(Editor’s Note. Many of our non-small business subscribers are not sure whether their contracts are covered by the Cost Accounting Standards. The question is particularly tricky with the proliferation of such contract vehicles as letter contracts, ID/ IQs, Basic Order Agreements (BOAs) and options so we undertook some research to clarify this question. We found an article by Karen Manos and Darryl Oyer in the Nov 2009 issues of the CP&A Report that was particularly helpful that addresses the meaning of “award” and “net awards.”)
There are three steps involved in determining applicability of CAS: (1) is the contract or subcontract subject to CAS (it is the contract, not contractor that is CAS covered) (2) is it fully CAS-covered or modified CAS-covered and (3) is a disclosure statement required. The threshold for each of these three steps is based on the dollar value of the CAS-covered “award” or “net awards” received by the contractor or subcontractor (unless otherwise specified, we will use the term contractor to encompass both contractors and subcontractors). Full CAS-coverage applies to contractor business units that receive either a single CAS-covered award of at least $50 million or at least $50 million in net CAS-covered awards during the preceding cost accounting period where one of those awards must be a “trigger” award of at least $7.5 million. Once this threshold is reached, all subsequent negotiated contracts and subcontracts valued at $850,000 or more (this amount is periodically changed) that are based on cost build-up estimates will also be fully CAS-covered. A disclosure statement is required if a business unit receives a single fully-CAS covered award of at least $50 million or if a company, together with its business segments, received net awards of at least $50 million in its most recent cost accounting period. Note that if a company with more than one business segment has fully CAS covered contracts then separate segments may need to complete a CAS Disclosure Statement even if it has no CAS covered contracts or subcontracts. If the fully CAS covered threshold is not met (e.g. no contracts exceeding $50 million or cumulatively the prior year) but a trigger contract of $7.5 million is awarded, then that contract is modified CAS-covered and then all subsequent contracts and subcontracts exceeding $850,000 will also be modified CAS covered.
Meaning of “Awards” and “Net Awards”
The CAS Board regulations do not define “award” but the term is used interchangeably with “CAS-covered contract” which is defined as “any negotiated contract or subcontract in which a CAS clause is required to be included.” The CAS Board does define “net awards” as “the total value of negotiated CAS-covered prime contract and subcontract awards, including the potential value of options, received during the reporting period minus cancellations, terminations and other related credit transactions.” This definition is similar to definitions in the FAR but the FAR definition does not take into account cancellations, terminations and other related credit transactions and the FAR convention requires use of the maximum quantity and highest final priced alternative to the government.
CAS Coverage of Unique Contract Vehicles
Though a determination of whether “contracts” and “subcontracts” are CAS covered is fairly straight forward, other contract vehicles that are increasingly more common is not so clear in some cases.
The guidance makes clear that the determination of whether a contract is subject to CAS is made at time of award and is not affected by modifications subsequently made regardless of dollar amount. DCAA has taken the position, purportedly based on Working Group Item No. 72, that a modification that adds new work must be treated for CAS purposes as if it were a new contract.
An option is defined in the FAR as a “unilateral right in a contract by which, for a specified time, the government may elect to purchase additional supplies or services called for by the contract or may elect to extend the terms of the contract.” Where the definition of “net awards” include the “potential value of contract options” the authors assert the proper interpretation of CAS Preamble WG No. 76-2 would mean the “probable” level rather than the “maximum” level where the probable amount of a contract with options would only include those options for net award that are probable to be exercised. Nonetheless, the authors warn that government auditors usually take the position that the maximum amount of price options should apply.
For Basic Agreements and basic ordering agreements the FAR definitions refer to “future contracts where both the FAR and CAS do not consider contracts and therefore concludes the orders issued under either type of agreement must be considered individually in determining CAS applicability. Because such instruments are not contracts they are not CAS-covered. Only individual CAS-covered orders are contracts. Consequently basic agreements and BOAs do not need to be included when calculating CAS thresholds but only the individual orders under them need to be included.
The FAR defines a letter contract as a “written preliminary contractual instrument that authorizes the contractor to begin immediately manufacturing supplies or performing services.” Since CAS applicability is determined based on the value at the time of award, subsequent definitization of letter contracts would not trigger any new standards since definitization is a contract modification rather than a new contract.
Though there is general agreement on applying CAS thresholds for many types of contracts there is general disagreements on IDIQ contracts. Whether the CAS threshold applies at the contract award level or individual task order and how is the IDIQ award amount determined is the subject of much disagreement at this time and will require clarification by the CAS Board in the future.
The authors argue the task or delivery order, not the contract level, should determine the net award under IDIG contracts for two reasons.
Though an IDIQ is a contract according to FAR Part 16 there are usually multiple contracts awarded where then it becomes nearly impossible to determine the contract value. They argue it is a contract only if the work is completely priced and can be unilaterally ordered by the government. If separately priced task orders are anticipated then those orders are like BOAs where they are recognized only when they are ordered.
Since IDIQ contracts provide a minimum and maximum amount where the minimum is required to be ordered and the maximum is often not a “realistic estimate of total quantity” determining the value of the contract is problematic and can produce irrational results that can deter companies from seeking government contracts. For example, if contractors with no CAS covered contracts were to accept a multiple award IDIQ contract with a specified minimum of $10,000 and a specified maximum of $50 million and the higher amount was used to determine CAS coverage then all negotiated contracts or subcontracts exceeding $850,000 the contractor is awarded while performing the IDIQ contract would be subject to full CAS coverage even though it may never receive task orders totaling more than $10,000.
The authors state awarded IDIQ contracts should be carefully analyzed to determine the reasonably anticipated amount the government will order at pre-established prices and that figure should be used for CAS threshold purposes. Possible additional task orders requiring new pricing offers should be treated as separate contracts if and when they materialize. (Editor’s Note. Under most IDIQ contracts we encounter, the question often arises at what level should CAS and Truth in Negotiations Act coverage be triggered where so far most contracting officers are accepting the task order level but this is far from universal.)
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