Cost Accounting Standards Guide and CAS Requirements for Government Contractors

Contractors engaging in business with the U.S. Federal Government encounter a regulatory landscape shaped by the Cost Accounting Standards (CAS). These Standards serve as a cornerstone for ensuring consistency, accuracy, and fairness in allocating and reporting costs associated with Government contracts, and understanding CAS is essential for contractors to navigate the complexities of Cost Accounting Practices within federal contracting. Our comprehensive Cost Accounting Standards guide can help contractors effectively manage these complexities

From CAS compliance requirements to the implications of noncompliance, contractors must grasp the fundamentals of CAS to effectively manage their cost accounting systems and maintain transparency and integrity in their financial reporting to the Government. To aid in this, our Cost Accounting Standards guide serves as an invaluable resource, providing detailed explanations and practical guidance on all aspects of CAS compliance.

Table of Contents

• Overview of Cost Accounting Standards
• Does CAS Apply to my Organization?
• CAS Applicability and Exemptions
• CAS Requirements
• Changes in Cost Accounting Practices
• Get Help With CAS

Overview of Cost Accounting Standards

The CAS are a collection of 19 standards contained within 48 CFR 9900 (FAR Part 99). The overall purpose of the Standards is to define how contractors measure, assign (to cost accounting periods), and allocate contract costs; and serve as guidelines for contractors’ Cost Accounting Practices. These guidelines are uniquely defined to allow contractors to establish practices unique and necessary to their individual business, while also serving the Government’s interests regarding consistency and transparency.

Does CAS Apply to my Organization?

A contractor’s organization (or Business Unit) may be required to comply with many of the Cost Accounting Standards if their contracts are awarded on the basis of cost versus price. FAR Part 31, Contract Cost Principles and Procedures “read in” many of the Standards for allowability of costs, e.g., FAR 31.205-6(k) states that the costs of deferred compensation shall be measured, assigned, and allocated in accordance with CAS 415, Accounting for the Costs of Deferred Compensation. Other alignment occurs with the following Standards:

• CAS 401/402 overlap with FAR 31.202/203 - Consistency in Allocating Costs Incurred for the Same Purpose;
• CAS 405 overlap with FAR 31.201-6 - Accounting for Unallowable Costs;
• CAS 412/413 read-in by FAR 31.205-6(j) – Composition, Measurement, Adjustment and Allocation of Pension Cost;
• CAS 414/417 read-in by FAR 31.205-10 - Cost of Money;
• CAS 416 read-in by FAR 31.205-19 – Accounting for Insurance Costs, and
• CAS 420 read-in by FAR 31.205-18 - IR&D and B&P.

CAS Applicability and Exemptions

Contractors may be required to comply with the administrative requirements of CAS unless an exemption applies. In order for CAS administrative requirements to apply, the contract must contain FAR 52.230-2 – Cost Accounting Standards, and not meet one of the following exemptions as defined by 48 CFR 9903.201-1 CAS Applicability:

• Sealed bid contracts;
• Negotiated contracts not in excess of the Truth in Negotiations Act (“TINA”) threshold (Currently $2M);
• Contracts with small businesses;
• Contracts with foreign governments;
• Contracts where price is set by law or regulation;
• Contracts authorized for the acquisition of commercial items;
• Contracts of less than $7.5M (trigger contract), provided that at the time of award the Contractor is not performing any CAS covered contracts at or above the trigger amount;
• Subcontracts under North Atlantic Treaty Organization (“NATO”) patrol combatant missile (hydrofoil) (“PHM”) Ship program to be performed outside the U.S. by a foreign concern, and
• Firm-fixed-price contracts awarded on the basis of adequate price competition without submission of certified cost or pricing data.

CAS Requirements

A contract containing FAR 52.230-2 and is not otherwise exempt may be subject to “full” or “modified” coverage. As the coverage descriptions indicate, full coverage requires compliance with all 19 CAS standards, while modified coverage requires compliance with:

• CAS 401 – Consistency in Estimating, Accumulating and Reporting Costs;
• CAS 402 – Consistency in Allocating Costs Incurred for the Same Purpose;
• CAS 405 – Accounting for Unallowable Costs, and
• CAS 406 – Cost Accounting Period.

Full Coverage CAS Requirements

For contracts under full CAS coverage, contractors must comply with all 19 CAS standards. This includes:

• Formal documentation of the organization’s Cost Accounting Practices through use of a Disclosure Statement (CASB DS-1), (Full CAS requirement);
• Consistently follow Cost Accounting Practices;
• Comply with all CAS including modifications and interpretations;
• Agree to an equitable adjustment as provided in the Changes clause for those changes the contractor is required to make, and
• Agree to an adjustment of the contract price for failure to comply with applicable CAS.

Modified CAS Coverage Requirements

For contracts under modified CAS coverage, the focus is on key standards that ensure consistency and fairness in cost allocation:

• CAS 401: Consistency in Estimating, Accumulating, and Reporting Costs – Contractors must ensure uniformity in cost practices across different contracts.
• CAS 402: Consistency in Allocating Costs Incurred for the Same Purpose – Costs must be allocated in the same manner across all contracts.
• CAS 405: Accounting for Unallowable Costs – Identifying and segregating unallowable costs to prevent them from being charged to government contracts.
• CAS 406: Cost Accounting Period – Establishing a consistent fiscal period for cost accounting purposes.

Additional Administrative Requirements

Beyond the specific CAS standards, contractors must adhere to several administrative requirements, including:

• Preparing and maintaining a Disclosure Statement (CASB DS-1) that outlines cost accounting practices.
• Ensuring compliance with all CAS standards, including any updates or interpretations.
• Conducting cost impact assessments when changes to cost accounting practices occur.
• Providing timely notifications to the Cognizant Federal Agency Official (CFAO) regarding any changes in cost accounting practices.

Administrative CAS Requirements

Additional administrative requirements include:

Formal documentation of the organization’s Cost Accounting Practices through use of a Disclosure Statement (CASB DS-1), (Full CAS requirement);

• Consistently follow Cost Accounting Practices;
• Comply with all CAS including modifications and interpretations;
• Agree to an equitable adjustment as provided in the Changes clause for those changes the contractor is required to make, and
• Agree to an adjustment of the contract price for failure to comply with applicable CAS.

Changes in Cost Accounting Practices

Cost Accounting Practices may undergo changes to ensure compliance with regulatory standards, improve efficiency, or address discrepancies. Cost accounting changes are categorized into four descriptions that each hold distinct characteristics and implications for contractors and the Federal Government.

Required Changes

• Changes Made to Comply with Applicable Standards: These are mandatory modifications to cost accounting practices to align with current regulatory standards. Failure to implement these changes can result in noncompliance.
• Prospective Changes to Maintain Compliance: Changes proactively made to an already compliant Cost Accounting Practice (CAP) to ensure ongoing adherence to evolving standards and regulations.

Desirable Changes

• Compliant Changes Not Detrimental to the Government: Changes to a CAP that remain compliant and are deemed acceptable by the Cognizant Federal Agency Official (CFAO). Such changes are not subject to the "no increased costs" provisions of CAS-covered contracts and subcontracts, meaning they do not impose additional costs on the government.

Unilateral Changes

• Changes from One Compliant CAP to Another: Modifications where an organization changes from one compliant CAP to another without the CFAO finding the change desirable. The government does not cover any aggregate increased costs resulting from these changes.

Changes Due to Noncompliance

Corrections to Achieve Compliance: These changes occur when an organization transitions from a non-compliant practice to a compliant practice. The financial impact of the change is calculated from the date the noncompliance began until the date of compliance.

Notification of Cost Accounting Practice Changes

A contractor submits a detailed description of the Cost Accounting Practice (CAP) change to the Cognizant Federal Agency Official (CFAO) no later than 60 days before implementing the change. This ensures that the CFAO has adequate time to review and evaluate the proposed adjustments.

For required and unilateral changes, the contractor must conduct a cost impact assessment of all CAS covered contracts. This assessment is essential to determine the financial implications of the CAP change, ensure that cost adjustments are accurately accounted for, and that the government is not disadvantaged. The cost impact assessment should include:

• Analysis of Cost Variances: Breakdown of how the CAP change will affect contract costs;
• Contractual Impact: Evaluation of the impact on each CAS-covered contract;
• Compliance Documentation: Evidence that the proposed change complies with CAS requirements, and
• Mitigation Strategies: Methods to address any adverse financial impacts on the government or contracts.

Litigation and CAS

There has been significant litigation on the proper method of calculating the financial impact of a change to a Cost Accounting Practice.

The Defense Contract Audit Agency (DCAA) issued on October 3, 2023 a Memorandum for Regional Directors (MRD) on “Revised Audit Guidance on the Cost Impact Calculation for a Unilateral Cost Accounting Practice Change”. The memo is unlikely to resolve disputes where contract price adjustment, where applicable is estimated on relevant contracts between the Government and the contractor that are subject to the CAS so as to protect the Government from payment of increased costs in the aggregate as defined by the CAS Board.

Conclusion

In conclusion of this Cost Accounting Standards guide, the CAS establishes an indispensable framework for contractors engaging with the U.S. Federal Government. Contractors' comprehension of CAS is critical as they navigate compliance requirements and implications, safeguarding the reliability of their cost accounting systems and promoting trust in government procurement.

CAS exemptions, modified, and full coverage delineate the scope of the application, with contractors obligated to adhere to the relevant Standards based on contract values and Business Unit thresholds. Compliance with CAS, spanning 19 distinct standards, is pivotal for contractors to qualify for and maintain government contracts, and in upholding financial stewardship and accountability in federal procurement. Moreover, understanding changes in Cost Accounting Practices and effectively disclosing them to the appropriate authorities is essential to ensuring continued compliance and transparency in contractor operations.

Capital Edge Consulting is a professional services company comprised of adept problem solvers who deliver tangible results to address today’s most complex U.S. government contracting challenges. Capital Edge helps clients address the challenging regulatory, contractual, and compliance requirements of U.S. federal contracts and we have experience working with a wide variety of industries that provide goods or services to the federal government including industries such as biotech and healthcare, nuclear energy, education, information technology, non-profit, professional services, defense, and software.