By: Eric Hayman, Director, Capital Edge Consulting

The Cost Accounting Standards (“CAS”) are a collection of 19 Standards contained within 48 CFR 9900 (FAR Part 99) which provide guidance and requirements to be followed when accounting for costs under Federal Government contracts.

The overarching purpose of CAS is to define how Contractors measure, assign (to cost accounting periods), and allocate costs associated with their Government contracts. For example, does a Contractor account for labor hours and costs at actual rates or standard rates (measurement), how are fixed assets depreciated (assignment), when are costs identified to direct and indirect projects (allocation), and how are indirect cost objectives allocated to direct projects (allocation).

In most cases, CAS does not narrowly dictate how a Contractor is to measure, assign, or allocate costs. These decisions are largely left to the Contractor to determine what is appropriate for their individual business. However, CAS does require homogeneity amongst costs included in each indirect cost pool, and a causal/beneficial relationship between each cost pool and the associated allocation base.

Additionally, CAS requires consistency by the Contractor. When applicable, Contractors are required to:

• Consistently identify costs as direct or indirect when incurred for the same purpose (like kind costs, in like kind circumstances)
• Propose, record, and report costs consistently (and in accordance with their defined practices)

As a point of clarification, Contractors should not conflate CAS with a Compliant Accounting System. Contractors with flexibly-priced contracts (Cost Type, Time & Material, etc.) will likely require an adequate or compliant accounting system in order to accurately record, report, and invoice costs to the Federal Government in accordance with the terms of their contract awards.

Depending on the unique circumstances of the Contractor, full compliance with CAS may not be required. However, many of the underlying principles are referenced or reiterated within FAR Part 31 – The Cost Principles, which would likely be applied to the Contractor’s flexibly-priced contracts by FAR 52.216-7 – Allowable Cost and Payment and FAR 52.232-16 – Payments Under Time & Material Contracts and Fixed Price negotiated contracts, modifications or claims where cost data is required.

Does CAS Apply to my Business?

The short answer to this question is “it depends.” CAS applies to contracts, not the organization as a whole; a given Contractor may have contracts with various levels of CAS coverage. Contractors with full CAS-covered contracts will likely need to consistently account for costs in accordance with the Standards for all contracts. In essence, once a Contractor has one fully CAS-covered contract, the organization’s cost accounting practices will need to be in compliance with CAS.

In order for CAS coverage to apply, the contract must contain FAR 52.203-2 – 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;
• Firm-fixed-price contracts awarded on the basis of adequate price competition without submission of certified cost or pricing data.

Assuming a contract contains FAR 52.203-2 and is not otherwise exempt, Contractors must then determine if full or modified CAS coverage applies. As the coverage descriptions indicate, full coverage requires compliance with all 19 CAS standards, while modified coverage only requires compliance with the following:

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

Additionally, full CAS coverage requires Contractors to formally document their organization’s cost accounting practices through the use of a Disclosure Statement (CASB DS-1); and provide copies to their Cognizant Contracting Officer and Cognizant Federal Auditor.

In order to determine whether full or modified coverage applies to a contract (assuming no exemption), the following questionnaire can provide clarity:

Full vs. Modified Coverage Questionnaire:

To determine whether full or modified CAS coverage applies to your contract, consider the following questions:

1) Is the award, including priced options, $7.5M or more, or are you currently performing on a CAS-covered contract of $7.5M or more?

Yes: Proceed to Question 2.

No: CAS does not apply.

2) Is the contract, including priced options, $50M or more?

Yes: Full CAS coverage applies.

No: Proceed to Question 3.

3) In the prior cost accounting period (year), did you receive aggregated CAS-covered awards of $50M or more?

Yes: Full CAS coverage applies.

No: Modified CAS coverage applies.

Another resource to determine CAS coverage for a contract is Figure 8-1-1, CAS Coverage and Disclosure Statement Determination found in Chapter 8: Cost Accounting Standards of DCAA’s Contract Audit Manual (DCAAM 7640.1). This figure is a CAS flowchart of Yes/No questions which assist in determining if a contract is exempt from CAS coverage, is subject to modified CAS coverage, or is subject to full CAS coverage. The flowchart is available publicly on DCAA’s website under its “Customer Guidance” section.

My business is responding to an RFP which, if awarded, will invoke full CAS coverage. What do we need to do?

Contractors new to CAS often have difficulty in determining when and how they are required to provide a Disclosure Statement, and the language in 52.230-1 – CAS Notices and Certification is confusing at best.

First, Contractors need to complete a Disclosure Statement and the practices described within the disclosure should comply with the requirements of CAS. Additionally, Contractors should be careful when selecting an “effective date” of the disclosed practices. If a potential award would subsequently invoke CAS, the effective date should read: “Upon award of XYZ contract.” This disclosure technique clearly informs the Government that the practices do not apply prior to contract award and will not apply if not awarded to the Contractor.

Next, Contractors should review their proposal and associated pricing to ensure compliance with the drafted disclosure. Noted review items include:

Direct Costs

• Are proposed direct costs compliant with DS Part II?
• Are proposed direct costs compliant and consistent with DS Part III?
• Are direct costs consistently treated as direct when incurred for the same purpose?

Indirect Costs:

• Are proposed indirect costs compliant and consistent with DS Part III?
• Are the indirect rates proposed compliant with DS Part IV?
• Are indirect rates proposed applied to proposed direct costs consistent with the allocation base descriptions in DS Part IV?

Unallowable Costs:

• Do proposed direct costs contain unallowable costs as defined by FAR 31.205 – The Cost Principles, by RFP instructions or Terms and Conditions?
• Are the indirect rates proposed free of unallowable costs?

Finally, assuming costs contained within the proposal are compliant with the Contractor’s disclosure, the Contractor should submit a certified copy of the Disclosure Statement as an attachment to their proposal.

How Should I Complete the Reps and Certs Notices Contained in FAR 52.230-1?

As part of proposal submission, potential awards subject to FAR 52.230-2 will require Contractors to certify the CAS coverage status that would be applicable upon award. Some Contractors may have an exemption, others may already be covered, while still others are awaiting their first CAS award. FAR 52.230-1 is intended to assist the Contractor in making these certifications.

Unfortunately, the language in the CAS clause is somewhat unclear and confusing. You can view the full text of it here.

The above CAS certification assumes the contract contains 52.230-2. The following scenarios have been developed to assist Contractors in properly completing the Notification and Certification under FAR 52.203-1:

Scenario 1:

Contract award, including priced options of $50M; Contractor does not qualify for any other CAS exemptions.

Markings: Mark Section I, Box #1 – Certificate of Concurrent Submission of the Disclosure Statement.

By marking Box #1, the Contractor is certifying that an award of the contract will invoke full CAS coverage and that a Disclosure Statement (effective upon award) has been included as an attachment to their proposal. Additionally, the Contractor should ensure that two copies (or an electronic copy) have been submitted to their current Administrative Contracting Officer (if applicable) or their Cognizant Federal Official/Contracting Officer.

Scenario 2:

Contract award, including priced options greater than $2M, and the Contractor is currently performing under at least one contract subject to full CAS coverage.

Markings:

Mark Section I, Box #2 – Certificate of Previously Submitted Disclosure Statement.

By marking Box #2, the Contractor certifies that they are already performing on a fully covered CAS contract and has a current Disclosure Statement on file with their ACO or Cognizant Federal Official, understands that an award of the contemplated contract will also be fully covered, and that the pricing included within their proposal is in accordance with their current disclosed practices and CAS 401 – Consistency in Reporting, Recording, and Estimating Costs.

Scenario 3:

Contract award, including priced options greater than $2M; however, the Contractor is not currently performing under any fully covered CAS contracts and the Contractor did not receive cumulative CAS covered awards of $50M or more in the Contractor’s preceding fiscal year.

Markings:

Mark Section I, Box #3 – Certificate of Monetary Exemption.

By marking Box #3, the Contractor is certifying that they are currently performing under contracts which have modified CAS coverage and that the contemplated award will also be subject to modified CAS coverage as the Contractor did not meet the $50M dollar look-back threshold necessary to graduate to full CAS coverage.

Additionally, as the contract will be subject to modified CAS coverage, the Contractor should also mark Section II.

Scenario 4:

Contract award, including priced options greater than $2M, and the Contractor did receive cumulative CAS covered awards of $50M or more in the Contractor’s preceding fiscal year; but the anticipated contract award is expected to occur within the first 90 days of the Contractor’s new fiscal year.

Markings:

Mark Section I, Box #4 – Certificate of Interim Exemption.

By marking Box #4, the Contractor is certifying that the anticipated award is subject to full CAS coverage under the look-back provisions of CAS. However, in accordance with 48 CFR 9903.202-1, the Contractor is not required to submit a Disclosure Statement until the end of their first fiscal quarter in the year following the look-back qualification. In the event an award is not made within the first 90 days of the Contractor’s fiscal year, the Contractor should complete and submit a new certification and mark Box #2.

Finally, as Contractors obtain and continue to pursue CAS-covered awards, they will likely encounter contract scenarios that will necessitate changes to their disclosed cost accounting practices.

In some cases, an award may require the Contractor to change a practice to maintain CAS compliance (i.e., a cost, which was once directly associated with a single contract, is now indirect and shared amongst two contracts) or because a change in practice may result in a more appropriate allocation of cost. Whatever the reason, if the award of this contemplated contract would require changes to the Contractor’s disclosed cost accounting practices, Section III should be marked.

Conclusion

Navigating the Cost Accounting Standards, current coverage types, future coverage, and related impacts to a Contractor’s business can be complex, confusing, and often overwhelming.

Capital Edge’s team of CAS experts and compliance professionals has the requisite experience and knowledge to guide Contractors through this challenging process in order to ensure proposal, contract, and regulatory compliance with the standards. Whether determining CAS coverage of current contract portfolios, establishing a new Disclosure Statement, or revising cost accounting practices and estimating cost impacts, we are here to partner with our clients to make compliant and effective choices to meet their unique business needs and challenges.