disclosure Statements
• 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
CAS Disclosure Statements
• 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
November 10, 2015 15
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)
November 10, 2015 16
Cost Impact/Price Adjustment Issues
• 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
November 10, 2015 17
Cost Impact/Price Adjustment Issues
• 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
November 10, 2015 18
Cost Impact/Price Adjustment Issues
• 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
November 10, 2015 19
Cost Impact/Price Adjustment Issues
• 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
Cost Impact/Price Adjustment Issues
• 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
Cost Impact/Price Adjustment Issues
• 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
Cost Impact/Price Adjustment Issues
• 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/Price Adjustment Issues
• 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
November 10, 2015 24
Cost Impact/Price Adjustment Issues
• 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
November 10, 2015 25
Cost Impact/Price Adjustment Issues
• 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
November 10, 2015 26
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
November 10, 2015 27
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
https://www.linkedin.com/pub/steven-
masiello/7/64a/3b0
Joshua D. Prentice
Associate
Government Contracts
D +1 303 634 4327
https://www.linkedin.com/in/joshuaprentice
29November 10, 2015
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