Compiling a cost impact analysis to ensure the government does not pay increased costs resulting from an accounting change or an allegation of non-compliance with a cost accounting standard is one of the most burdensome requirements of conducting business with the federal government. Whether a firm is fully or modified CAS covered, the CAS Board standards, rules and regulations define a range of circumstances under which price and cost adjustments to CAS covered contracts are necessary due to changes to the cost accounting system. Though the rules explicitly cover full and modified CAS covered contractors, much if not all of the information is often informally required for non-CAS covered contractors when an accounting change is made or anticipated and the government wants to make sure the change will not increase the costs it must pay. The content of cost impact proposals is left up to individual agencies but the following information is usually required: (1) description of all changes to a cost accounting practice (2) general dollar magnitude statement showing cost shifts by contract type, agency or department (3) identification of CAS-covered contracts and (4) oftentimes, a contract-by-contract cost impact proposal. Sometimes the information must be provided on an historical basis (e.g. allegations of CAS non-compliance) and/or on a prospective basis where estimates to complete must be included.
A new government wide rule was issued March 9, 2005 (Fed. Reg. 11,742) effective April 8, addressing the cost impact process. The process is intended to provide “significant flexibility” to both the “cognizant federal agency official” (CFAO) – representing the government – and the contractor according to the Federal Acquisition Regulation Council. Specifically, this flexibility includes:
The ability to determine any time in the process the materiality of the contractor’s cost accounting practice change with respect to costs paid by the government. This is a critical change – we cannot count the number of times auditors and COs insisted on full scale cost impact analyses when it was clear from the beginning that the impact of a change was insignificant.
If the cost impact to the government is material, the ability of the contractor to submit, in any form acceptable to the CFAO, either a general dollar magnitude (GDM) proposal reflecting the minimum data to resolve the cost impact or a detailed cost impact (DCI) proposal.
The ability of the CFAO and the contractor to negotiate the cost impact by adjusting a single contract, multiple contracts or some other suitable method. The ability to adjust one contract saves considerable effort when compared to the need to obtain multiple acceptances from several COs and/or different government agencies and departments.
The final rule comes almost five years after the FAR Council first proposed a CAS administration rule in April 2000. That proposal was criticized for being overly prescriptive and burdensome by commentators who submitted written comments and attended two public meetings. In July 2003, the FAR Council issued a second proposed rule that differed significantly from the first.
The new final rule addresses public comments received from the second proposed rule as well as the FAR Council’s observations regarding those comments. Some include:
Because each cost impact must be evaluated based on its particular facts and circumstances, the rule does not provide guidelines on documentation for materiality determinations.
There will be instances in which a determination of materiality can be made before the contractor submits a GDM and the rule gives the CFAO flexibility to determine the data required on a case-by-case basis.
The rule includes a requirement for the CFAO to document a determination that the cost impact on the government is immaterial.
The rule does not include a specific time requirement for CFAO action on cost impact proposals.
Allowing but not requiring the submittal of a GDM gives contractors flexibility to submit proposals as complex and precise as they choose, up to and including a full DCI.
For some contractors, the projection of representative samples is a feasible method for computing increases and decreases in cost accumulations for a GDM; for contractors that find it problematic to reach agreement with the government on what constitutes a representative sample, there are alternative methods for computing increases and decreases in cost accumulations.
The rule reflects the FAR Council’s determination that firm fixed-price contracts, closed contracts and closed fiscal years are properly included in the calculation of cost impacts.
Using current estimates to complete is the only feasible method for computing the cost impact of changes in cost accounting practice.
The rule does not include the calculation of increased cost in the aggregate. (The FAR Council noted that eight commentators stated the proposed provisions on increased cost in the aggregate violated CAS.)
The rule eliminates the discussion of interest calculations as overly prescriptive.
The rule does not preclude combining cost impacts for changes implemented in different years but it does prohibit combining the cost impacts of required/desirable changes with the cost impacts of unilateral changes/noncompliances. (The cost impact requirements for changes that are required because of changes to the CAS or that are considered “desirable” are different from the impact requirements steming from contractors choosing to make an accounting change or that result from CAS noncompliances.)
The calculation of the cost impact of an accumulation noncompliance is necessary to ensure the government recovers the full extent of any increased costs as well as any statutorily required interest.
The adjustment of final interest rates by the CFAO does not force CAS issues on non CAS-covered contracts because the contractor must agree to any such adjustment. (Remember, contractors are not CAS-covered, but rather contracts are.)
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