[Federal Register Volume 64, Number 161 (Friday, August 20, 1999)]
[Proposed Rules]
[Pages 45700-45742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21334]
[[Page 45699]]
_______________________________________________________________________
Part IV
Office of Management and Budget
_______________________________________________________________________
48 CFR Part 9903
Cost Accounting Standards Board; Changes in Cost Accounting Practices
Proposed Rule
Federal Register / Vol. 64, No. 161 / Friday, August 20, 1999 /
Proposed Rules
[[Page 45700]]
OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Part 9903
Cost Accounting Standards Board; Changes in Cost Accounting
Practices
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, OMB.
ACTION: Supplemental notice of proposed rulemaking.
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SUMMARY: The Cost Accounting Standards Board (CASB) invites a third
round of comments on proposed amendments to the regulatory provisions
contained in chapter 99 of title 48. The CASB's objective in issuing
this document is to utilize the proposed amendments as a basis for
holding an open public meeting, conducting a benchmarking survey, and
soliciting public comments.
The proposed amendments, when issued as a final rule, would revise
the current definitions, exceptions and illustrations governing changes
in cost accounting practices; exempt certain changes in compliant cost
accounting practices from the CASB's contract price and cost adjustment
requirements, and establish new coverage for ``desirable changes.'' A
new subpart 9903.4, Contractor Cost Accounting Practice Changes and
Noncompliances, is also proposed. The new subpart would establish
contractor notification requirements for circumstances when contractors
make changes to their compliant cost accounting practices. The new
subpart would also delineate the process for determining and resolving
the cost impact of a compliant change in cost accounting practice or a
noncompliant practice on existing covered contract and subcontract
prices and/or costs.
Educational Institutions: For covered contracts and subcontracts
awarded to an educational institution, the proposed subpart also
provides that certain subpart requirements may be waived, on a case-by-
case basis, if the cognizant Federal agency official concurrently
establishes with the educational institution an ``advance agreement''
that details the specific procedures to be followed for the
notification and resolution of compliant changes to established cost
accounting practices and/or the correction of noncompliant practices
when the educational institution is performing covered contracts,
covered subcontracts and other Federally sponsored agreements.
DATES: Comments must be submitted in writing, by letter, and should be
received by October 19, 1999.
ADDRESSES: Comments should be addressed to Mr. Rudolph J. Schuhbauer,
Project Director, Cost Accounting Standards Board, Office of Federal
Procurement Policy, 725 17th Street, NW, Room 9013, Washington, DC
20503. Attn: CASB Docket No. 93-01N(3). To facilitate the CASB's review
of your submitted comments, please include with your written comments a
three point five inch (3.5'') computer diskette copy of your comments
and denote the format used. A format that is compatible with Corel
WordPerfect 8 is preferred. The submission of public comments via the
internet by ``E-mail'' will not satisfy the specified requirement that
public comments must be submitted in writing, by letter, as receipt of
a readable data file is not assured.
FOR FURTHER INFORMATION CONTACT: Rudolph J. Schuhbauer, Project
Director, Cost Accounting Standards Board (telephone: 202-395-3254).
SUPPLEMENTARY INFORMATION: In response to the second of comments
requested on this topic in the Supplemental Notice of Proposed
Rulemaking, promulgated on July 14, 1997 (hereinafter referred to as
``SNPRM-I''), a number of commenters expressed their concerns regarding
the purpose and scope of the Board's proposed amendments. In
consideration of those concerns, the Board has decided to request a
third round of public comments via this Supplemental Notice of Proposed
Rulemaking (hereinafter referred to as ``SNPRM-II'') To ensure the
views and concerns of interesteed parties are fully surfaced, the Board
will also conduct an open public meeting and initiate a
``benchmarking'' survey.
Open Public Meeting
In addition to the submission of public comments, the Board will
schedule an open public meeting to discuss this proposed rule. The
date, time and location details of that meeting will be the subject of
a separate Federal Register notice.
Benchmarking Survey
In response to the Board's prior proposal, some commenters
generally recommended that the Board field test and/or further study
the impact its proposal will have on contractors and the Government and
then to reconsider the need for the proposed amendments. For a more
detailed discussion of the commenters' concerns, see ``Cost Benefit
Issues'' contained in Section B below. To better understand such
concerns, the Board will invite a small number of major defense
contractors to participate in a coordinated ``benchmarking'' survey.
The objective of the survey will be to specifically identify the
additional number of contract price and cost adjustment cases that
would result if the Board's current proposal were applied to actual
contractor changes that occurred in a recently completed cost
accounting period. Participation by contractors will be on a voluntary
basis. Collection and identification of the survey data is expected to
be coordinated with the contractor's cognizant Federal audit
organization prior to its submission. These ``benchmarking'' surveys
will be formally initiated by the Board through coordination with
interested industry associations. For those contractors that wish to
participate in the survey but are not included in the resultant
contractor groupings established through coordination with the industry
associations, the survey questionnaire may be obtained by faxing a
request to the CASB staff at 202-395-5105. In such cases, the survey
data should be submitted by the due date specified below. Timely
submitted contractor surveys will be examined, on a sampling basis, by
the cognizant Federal audit organization after they are received by the
CASB.
A. Regulatory Process
The CASB's rules, regulations and Cost Accounting Standards (CAS)
are codified at 48 CFR Chapter 99. Section 26(g)(1) of the Office of
Federal Procurement Policy Act, 41 U.S.C. 422(g), requires that the
Board, prior to the establishment of any new or revised Standard,
complete a prescribed rulemaking process. The process generally
consists of the following four steps:
(1) Consult with interested persons concerning the advantages,
disadvantages and improvements anticipated in the pricing and
administration of Government contracts as a result of the adoption of a
proposed Standard (e.g., promulgation of a Staff Discussion Paper
(SDP)).
(2) Issue an Advance Notice of Proposed Rulemaking (ANPRM).
(3) Issue a Notice of Proposed Rulemaking (NPRM).
(4) Promulgate a Final Rule.
This Notice is a continuation of the third step of the four-step
process.
[[Page 45701]]
B. Background
Prior Promulgations
Many commenters have identified the Board's regulatory coverage on
``changes in cost accounting practice'' as a matter requiring
clarification and/or further coverage. The CASB requested public
comments from interested parties on this topic in an SDP published in
the Federal Register on April 9, 1993 (58 FR 18428) and in an ANPRM
published on April 25, 1995 (60 FR 20252). On September 18, 1996, the
CASB, in an NPRM published in the Federal Register (61 FR 49196),
proposed to amend the Board's current coverage governing changes in
cost accounting practices. That NPRM also included proposed amendments
to conform the language contained in the contract clauses for ``Full''
and ``Modified'' coverage, specify certain Federal agency
responsibilities, and expand the criteria for desirable change
determinations. A new subpart was also proposed to delineate the
actions to be taken by the contracting parties when a contractor makes
a compliant change to a cost accounting practice or follows a
noncompliant practice. On July 14, 1997, the CASB published the SNPRM-I
in the Federal Register (62 FR 37654), to solicit additional comments
concerning certain proposed revisions to the previously proposed NPRM
coverage and to solicit comments to determine to what extent, if any,
there may be support for the establishment of new provisions that would
exempt certain voluntary changes in a contractor's cost accounting
practices from the Board's contract price and cost adjustment
requirements.
Public Comments
Of the sixty-nine sets of public comments received in response to
the SNPRM-I, fifty-nine were provided in a timely manner. The public
comments were received from contractors, educational institutions,
professional associations, Federal agencies, accounting organizations,
and other individuals. A number of commenters supported the
establishment of new provisions that would exempt from the Board's
contract price and cost adjustment requirements those voluntary changes
in compliant cost accounting practices that directly result from
changes made by a contractor to improve the economy and efficiency of
its operations. Some commenters supported the proposed amendments
contained in the SNPRM-I. Some did not. Others offered suggestions on
how the proposed coverage might be clarified or otherwise improved. The
responses received in a timely manner are addressed in Section E,
Public Comments.
Certain other inquiries and concerns, of a more general nature,
that were expressed by several commenters with respect to the Board's
overall objectives and rationale for the proposed amendments are
addressed immediately below.
Board Objectives and Rationale
A number of contractors and professional associations questioned
the purpose of the Board's proposed amendments and asked if other more
simplified approaches would not better serve the Government and
contractors. Some commenters felt that the Board had never supplied a
clear rationale for the proposed definition of the term ``cost
accounting practice.'' One commenter stated that because ``cost
accounting practice'' is not so much an accounting concept as it is a
key to the administration of CAS, a statement of purpose or rationale
would help to understand the CAS Board's goal.
The Board's objectives are discussed below.
Continuing Board Objective: To support the Government's procurement
process for negotiated cost-based contracts.
The Board's continuing objective is to promote an acquisition
environment wherein Government contracting officials can, with a high
degree of confidence, rely upon the estimated and actual cost
information provided by contractors relative to (1) the costs contained
in and/or submitted in support of proposed contract prices, (2) the
overall costs of operations and/or (3) the costs of prior contract
performance. Because the Board's CAS and Interpretations often limit or
narrow the range of alternative cost accounting practices that might
otherwise be used by a contractor, or by competing contractors, in
calculating submitted cost information, Government procurement
officials can with a greater degree of reliance make meaningful
analyses and comparisons when contractor submitted cost information is
derived through a contractor's consistent application of CAS compliant
cost accounting practices.
Pursuant to its enabling statue, the Board promulgates CAS and
Interpretations that are designed to achieve uniformity and consistency
in the cost accounting practices used by contractors to estimate,
accumulate and report costs. The concepts of ``uniformity'' and
``consistency'' are set forth in the Board's ``Statement of Objectives,
Policies and Concepts'' (57 FR 31036, 7/13/92). The Board's rules also
require the larger CAS-covered contractors to formally disclose to the
Government their established cost accounting practices, via submission
of a disclosure statement. Disclosure reduces the potential for
Government misunderstandings concerning contractor cost information
submissions. Consequently, the submission of estimated or actual cost
information developed by contractors based on the consistent
application of CAS compliant cost accounting practices enables the
Government to make more meaningful cost comparisons between competing
contractors, facilitates the negotiation of fair and reasonable
contract prices, and permits the Government to make more reliable
comparisons of a particular contractor's estimated and actual contract
costs.
Immediate Board Objective: To bridge the gap between contractor
cost accounting matters and the Government's procurement process for
negotiating and administering negotiated cost-based contracts,
particularly when contractors fail to apply their established cost
accounting practices in a consistent manner, fail to comply with
applicable CAS or make compliant changes to their established cost
accounting practices.
Statutory Requirement. Under its enabling statute, the Board is
required to promulgate regulations that require contractors and
subcontractors to ``* * * agree to a contract price adjustment * * *
for any increased costs paid to such contractor or subcontractor by
reason of a change in the contractor's or subcontractor's cost
accounting practices or by reason of a failure by the contractor or
subcontractor to comply with applicable cost accounting standards.''
Accordingly, the Board's implementing regulations include provisions
that are designed to establish what constitutes a ``change to a cost
accounting practice'' and ``increased cost'' to the Government. The
Board's regulations also provide for contract price and cost
adjustments if a contractor changes its established cost accounting
practice or applied a noncompliant practice. The Board's current
proposal is designed to facilitate the implementation of the Board's
statutory requirements.
Cost Accounting Practice Definition: Consistent with the Board's
statutory requirements, the purpose of the Board's proposed amendments
to the definitions of the terms ``cost accounting practice'' and
``change to a cost accounting practice'' is to direct the contracting
parties to focus on the cost accounting
[[Page 45702]]
practices actually used by contractors to accumulate cost in cost pools
for subsequent allocation to intermediate and final cost objectives
when determining if a voluntary change in cost accounting practice has
occurred. Specifically, the proposed amendments make clear that changes
in the selection and/or composition of cost pools are changes in the
methods and techniques used to allocate cost to cost objectives, i.e.,
a change to a cost accounting practice.
Based on the commenters' stated perceptions, some contractors
apparently believe that the term ``cost accounting practice'' as
defined in the Board's existing rules is merely a contractual term of
art that is used to identify a finite or limited number of
circumstances which trigger contract price or cost adjustments under
the terms and conditions of CAS-covered contracts. In their view, a
change in cost accounting practice only occurs if the change is
specifically cited or illustrated in the Board's rules. That line of
reasoning would inappropriately preclude from consideration the
complete spectrum of cost accounting practices actually used by each
contractor to accumulate costs in cost pools for subsequent allocation
to intermediate and final cost objectives. The commenters' inferences
are that the Board has the ability to promulgate a rule that describes
or illustrates every conceivable circumstance that the Board considers
to be a change to a cost accounting practice for each contractor
performing CAS-covered contracts. That, however, is not feasible or
desirable. Instead, the Board's objective is to maintain cost
accounting practice definitions that can be related to each
contractor's established cost accounting practices.
The Board's proposed definitions are, therefore, from a broader
perspective. The Board's objective is to permit the application of the
Board's rules to all contractors and subcontractors, regardless of
their specific individual cost accounting practices applied to
accumulate costs. The Board's expectations are that the contracting
parties will be able to determine, on a case-by-case basis, whether a
change in a particular contractor's established cost accounting
practice has occurred based on the revised language contained in the
Board's proposed definitions. Under the definition being proposed
today, if a contractor makes changes that alter the flow of pooled
costs to intermediate and final cost objectives, for ongoing functions,
such changes would generally be considered a change in cost accounting
practice. Thus, it is the substance of the actual change made that is
to be evaluated by the contracting parties. A cost accounting practice
change may occur even if it is not specifically depicted in the Board's
rules.
The accompanying illustrations are a secondary source of guidance
regarding the application of the primary policy reflected in the
definitional language. A determination that a change in practice has
occurred should normally result whenever there is a change in how
pooled costs are accumulated for allocation to intermediate and final
cost objectives. The determination is, therefore, not limited to only
those circumstances that replicate the conditions associated with the
changes in cost accounting practices illustrated in the Board's amended
rule or by any previously proposed coverage (proposed definitional
language or illustrations) associated with this rulemaking that is not
eventually incorporated in the final rule.
Contract Price and Cost Adjustments. In proposing a new subpart
9903.4, the Board's objective is to establish a definitive cost impact
process that fully considers and reflects how contractor submitted cost
information is used by the Government (i) to negotiate contract prices
at the time of award, (ii) to convert cost ceilings or target costs
into final contract prices for flexibly priced contracts after award,
and (iii) to pay contract costs under the terms and conditions of the
different types of negotiated cost based contracts (FFP, CPFF, etc.)
that are utilized by the Government to obtain products, supplies and
services, research, etc.
Contractor cost estimates submitted to support proposed contract
prices for the performance of specific tasks generally reflect the
amount of direct and indirect costs that contractors expect they will
actually accumulate in accordance with their established cost
accounting practices after receipt of a contract award, if they were
selected to perform the specific tasks. The Government's negotiators
rely upon such cost estimates when they establish the negotiated
contract price at the time of contract negotiations, prior to contract
award. If a contractor changes a compliant cost accounting practice
after contract award, the amount of costs accumulated for existing CAS-
covered contracts may increase or decrease in comparison to the amounts
that would have been accumulated had no practice change been made. Such
post award changes made by a contractor could result in the payment of
increased costs by the Government. If a contractor applied a
noncompliant cost accounting practice, the amount of estimated costs
based on the noncompliant practice may result in overstated or
understated negotiated contract prices and/or the amount of actual
costs accumulated for resultant CAS-covered contracts may be higher or
lower than the amounts that would have resulted if a compliant practice
had been used to accumulate costs. In such circumstances, contract
price or cost adjustments may be required to preclude the payment of
increased cost, to correct overstated contract prices and to deobligate
overstated funding obligations that resulted from an estimating
noncompliance, or to address individual contract cost overrun or
underrun conditions that may result. Adjustments may also be required
so that Government cost comparisons between estimated and actual costs
of contract performance contained in contract cost status reports
result in valid comparisons.
By proposing a definitive cost impact process, the Board is taking
action to establish how the contracting parties are henceforth to:
Estimate the amounts by which the amount of costs
accumulated under existing CAS-covered contracts will increase or
decrease after a compliant cost accounting practice change is made.
Convert the estimated changes in cost accumulation
(increases or decreases) for individual contracts to equitable contract
price adjustments for ``required'' and ``desirable'' practice changes.
Determine if ``voluntary'' cost accounting practice
changes made unilaterally by a contractor after contract award will
result in the payment of increased costs, in the aggregate, by the
Government and to prescribe the actions to be taken to preclude the
payment of the aggregate increased costs. At the time of contract
award, a contractor agrees to consistently apply its established cost
accounting practices when accumulating and reporting the costs of
contract performance. A voluntary change in cost accounting practice
negates that agreement and triggers the CAS contract clause price and
cost adjustment provisions which preclude the Government from paying
aggregate increased costs (as defined by the Board) that may result
from a voluntary change in cost accounting practice. When a contractor
makes a voluntary change to its established cost accounting practices,
the amount of contract costs accumulated by the contractor for
individual contracts may increase or decrease as compared to the
amounts
[[Page 45703]]
that would have been accumulated for the individual contracts had the
practice change not occurred. The cost impact process being proposed
prescribes how to determine if the Government would pay ``increased
costs,'' in the aggregate, as the result of a voluntary change in
practice for the different types of contracts that may be involved (FFP
or flexibly priced contracts). The increased cost determination is
predicated upon an analysis of the changes in individual contract cost
accumulations that are expected to result after the practice change and
a determination on whether or not contract price adjustments or other
actions are required to preclude the payment of aggregate increased
costs, e.g., require adjustment of the Government's contractual
obligations to pay the negotiated cost-based contract prices (FFP or
cost ceilings for flexibly priced contracts) which were determined at
the time of award based on proposed contract costs that were estimated
in conformity with the contractor's then established cost accounting
practices and the contractor's agreement to consistently apply such
established practices when accumulating and reporting the actual costs
of contract performance.
Convert the estimated changes in cost accumulations
(increases or decreases) for individual contracts to contract price
adjustments and/or other actions that may be required to preclude the
payment of increased costs or to otherwise reflect the cost impact of
``voluntary'' cost accounting practice changes.
Determine if increased cost to the Government, in the
aggregate, occurred in the event a noncompliant cost accounting
practice was used to estimate contract costs and/or to accumulate
contract costs.
Correct noncompliant conditions.
The purpose of the foregoing discussion is intended to guide
interested parties in commenting on the Board's proposal.
Alternative Procedures
Some commenters advocated that the use of other approaches might
better serve the Government and its contractors. The thrust of their
arguments was that other measurement criteria for evaluating the
reliability of contractor cost submissions and remedies for
``unreliable'' cost submissions might be developed with the result that
the contracting parties would incur less administrative costs. General
references were made to recent regulatory changes established by the
procurement community in response to acquisition reform legislation
that produced ``streamlined'' acquisition regulations for contract
awards where contract prices are generally based on ``adequate price
competition,'' e.g., the use of ``past performance'' evaluations for
determining responsible sources and ``Process Oriented Contract
Administration Services (PROCAS),'' a ``team approach'' review program
developed by the Defense Logistics Agency that establishes increased
reliance on contractor internal control procedures so that Government
surveillance can be lessened. How such alternative processes might be
related to the implementation of the Board's statutory requirements for
negotiated cost-based contracts was not, however, detailed. Any
alternative system, if designed to provide the basis for making
meaningful evaluations regarding compliance with the Board's CAS and
the resulting submission and use of contractor prepared cost
information, would require a baseline or benchmark against which
submitted cost information could be measured, verified and equitably
adjusted if unreliable cost information had been submitted. Additional
contractor reporting systems and new measurement criteria relative to
the Board's statutory requirements would need to be developed and
implemented. Team reviews also consume considerable resources, pose
scheduling delays, and are generally invoked only at the largest
contractor locations.
In a cost-based contracting environment, the use of such
alternative processes may not be as effective or less costly than the
Board's administrative requirements. The Board has carefully considered
the commenters' views and believes that its regulatory requirements
(once amended as proposed in this SNPRM-II) and Standards result in a
reasonably efficient and effective process for administering contractor
cost accounting matters that affect the pricing of negotiated cost-
based Government contracts and subcontracts.
Cost Benefit Issues
Cost Accounting Practice Definition
A number of commenters opined that the costs of implementation of
the Board's proposed amendments would exceed any cost savings the Board
might expect from the potential recovery of increased costs paid by the
Government. The commenters premised their concerns on the notion that
the proposed amendments to the Board's definitions of a ``cost
accounting practice'' and ``change to a cost accounting practice'' will
increase the number of cases (cost accounting practice changes) that
will need to be reported to the Government and subjected to the Board's
cost impact process. They reasoned that the increased number of cases
will, in turn, increase the Government's and contractors'
administrative costs over the levels currently being experienced.
Consequently, they generally recommended that the Board field test and/
or further study the impact its proposal will have on contractors and
the Government and then reconsider the need for the proposed
amendments. It is their belief that the Board will find that the
Government's and contractors' administrative cost levels would increase
substantially while any increase in the levels of ``increased costs''
to be recovered by the Government would not justify the higher
administrative cost levels.
The Board acknowledges that for some contractors the reported
number of cost accounting practice changes that would become subject to
the Board's contract price or cost adjustment process may increase when
compared to the number currently being reported. The possible increase
would not be due to the actual number of ``changes'' made each year,
but rather due to those changes that have been made routinely in the
past but were not treated by the contractor as a ``change to a cost
accounting practice'' (e.g., pool combinations, pool split-outs, and
transfers of ongoing functions from one pool to another pool). Some
contractors do not believe such changes are currently subject to the
Board's consistency requirements and CAS contract price and cost
adjustment provisions due to their interpretations of the Board's
existing definitions, illustrations and rulemaking history regarding
the definition of a change to a cost accounting practice.
Such cost pool changes normally impose additional non-CAS driven
administrative burdens on both the Government and contractors because
they generally require the negotiation of revised sets of forecasted
indirect cost rates for contract cost estimating purposes and the
establishment of revised sets of provisional and actual indirect cost
rates for the payment of accumulated actual contract costs. These
revisions are required whenever changes in the accumulation of pooled
costs significantly affect estimated and/or actual contract cost
accumulations. However, this additional administrative cost burden does
not appear to be a contractor concern since these corollary
administrative actions were not mentioned. Also not considered was the
impact of the alternative outcomes and
[[Page 45704]]
alternative administrative actions that would result if the CAS cost
impact process were not applied to uniformly resolve individual
contract cost overruns or under-runs that may result from such changes.
A study of Government cost recoveries is not needed since the Board
does not expect that only contract price reductions will occur due to
the promulgation of this proposed rule. The contract price and cost
adjustments made under the CAS cost impact process generally increase
and decrease individual contract prices and costs in synchronization
with the increase or decrease in actual cost accumulations expected to
result from the practice change. If the Government determines a
practice change to be a ``desirable change'', then the Government may
increase, not decrease, contract prices in the aggregate. The objective
is to track the expected changes in cost accumulation for the
individual covered contracts and to adjust individual contract prices,
if necessary. It is not to gain an advantage for the Government. The
``savings'' will accrue through the Government's continued reliance on
contractor cost submissions, the Government's ability to adjust
contract prices and costs to preclude the payment of increased costs
(as defined by the Board), and the implementation of a less burdensome
cost impact system.
The commenters' ``cost savings'' rationale avoided the basic issues
under consideration by the Board, i.e., what constitutes a change in a
contractor's established cost accounting practices used to estimate,
accumulate and report costs for covered contracts, and, has the Board's
statutory requirement to preclude the payment of ``increased costs''
been implemented in an effective manner? Their arguments were limited
to the premise that if the proposed amendments increase existing
administrative cost levels to the contractor and/or there is no
significant increase in the level of amounts recovered by the
Government, promulgation of the proposed amendments is not justified.
Throughout this rulemaking process, contractors continued to
advocate that, from a technical prospective, the definition of a change
to a cost accounting practice should not be amended, i.e., the Board's
contract price and cost adjustment provisions should not be triggered
if a contractor's estimated cost proposal was predicated on the
accumulation of estimated pooled costs in a particular manner and,
after contract award, the contractor elected to accumulate actual
pooled costs differently and thereby altered the amount of actual
contract costs accumulated for individual contracts. This
administrative cost burden argument is really an extension of those
technical arguments which are addressed elsewhere in this Preamble.
However, as presented, the burden argument ignores the potential direct
``cost'' risk to the Government in terms of increased contract prices
or costs that may result and be billed to the Government due to such
post-award changes. By objecting on the basis that the Board's proposed
amendments will increase the administrative cost burden, some
contractors are really arguing that the CASB's requirements for
adjusting contract prices to reflect the changes in the accumulation of
pooled costs allocated to individual contracts, should not be applied.
If such ``burden'' arguments were accepted, the CASB's cost impact
process would not be used to uniformly resolve individual contract cost
shifts resulting from such changes. The Board does not agree with such
views. The Board does not believe that the commenter's arguments have
technical merit or that the Board's proposal will materially increase
the overall administrative cost burden level currently imposed by the
Government on cost-based contractors.
The Board's objective is to consistently treat unilateral changes
made by contractors that alter the manner by which the costs of ongoing
functions are accumulated in cost pools for subsequent allocation to
intermediate and final cost objectives as a change in cost accounting
practice. Such contractor changes are viewed as a constant. They occur
irrespective of the Board's rules, regulations and Standards.
Therefore, the issue is simply whether changes in the accumulation of
pooled costs that alter the flow of costs to intermediate and final
cost objectives are also to be recognized as changes in a contractor's
cost accounting practices for contract pricing purposes.
To ensure that equity results from the Government's cost-based
contract pricing process, the Board is of the opinion that a change
made by a contractor which alters the flow of costs to cost objectives,
for ongoing functions, constitutes a change in cost accounting practice
for contract cost or pricing purposes. In the final analysis, an
approach that protects the Government's interests in an equitable
manner, consistent with the Board's enabling statute, is needed in a
cost-based contracting environment. The benefits of commonly understood
definitions that result in implementation of the Board's statutory
requirements will tend to negate the administrative costs of
implementation even if some administrative cost levels were to increase
for a short time. This is because the Board's existing rules have not
resulted in an effective, easily understood and agreed to regulation.
The contracting parties have experienced contentious disagreements and
legal disputes concerning amounts paid under covered contracts after
contractors made ``changes'' that altered the flow of costs to
intermediate and final cost objectives which in turn altered the
aggregate amount of accumulated contract costs. Settlement of these
disagreements and adjudication of the resulting legal cases,
particularly when extended over long periods of time, have produced
significant ``administrative costs'' to both the Government and
contractors. It is the Board's expectation that finalization of this
proposal to more precisely define what constitutes a ``change to a cost
accounting practice'' will reduce the potential for such disagreements
and therefore will obviate the cost of protracted legal proceedings for
many such changes in the future.
Cost Impact Process
The Board found that the administrative process for making the
contract price and cost adjustments has not always been implemented in
a uniform manner, and that the ``undocumented'' procedures and
processes for making such adjustments is not widely understood by the
Government or its contractors. The proposed cost impact process
delineates the entire process to be followed when a contractor changes
a compliant cost accounting practice, or is required to correct a non-
compliant practice. It addresses when notification of a practice change
is required and specifies a flexible process for determining and
resolving the cost impact of a cost accounting practice change or
noncompliance. The Board believes that the proposed process, when
promulgated as a final rule, will prove to be more flexible and less
burdensome than current practices. It will also facilitate user
comprehension of the process and thereby tend to reduce the overall
amount of administrative effort currently being expended to resolve
individual cases.
In Summary
The Board's continuing objectives are to maintain its existing
rules and Standards in a manner that is consistent with its enabling
statute. The purpose of the Board's current proposal is to focus
[[Page 45705]]
on the two basic issues that are an essential part of the Board's
overall contract price and cost adjustment process, i.e., what
constitutes a ``cost accounting practice'' and how to administer CAS-
covered contracts in the event a contractor or subcontractor makes a
change to its otherwise compliant cost accounting practices or a
contractor or subcontractor does not comply with an applicable CAS when
estimating, accumulating or reporting costs. Based on the public
comments received throughout this proposed rulemaking, it is clearly
evident that disagreements still exist over what should constitute a
change in a contractor's established cost accounting practices for
purposes of triggering the CAS contract price and cost adjustment
process. Accordingly, the Board believes that the amendments being
proposed today are needed to facilitate implementation of the Board's
statutory mandate concerning the payment of increased costs
attributable to contractor cost accounting practice changes, and that
the contracting community will benefit from the promulgation of a
flexible cost impact process that is designed to achieve a more
flexible and less burdensome administrative process.
The Board does not believe that its proposed amendments, when
promulgated as a final rule, will increase the level of administrative
costs currently being experienced by contractors and Government
agencies by any appreciable margin. In the long run, the benefits
accruing from a more precise definition of a ``change to a cost
accounting practice'' and a more flexible cost impact process should
reduce, not increase, the overall administrative burden currently being
experienced by contractors and agencies.
Proposed Amendments
A brief description of the proposed amendments follows:
Part 9903, Contract Coverage--Proposed Amendments
In subpart 9903.2, CAS Program Requirements, subsection 9903.201-4
is amended to conform certain language in the ``Full'' and ``Modified''
contract clauses and to clarify the provisions governing changes made
to a contractor's established cost accounting practices and changes
made to correct noncompliant practices. Subsection 9903.201-6 is
amended to provide exemption criteria for determining if a voluntary
change in cost accounting practice associated with certain
restructuring activities can be exempted from the contract price or
cost adjustment requirements prescribed in part 9903. Subsection
9903.201-7 is amended to establish criteria for determining when a
voluntary change in cost accounting practice is desirable and not
detrimental to the Government's interests and to establish alternate
processes for resolving desirable changes. Subsection 9903.201-8 is
added to specify certain cognizant Federal agency responsibilities for
administering CAS-covered contracts and subcontracts.
In subpart 9903.3, CAS Rules and Regulations, section 9903.301 is
amended to incorporate definitions for the terms ``Function'' and
``Intermediate cost objective.'' In subsection 9903.302-1, Cost
Accounting Practice, the definition is amended to incorporate language
changes and to add clarifying guidance. Subsection 9903.302-2, Change
to a cost accounting practice, is revised to make explicit the types of
changes that are to be regarded as a change in cost accounting
practice.
The illustration of a change in cost accounting practice at
9903.302-3(c)(3) is replaced by a new illustration. In 9903.302-3(c)
and in 9903.302-4, several illustrations have been included to provide
additional guidance regarding the revised definitions of the terms
``cost accounting practice'' and ``change to a cost accounting
practice.''
A new subpart 9903.4 is added to establish the notification and
cost impact resolution process to be followed by a contractor and the
cognizant Federal negotiator when a CAS-covered contractor or
subcontractor changes a compliant cost accounting practice, fails to
comply with an applicable Standard or fails to consistently follow its
established cost accounting practices.
Summary Description of Proposed CAS Coverage
In subpart 9903.2, the proposed amendments:
Conform the contract clause language for ``Full'' and ``Modified''
coverage. The contract clause provisions are also revised to clarify
the actions required when a contractor or a subcontractor is required
to change a cost accounting practice or elects to replace an
established practice with another compliant cost accounting practice.
Also specified are the corrective actions required when a contractor's
estimated cost proposal was based on a noncompliant practice and/or
actual contract cost accumulations were based on a noncompliant
practice.
Provide criteria for determining when a voluntary change in cost
accounting practice associated with restructuring activities can be
exempted from contract price or cost adjustment.
Provide criteria for determining when a non-exempted voluntary
change in cost accounting practice can be determined to be a desirable
change that is not detrimental to the Government's interests.
Provide a more flexible process for resolving the cost impact of
certain desirable changes.
Require Federal agencies, in accordance with agency procedures, to:
--Establish internal policies and procedures for administering CAS-
covered contracts when the agency is and is not the cognizant Federal
agency for contractors performing agency contracts.
--Designate the agency office or official responsible for administering
the agency's CAS-covered contracts and subcontracts.
--Delegate contracting authority to designated agency officials, as
required, for the negotiation of cost impact settlements and associated
contract price or cost accumulation adjustments.
--Concurrently settle, on a Government-wide basis, the cost impacts on
all CAS-covered contracts and subcontracts affected by a contractor's
or subcontractor's change in cost accounting practice or noncompliant
practice.
In subpart 9903.3, 9903.301 is amended to incorporate two
definitions to clarify the terms ``Function'' and ``Intermediate cost
objective.'' The amendments made to 9903.302-1(c), Allocation of cost
to cost objectives, make explicit the methods and techniques that are
considered to be a cost accounting practice, including the methods and
techniques used to accumulate the cost of specific activities in cost
pools. Additional subparagraphs are added to clarify the concepts
associated with the selection and composition of cost pools and their
allocation bases.
The proposed amendments to 9903.302-2 expand the existing coverage
by specifying that, as used in part 9903 and the applicable contract
clauses, changes in cost accounting practices include pool
combinations, pool split-outs and transfers of existing ongoing
functions. The existing cost accounting practice exceptions cited in
9903.302-2(a) and (b) are restated and modified in new subparagraphs.
Within 9903.302-3, a new introductory paragraph is added regarding
the use of the illustrations that follow. Introductory paragraphs (a),
(b) and (c) are revised to clarify that the illustrations involve
``cost accounting practices'' that have changed. The
[[Page 45706]]
illustration at 9903.302-3(c)(3) is replaced by new illustrations
depicting changes in cost accounting practices that are consistent with
the revised definitions. The new illustration at 9903.302-3(c)(3)
illustrates that the use of a different base for the allocation of
indirect costs to final cost objectives is a change in cost accounting
practice. Additional illustrations are added to 9903.302-3(c) and
9903.302-4 to depict various changes which do and do not result in
changes in cost accounting practices when a contractor combines,
eliminates or splits-out pools, transfers functions or when business
combinations due to mergers and acquisitions occur.
A new subpart 9903.4, Contractor Cost Accounting Practice Changes
and Noncompliances, is proposed. It details the methodology for
determining required contract price or cost accumulation adjustments
due to changes in a contractor's cost accounting practices and
specifies the actions to be taken by a contractor and the cognizant
Federal official (e.g., the contracting officer, administrative
contracting officer (ACO) or other agency official authorized to act in
that capacity), including the negotiation of cost impact settlements on
behalf of the Government. The new subpart provides coverage on the
applicability and purpose of the subpart, materiality considerations,
definitions of terms related to the subpart, procedures for changes in
compliant cost accounting practices, and procedures for noncompliance
actions. An additional section is also included to illustrate the
application of the proposed coverage. The proposed coverage is briefly
described below.
Section 9903.405, Changes in Cost Accounting Practices, includes
subsections on the following areas: contractor notification of changes
in cost accounting practices; Government determinations, approvals and
initiating the cost impact process; contractor cost impact submissions;
and negotiation and resolution of the cost impact action.
Section 9903.405 provides a streamlined process which does not
require submissions of cost impact estimates or contract price
adjustments for every CAS-covered contract affected by a change in
accounting practice. It provides for the submission of ``cost savings''
data that will enable the cognizant Federal agency official to promptly
determine if a voluntary change can be exempted from contract price or
cost adjustment. For changes in cost accounting practices that can not
be exempted, it provides flexibility to the cognizant Federal agency
official in determining the level of detail required for a cost impact
submission and materiality thresholds for required contract price and
cost adjustments. To this end, it creates a three-step sequential
process which includes (1) an initial evaluation to determine if the
cost impact of the accounting change is obviously immaterial, (2) the
use of a general dollar magnitude (GDM) settlement proposal, and if
ultimately determined necessary, (3) the submission of a detailed cost
impact proposal for contracts exceeding Government determined
materiality thresholds. The proposed procedure encourages settlement of
material cost impacts based on the contractor's GDM settlement proposal
to the maximum extent possible, without having to resort to a detailed
cost impact proposal. It also provides for contract price adjustment on
individual contracts only when the cost impact amount is material.
Section 9903.405 addresses the use of the offset process. It allows
for the use of the offset process to reduce the number of contract
price and cost adjustments required as a result of a change in cost
accounting practice, while still providing for adjustments of
individual contracts when the cost impact amount on individual
contracts is material. The rules provide that offsets of increased
costs against decreased costs shall only be made within the same
contract type.
Section 9903.405 also explains when and what action needs to be
taken to preclude increased costs paid by the Government as a result of
a voluntary change in cost accounting practice. It clarifies how
increased costs to the Government are measured on firm-fixed-price
contracts as a result of a change in accounting practice. It also makes
clear that action must be taken to preclude increased costs from being
paid when the estimated aggregate higher allocation of costs on
flexibly-priced contracts subject to adjustment exceeds the estimated
aggregate lower allocation of costs on firm-fixed-price contracts
subject to adjustment as a result of a voluntary change in accounting
practice.
Section 9903.406, Noncompliances, details the processes for
handling noncompliant actions. It outlines the procedures to be
followed when the parties agree or disagree on whether a noncompliant
condition exists. An example of an acceptable GDM Settlement Proposal
format that the contracting parties may use to resolve a noncompliance
is included. The proposed section contains separate coverage on
estimating practice noncompliances and cost accumulation practice
noncompliances to clarify the different actions, particularly to
recover increased costs and/or applicable interest on increased costs
paid, that need to be taken under these different noncompliant
conditions. It also provides procedures to be followed when a
noncompliant condition does not result in material increased costs paid
by the Government.
C. Paperwork Reduction Act
The Paperwork Reduction Act, Public Law 96-511, does not apply to
this proposal, because this proposal imposes no paperwork burden on
offerors, affected contractors and subcontractors, or members of the
public which require the approval of OMB under 44 U.S.C. 3501, et seq.
D. Executive Order 12866 and the Regulatory Flexibility Act
The economic impact of this proposal on contractors and
subcontractors is expected to be minor. As a result, the Board has
determined that this proposal will not result in the promulgation of a
``major rule'' under the provisions of Executive Order 12866, and that
a regulatory impact analysis will not be required. Furthermore, this
proposal will not have a significant effect on a substantial number of
small entities because small businesses are exempt from the application
of the Cost Accounting Standards. Therefore, this proposed rule does
not require a regulatory flexibility analysis under the Regulatory
Flexibility Act of 1980.
E. Public Comments
This proposed rule was developed after consideration of the public
comments received in response to the Board's NPRM (61 FR 49196, 9/18/
96) and the SNPRM-I (62 FR 37654, 7/14/97) that were published in the
Federal Register, wherein public comments were invited. The NPRM
comments received and the Board's actions taken in response thereto
were reflected in the SNPRM-I. The supplemental comments received in
response to the SNPRM-I and the Board's actions taken in response
thereto are summarized in the paragraphs that follow:
Contract Price and Cost Adjustment Exemption
Comment: Although commenters remained concerned regarding the level
of detail that would be needed to obtain an exemption, they expressed
strong support for the creation of a provision that would exempt from
the Board's contract price and cost adjustment requirements those
voluntary changes in
[[Page 45707]]
cost accounting practices that are associated with management changes
made to improve the efficiency and effectiveness of a contractor's
operations.
Response: The Board's deliberations focused on how a voluntary
change to a contractor's established cost accounting practices should
be treated under the Board's rules when the practice change is directly
associated with management actions undertaken to improve the economy
and efficiency of the contractor's operations. It is the Board's
continuing belief that the Government should be informed of any changes
made to the contractor's established cost accounting practices that are
being used to accumulate and report the costs of performing existing
CAS-covered contracts. Such notification facilitates the contract
administration process and beneficially reduces the potential for
disputes, particularly if a disclosure statement is required. However,
in cases where a change in cost accounting practice is made in
conjunction with contractor restructuring activities that are
undertaken to reduce personnel or facilities in order to significantly
lower the contractor's overall costs of operations, the contract price
and cost adjustment process contractually required for changes in cost
accounting practices under existing CAS-covered contracts may not be
necessary or appropriate.
For example, assume that after contractor restructuring activities
and associated practice change(s) are implemented concurrently, a
reduction in the contractor's future overall operating costs is
expected and the aggregate costs accumulated for existing covered
contracts are also expected to be less than the aggregate costs that
would have been accumulated if the restructuring activities had not
been made by management. In such cases, it would generally be
inappropriate to separately adjust existing contract prices or costs
only for the cost impact of the change in cost accounting practice.
That is because the aggregate CAS cost impact calculation for a
practice change is based on the application of the original and changed
cost accounting practices to the contractor's lower level of costs
expected to result after restructuring changes are implemented. It does
not give consideration to the impact that the lower overall operating
cost levels (cost savings) expected to result from the restructuring
activities will have, in the aggregate, on accumulated contract costs
for existing covered contracts. Nor would the CAS cost impact
adjustments give consideration to the effects of any resulting contract
ceiling or target price adjustments or decisions that may otherwise be
made by the Government based on the expected aggregate reductions in
accumulated costs for the existing contracts as reported in the
contractor's restructuring cost savings submissions or contract cost
performance status reports. For such actions, the Government's
decision(s) would be based on reported cost information that already
reflects the application of the new changed cost accounting practices
to the lower level of costs expected to occur after the restructuring
changes are made by management. Consequently, an independent CAS
contract price or cost adjustment made for the shift in costs
attributable only to the cost accounting practice change(s) might
alter, in part, the contractor's reported cost savings estimates and/or
any resultant actions otherwise taken by the Government.
After considering this matter at length, the Board proposes to
establish contractor notification requirements for any changes made to
the contractor's established cost accounting practices (at 9903.405-2).
The Board also proposes to establish an exemption from its contract
price and cost adjustment requirements for certain voluntary changes
made to a contractor's cost accounting practices (at 9903.201-6). The
proposed exemption would become applicable when the cognizant Federal
agency official determines that the Board's promulgated criteria for
granting the exemption has been met: i.e., when a contractor adequately
demonstrates that a planned restructuring activity is expected to
result in cost savings to the Government; the practice change would not
occur but for the planned restructuring activity; reductions in
contractor personnel or facilities will occur; and reduced contract
cost accumulations are expected to occur, in the aggregate, for
existing flexibly priced contracts, and all expected future CAS-covered
contracts and subcontracts.
If a change in cost accounting practice directly associated with
planned restructuring activities were exempted, existing flexibly
priced contracts would, however, remain subject to applicable contract
terms and conditions prescribed in agency procurement regulations.
Accordingly, the Contracting Officer may still make individual contract
cost ceiling and/or target cost adjustments or otherwise take action to
address any potential contract cost overrun and/or underrun conditions
that are expected to result due to the restructuring activities.
The administrative process for requesting the exemption and
granting an exemption is also proposed at 9903.405-2 and 9903.405-3.
When a contractor requests an exemption, the submission of some
contractor information is necessary concerning the contract cost
accumulation changes and cost savings that are expected to result from
the planned restructuring activities. Otherwise, the cognizant Federal
agency official would not have a reasonable basis for determining, in a
meaningful manner, if a planned cost accounting practice change meets
the Board's specified exception criteria, and should be exempted, or if
the practice change should be subjected to the Board's standard
contract price and cost adjustment process.
Comment: A Federal agency supported the establishment of an
exemption for improved management efficiency and effectiveness. It
recommended, however, that the exemption only be granted when the
contractor meets the Board's stated requirements and the cognizant
Federal agency official makes a determination, based on the facts and
circumstances of the situation, to grant the exemption. A related
concern was that flexible contract adjustment provisions were needed so
that adjustments can be made for shifts in contract costs resulting
from changes made in cost accounting practices to ensure that
contractor completion of flexibly priced contracts would not be
jeopardized.
Response: In considering the establishment of an exemption, the
Board did not expect to establish a mandatory exemption provision that
would obviate the need for determinations, on a case-by-case basis, by
the cognizant Federal agency official on whether a cost accounting
practice change should be exempted. A unilateral exemption decision by
the contractor was not envisioned, e.g., the draft ``Option B''
language included in the SNPRM-I provided that the contractor would
request an exemption and the cognizant Federal agency official would
notify the contractor if the Board's exemption criteria had been met
and that the voluntary change would be exempt.
The Board's objective is to not discourage restructuring
activities. Consequently, the Board is proposing an exemption provision
so that cognizant Federal agency officials will not be required to
apply the Board's contract price and cost adjustment process for
certain changes in cost accounting practice that are directly
associated with certain restructuring activities. The exemption would
only apply when a
[[Page 45708]]
cognizant Federal agency official finds that contract price and cost
adjustments otherwise required under the Board's regulations for
existing contracts are not considered necessary to protect the
Government's interest. This would occur where the cognizant Federal
agency official determines that a contractor has met the Board's
proposed exemption criteria which includes a demonstration that
aggregate reductions in contract cost accumulations for existing
flexibly priced CAS-covered contracts and future CAS-covered contracts
are expected to result from the planned restructuring activity.
However, when such ``cost savings'' to the Government are expected to
occur in the aggregate due to restructuring and a voluntary cost
accounting practice change is made concurrently with the restructuring
change, then the two changes made in unison may produce cost underrun
and/or overrun conditions for some individual flexibly priced type
contracts. In such cases, the Board would expect that, as a normal
contract administration matter, the contracting parties would mutually
agree to concurrently decrease or increase the affected contract
ceiling or target prices, and revise funding obligations, as necessary,
to reflect the lower cost accumulations (cost savings), expected in the
aggregate, for all affected flexibly priced contracts. The overall
objective of such actions would be to recognize the aggregate ``cost
savings'' and to address (correct) any individual contract cost overrun
conditions that might result under existing CAS-covered contracts and
subcontracts.
When the aggregate cost accumulations for existing flexibly priced
contracts are expected to increase due to planned restructuring
activities, then the cognizant Federal agency official may grant the
exemption if a determination is made that the ``cost savings'' expected
to result under future covered contract awards exceed the aggregate
increase for such existing contracts. However, the resulting cost
overrun conditions for such exempted CAS-covered contracts would remain
subject to the same Contracting Officer actions that are normally taken
to address cost overruns in accordance with the existing contracts'
other terms and conditions that are prescribed in applicable agency
procurement regulations.
The Board's intent is to provide flexibility to cognizant Federal
agency officials administering CAS-covered contracts and subcontracts
while also providing assurance to contractors that requests for the
proposed exemption will generally be granted when the Board's specified
criteria are applied. The granting or use of the Board's proposed
exemption should not otherwise disrupt the Government's ongoing
administration of CAS-covered contracts.
In response to the commenter's concerns, the Board proposes to
establish a ``finding'' requirement at 9903.201-6 to clarify that a
cognizant Federal agency determination is needed before a voluntary
change in cost accounting practice can be considered exempt from a CAS-
covered contract's contract price and cost adjustment provisions. The
establishment of an adjustment provision for flexibly priced contracts
to address the potential cost overrun conditions attributable to a
change in cost accounting practice associated with a planned
restructuring activity was not considered necessary.
Comment: A number of commenters advocated that if an exemption
provision is promulgated, the coverage should not be limited to
``transfers of functions'' or ``merger of cost pools.'' Several
commenters recommended that the exemption language not be limited to
cost accounting practice changes resulting from ``organizational
changes.'' Conversely, some commenters objected to the promulgation of
an exemption based on their belief that an exemption for economy and
efficiency changes would be abused. They opined that virtually every
change in cost accounting practice could be covered as a change made
for ``improved management efficiency and effectiveness.''
Response: The exemption criteria being proposed today has been
expanded to include any changes in the ``allocation of cost to cost
objectives'' (9903.201-6(c)) that occur within a cost accounting
period, i.e., ``intra-period'' cost shifts. Changes involving the
``measurement of cost'' or the ``assignment of cost to cost accounting
periods'' are not subject to exemption.
The Board also shares the concerns expressed by those commenters
advocating that no exemption be provided in order to avoid the
potential for abuse. In that regard, the SNPRM-I ``Option B'' exemption
criteria has been modified to require an adequate contractor
demonstration that the planned restructuring activities, when
implemented, are expected to result in cost savings to the Government,
in the aggregate. With regard to the latter, this proposed rule also
requires a demonstration of the expected impact on projected cost
accumulations for existing CAS-covered FFP contracts. Contract price
adjustments normally required to resolve the cost impact resulting
solely from a voluntary change in cost accounting practice would not,
however, be required for existing CAS-covered FFP contracts, if the
practice change is exempted. But the data submission in a FFP
environment would provide support for the determination that similar
offsetting ``cost savings'' can be reasonably expected to occur in
future CAS-covered contracts.
The Board will revisit this matter if subsequent events reveal that
the proposed exemption is ``abused'' after promulgation as a final
rule.
Comment: A commenter opined that the proposed language would limit
the exemption only to organizational changes that involve ``physical''
actions. The commenter recommended that a clarifying revision be made
to permit changes that make more efficient use of existing facilities
and personnel or increase productivity of those facilities and
personnel.
Response: The proposed requirement for physical actions to evidence
that a significant nonrecurring management change was being made to
improve the economy and efficiency of operations has been retained in
the exception being proposed today. The Board's intent is to provide a
clear distinction between management actions taken to lower overall
operating cost levels through reductions in personnel or facilities
(physical changes) where any associated voluntary change to a cost
accounting practice should be exempted, and other management actions
taken to otherwise improve the economy and efficiency of operations
where any associated voluntary change in cost accounting practice would
remain subject to the cost impact process required for existing CAS-
covered contracts. The proposed provisions are intended to facilitate
overall contract administration activities, protect the Government's
interests and reduce the potential for disagreements over whether a
particular management change resulting in a voluntary change to an
established cost accounting practice is an ``exempt'' or a
``desirable'' change under the Board's rules.
Comment: The draft Option B exemption should be applicable to all
organizational changes (both internal and external) that meet the
benefit test.
Response: The exemption criteria being proposed today applies to
all restructuring activities as defined by the Board at 9904.406-61(b).
It is not limited to ``external restructuring activities'' as currently
defined in the Defense Federal Acquisition Regulation
[[Page 45709]]
Supplement (DFARS) at DFARS 231.205-70(b)(2).
Contract Price and Cost Adjustment Exemption for Changes in the
Composition of Overhead and General an Administrative Expense Pools
Comment: A number of commenters felt the CASB staff's draft
``Option C'' presented for the Board's consideration was not useful. A
few commenters believed that the draft ``Option C'' exemption concept
was feasible and that it provided adequate protection to the
Government.
Response: The Board has not incorporated this concept in this
proposed rule.
Desirable Changes
Comment: Several commenters who supported the draft ``Option B''
exemption provision also advocated that the Board retain the proposed
SNPRM-I mandatory ``desirable change'' provisions requiring the
cognizant Federal agency official to find as ``desirable'' all
voluntary cost accounting practice changes made to improve the
efficiency and effectiveness of a contractor's operations.
A Federal agency recommended that the proposed mandatory desirable
change criteria for changes in cost accounting practice that result in
``cost savings'' be deleted because the proposed criteria precludes
consideration of other relevant facts and circumstances. In addition,
if ``cost savings'' form the basis for granting a requested exemption,
as advocated by the commenter, then contractors should not have the
ability to choose between an exemption or a desirable change provision.
A Federal agency, with oversight responsibilities, recommended
deletion of the SNPRM-I proposed amendment mandating desirable change
findings for contractor changes made to improve the economy and
efficiency of operations, and strongly supported the draft exemption
provisions included as ``Option B'' because it offered ``* * * controls
to protect the Government * * *'' The commenter felt that the proposed
SNPRM-I amendments for desirable changes, at 9903.201-6(c)(2), did not
offer adequate protection to the Government.
Response: A desirable change determination permits the contracting
parties to increase existing CAS-covered contract prices, in the
aggregate, to reflect the aggregate increased costs to the Government
(as defined by the Board) that are expected to result from a
contractor's voluntary change in cost accounting practice. In such
cases, equitable contract price adjustments are negotiated to resolve
the cost impact of the changes in contract cost accumulations that are
estimated to result for the existing CAS-covered contracts due to the
practice change. Where the cost impact of a practice change on existing
CAS-covered contracts does not result in increased costs to the
Government, in the aggregate, a desirable change determination is not
needed to effect the required contract price and/or cost adjustments,
in the aggregate. Only if the cost impact of a practice change on
existing contracts results in aggregate ``increased costs'' after the
change is made, would a desirable change determination serve a useful
purpose.
In the SNPRM-I, the proposed mandatory desirable change
determination criteria included changes in cost accounting practices
attributable to organizational changes where ``cost savings'' were
expected to occur under existing and/or future CAS-covered contracts.
That provision was proposed as a stand alone amendment in the SNPRM-I,
on the premise that the proposed mandatory provision would not be
accompanied by an exemption provision for changes in cost accounting
practices associated with management changes that are expected to
result in more economical and efficient operations or cost savings (see
the introduction to item 2 of the draft ``Option B'' provisions, in the
SNPRM-I, which indicated that the desirable change criteria proposed at
9903.201-6(c)(2) for economy and efficiency improvements would be
deleted or modified if the ``Option B'' draft exemption were
established (62 FR 37671, 7-14-97)).
The Board believes the underlying merits of cost accounting
practice changes that result in aggregate ``increased costs'' to the
Government, as defined by the Board, need to be evaluated on a case-by-
case basis. It would be inappropriate to mandate that ``all'' voluntary
practice changes made ostensibly for improved economy and effectiveness
reasons be deemed desirable changes that are not detrimental to the
Government if expected cost savings to the Government cannot be
demonstrated for existing and/or future contracts.
As specified under ``Contract Price and Cost Adjustment
Exemption,'' the Board concluded that contract prices and costs should
not be separately adjusted to only reflect the cost impact of a change
in cost accounting practice when that practice change is associated
with planned restructuring activities that are expected to produce cost
savings to the Government. Furthermore, it would be inappropriate to
establish two provisions, an exemption provision and a desirable change
provision to cover cost accounting practice changes made for the same
reason, i.e., restructuring changes that produce cost savings. The
contracting parties would undoubtedly experience endless debate over
which one of the two provisions should be applied in a particular
circumstance.
The Board has therefore concluded that one consistent approach is
needed for cost accounting practice changes that are associated with
management actions which are expected to produce costs savings. In
consideration of the comments received, the Board's current proposal is
to require the following:
Where the cognizant Federal agency official finds that cost savings to
the Government are expected to result from planned restructuring
activities in accordance with the Board's prescribed criteria, the
changes in cost accounting practice directly associated with such
restructuring activities will be exempted from the CAS contract price
and cost adjustment requirements, unless a determination is made that
the exemption would otherwise be detrimental to the Government's
interests.
--Where the cognizant Federal agency official finds that cost savings
to the Government are expected to result from planned management
changes, including planned restructuring activities that do not result
in an exemption determination in accordance with the Board's proposed
exemption criteria at 9903.201-6, the changes in cost accounting
practice directly associated with such management changes will
generally be treated as a ``desirable change.'' In such cases, the CAS
contract price and cost adjustments normally required to resolve the
resulting cost impact of the practice change may be otherwise resolved,
without requiring the submission of additional data in the form of a
cost impact proposal, provided a determination is made that an
alternative resolution (based on the contractor's previously submitted
expected ``cost savings'' and contract cost accumulation changes data
(see 9903.405-2(e)) is not detrimental to the Government's interests.
The Board believes that the proposed ``cost savings'' demonstration and
alternative resolution determination requirements should provide
adequate controls to protect the Government's interests.
[[Page 45710]]
--All other voluntary changes in cost accounting practices made for any
other reason will remain subject to the Board's voluntary change ``no
increased cost'' prohibition and other related desirable change
provisions (see proposed 9903.201-7(c)(3)).
In conjunction with the exemption being proposed today, the Board
has modified the mandatory desirable change amendment that was proposed
in the SNPRM-I at 9903.201-6(c)(2). Essentially, the Board's current
proposal is to amend its existing desirable change criteria to provide
that a voluntary change to a cost accounting practice, including those
associated with restructuring activities but not exempted under
9903.201-6(a), shall be deemed to be desirable change if the contractor
can demonstrate cost savings to the Government, in the aggregate, for
existing flexibly priced and all future CAS-covered contracts or
otherwise demonstrate desirability of the practice change (see
9903.201-7(c) (2) and (3)).
Comment: A Federal agency responded that contract disputes have
arisen as to when a voluntary change in cost accounting practice can be
considered to be a desirable change. The agency recommended that the
rule state a voluntary change is not to be considered desirable until
the cognizant Federal agency official notifies the contractor the
change has been determined to be a desirable change.
Response: Proposed provisions have been added, at 9903.201-7(b), to
clarify the purpose of a desirable change determination and that until
the cognizant Federal agency official determines that a change is
desirable and not detrimental to the Government, the change shall be
considered to be a voluntary change for which the Government will pay
no increased costs.
Comment: A Federal agency recommended that more flexibility would
be provided for making desirable change determinations if the phrase
``provided there is a reasonable expectation that benefits will accrue
to the Government in future awards'' were deleted from the last
sentence proposed in the SNPRM-I at 9903.201-6(d).
However, many industry commenters argued that the cost impact on
future CAS-covered contracts should be considered by the cognizant
Federal agency official in determining how to resolve the cost impact
of a voluntary change in cost accounting practice that results in
``increased'' cost to the Government. The commenters opined that
inequitable results that penalize a contractor may occur if decreased
cost accumulations expected to result for future CAS-covered contracts,
after the voluntary change is made, are not considered.
Response: One of the Board's statutory mandates is to preclude the
payment of increased costs, as defined by the Board, under CAS-covered
contracts due to voluntary changes in cost accounting practices made by
contractors after contract award. Under the terms and conditions of the
Board's implementing contract clauses, a contractor agrees to
consistently follow its established cost accounting practices when
accumulating and reporting the costs of contract performance after
contract award. A contractor also agrees that if a voluntary change is
made, the Government will not pay any aggregate increased cost for
existing covered contracts whose negotiated prices were predicated on
cost estimates that were premised on the consistent application of the
contractor's previously established cost accounting practices.
The Board's voluntary change--no increased cost prohibition, limits
potential contract price and/or cost adjustments, so that any resultant
increased costs to the Government under existing contracts are not
paid, i.e., after the change, the amounts paid by the Government in the
form of adjusted contract prices and/or increased contract cost
accumulations, in the aggregate, can not be more than the aggregate
amount the Government would have paid under the terms of the existing
CAS-covered contracts if the contractor had continued to consistently
apply its established cost accounting practices for the accumulation
and reporting of contract costs. In essence, the Board's no increased
cost prohibition provides that the Government's liability to pay
contractually specified sums, in the aggregate, can not be increased
unilaterally by a contractor that makes a voluntary change to its
established cost accounting practices after contract award. The
objective is to encourage the consistent application of a contractor's
established cost accounting practices and to discourage voluntary
changes that would otherwise result in the payment of increased costs
by the Government under existing covered contracts. It would therefore
be inappropriate for the Board to mandate that the cost impact expected
to occur on potential future covered contracts, which may or may not be
awarded, be considered when determining the cost impact that a
voluntary change will have on existing contracts for purposes of
mitigating the application of the prescribed no increased cost
prohibition provisions to existing contracts.
Since future contract prices will reflect estimated costs that are
already based on the application of the new cost accounting practice,
they require no adjustments and there is no cost impact calculation
required for such contracts. The cost impact calculation due to changes
in cost accounting practices is limited to existing covered contracts.
The calculation is based on the differences in accumulated contract
costs that are expected to result for the existing covered contracts
based on the application of the old and new cost accounting practices
to the projected ongoing level of costs expected to occur after the
practice change is made. For voluntary changes, the no increased cost
prohibition is then used to limit any upward contract price or cost
adjustments, in the aggregate, to the aggregate amount of downward
adjustments being made for the existing CAS-covered contracts.
The Board believes, however, that equitable solutions can be
achieved under the rules being proposed today. In cases where a
continuing long term relationship between the Government and a
contractor is evident and when a voluntary change in cost accounting
practice is not otherwise determined to be exempt from contract price
or cost adjustment (9903.201-6), a contractor may request the cognizant
Federal agency official to determine that the voluntary change is not
detrimental to the Government (9903.201-7) so that the affected
existing covered contracts and subcontracts desirable change provisions
can be applied (9903.405-2(e) and 9903.405-2(f)(3)). To support the
request, a contractor should demonstrate to what extent cost
accumulations for projected new CAS-covered contract work included in
the contractor's forecasted business base are expected to decrease as a
result of the voluntary change. The calculations should also be based
on the differences in accumulated contract costs that are expected to
result for the anticipated future CAS-covered contracts based on the
application of the old and new cost accounting practices to the same
projected ongoing level of costs expected to occur after the practice
change is made that is used to determine the cost impact on existing
contracts.
The cognizant Federal agency official may consider such data, from
an equity standpoint, when determining if the existing contract prices
should be increased, in the aggregate, under a contract's desirable
change provisions.
In consideration of the commenters' expressed concerns, the
proposed proviso of concern to the Federal
[[Page 45711]]
commenter has been deleted. In addition, paragraph 9903.201-7(d) has
been expanded to clarify that a desirable change determination may be
appropriate to the extent there is a reasonable expectation that the
costs of anticipated future CAS-covered contract awards will decrease
after a voluntary change is made by a contractor.
Cognizant Federal Agency Responsibilities
Comment: A Federal agency recommended that the SNPRM-I proposed
responsibilities at
9903.201-7(d)(1) and (2) for the cognizant Federal agency official
involving the processing of contract price modifications be deleted
because it duplicates and conflicts with existing coverage currently
included in FAR Part 30, at FAR 30.601(a) and 30.602-1(c).
Response: A change in cost accounting practice made by a contractor
may affect some or all existing CAS-covered contracts awarded by one or
more agencies, e.g., agencies within the Department of Defense or other
defense or civilian agencies. The proposed responsibilities in question
are premised on the concept that a cognizant Federal agency approach
shall be followed to resolve the cost impact that a particular change
in cost accounting may have on all affected CAS-covered contracts
regardless of the number of awarding agencies involved. The proposed
requirements recommended for deletion would, if finalized, require the
cognizant Federal agency official to coordinate all actions needed to
implement the negotiated cost impact settlement on behalf of the
Government with the contractor.
When the cognizant Federal agency official negotiates contract
price adjustments to resolve a cost impact, the current FAR provisions
cited by the commenter do not establish a coordinated systematic
approach to effect the necessary contract price adjustments. The
cognizant Federal official is excused from any further actions after
the negotiation memorandum is distributed to affected agencies. No
follow up action by the cognizant Federal official is required if all
the contract prices that the contractor and cognizant Federal agency
official have agreed to modify are not so modified. The contractor
would have to follow up with the other agencies on an individual basis
in order to obtain the necessary contract price adjustments. This could
prove to be a difficult task, particularly in cases where the other
agencies are expected to increase the price of their CAS-covered
contracts. Additionally, the FAR does not require the other agencies to
support the cognizant Federal agency official. The proposed provisions
are considered appropriate in the circumstances and have been retained
at 9903.201-8.
Contract Clauses
Comment: Federal agencies suggested that the proposed provisions on
interest should be conformed throughout the rule to cite Section
6621(a)(2) of the Internal Revenue Code and that the contract clause
interest provisions through out the proposed rule be conformed.
Response: The suggestions were adopted. The proposed contract
clause provisions were conformed for consistency with the interest
provisions specified in proposed 9903.4 for estimating noncompliances
and cost accumulation noncompliances.
Comment: Why was the provision in the contract clause paragraph
(a)(4) at 9903.201-4(a) that reads ``* * * agree to an equitable
adjustment as provided in the Changes clause * * *'' deleted?
Response: The CAS contract clauses' equitable adjustment provisions
are not dependent upon another contract clause. The Board's proposed
amendments provide for equitable adjustments in accordance with the
contract clause and part 9903.
Comment: A Federal agency recommended that the contract clauses for
educational institutions and United Kingdom contracts be updated and
conformed with the amended Full and Modified contract clauses.
Response: The Clause for United Kingdom contractors is quite
different from the other referenced provisions. In addition, it is both
brief and simple. In the absence of any identified implementation
problems, that clause does not appear to be in need of modification.
The clause for educational institutions was promulgated on November 8,
1994. In response to one related ANPRM comment, the Board asked in the
prior NPRM (61 FR 49206) for further comments on the desirability and
support for making such revisions. Only one commenter responded to the
NPRM and the SNPRM-I on this matter. Accordingly, the Board believes
that such amendments are not currently warranted.
Intermediate Cost Objective Definition
Comment: Commenters suggested that the definition of the term
``intermediate cost objective'' would be easier to implement and
understand if the phrase ``* * * included in specific indirect cost
pools * * *'' were deleted from the proposed definition.
Response: The concept of an intermediate cost objective evolved
from the Board's promulgation of CAS 9903.402, in 1972, when a
definition of the term ``indirect cost'' was promulgated. That
definition introduced the concept that a cost was not direct if it was
identified with two or more final cost objectives or with at least one
``intermediate cost objective.'' The latter term, however, remained
undefined. How costs are grouped for cost accumulation purposes and
their subsequent allocation to intermediate and final cost objectives
constitutes a cost accounting practice, i.e., the ``accounting methods
or techniques used to accumulate costs'' (9903.302-1(c)). Also, it is
recognized that at times, for reasons of economy and efficiency,
certain costs of a direct nature may be accumulated in cost pools that
are subsequently allocated to final cost objectives as direct cost.
In view of the commenters' concerns, the proposed definition was
revised to clarify that different cost elements and the costs of
various functions can be accumulated in a varying number of
intermediate cost objectives that are included in specific cost pools,
e.g., overhead cost pools, G&A expense pools, service center expense
pools and other expense pools, and/or cost pools that are allocated as
direct costs. All such pooled costs are subsequently allocated to other
intermediate and/or final cost objectives in accordance with applicable
CAS and/or the contractor's established, and, if required, disclosed
cost accounting practices.
Cost Accounting Practice Change Definitions and Illustrations
Comment: A number of commenters stated that the proposed amendments
have improperly expanded the meaning of the term ``cost accumulation''
and that such expansion is unfortunate since almost any change in the
flow of cost to contracts will be treated as a cost accounting practice
change.
Response: The Board does not agree with the commenters' rationale.
To accumulate cost, a contractor must apply its established, and, if
required, disclosed cost accounting practices, i.e., the accounting
methods or techniques used to accumulate cost for CAS-covered
contracts. The Board's definition at 9903.302-1(c) presently states
that one of the examples of a cost accounting practice involving the
allocation of cost to cost objectives are ``the accounting methods or
techniques used to accumulate cost . . .'' The Board has not expanded
the definition or proposed a new requirement. The reason for the
Board's proposed
[[Page 45712]]
amendments is that under the present definition, some contractors have
concluded that the methods or techniques used to accumulate costs in
cost pools are not a cost accounting practice and that changes made to
the methods or techniques used to accumulate costs in cost pools are
not a change in cost accounting practice. Some contractors, in their
responses to the SNPRM-I, specified that they do not believe that a
change in cost accounting practice occurs when cost pools are combined
or split-out, or when ongoing functions are transferred from one cost
pool to another cost pool; based, presumably, on their interpretation
of the Board's existing definition. With regard to changes which alter
the flow of costs to contracts, the commenters' inferences appear
contrary to the basic consistency requirements of CAS 9904.401 or
9905.501, as applicable, which require that a contractor's established
cost accounting practices be applied consistently when estimating,
accumulating and reporting costs.
The Board's proposed amendments would make it explicit that the
methods or techniques used to accumulate costs in cost pools are to be
considered a cost accounting practice when a contractor estimates,
accumulates and reports costs, and that a change made to the methods or
techniques used to accumulate cost in cost pools is a change in cost
accounting practice under the Board's rules. In response to the
commenters' expressed concerns, some editorial changes were made to
clarify the Board's stated concepts regarding use of the phrase
``accumulate cost.''
Comment: A Federal agency recommended that the words ``item of cost
or a group of items of cost'' proposed for inclusion at 9903.302-1(c)
be replaced with the words ``accumulate and distribute.'' They believe
that the proposed wording might be interpreted, by some, to mean that
the transfer of one direct labor employee from one plant to another
plant could be viewed as a change in cost accounting practice. Some
contractor representatives also expressed concern that the SNPRM-I
proposal introduced uncertainty with regard to the transfer of
personnel from one functional activity to another.
Response: The agency's suggestion was adopted. The words
``accumulate and distribute'' were previously proposed in the NPRM and
appear to more clearly convey the primary cost accounting concept being
addressed in this rulemaking, i.e., that the methods and techniques
used for the allocation of cost to cost objectives include the
selection and use of specific cost pools to accumulate costs for
subsequent distribution to other intermediate and final cost
objectives.
Comment: A Federal agency agreed with the proposed provision at
9903.302-1(c)(2), but recommended that the words ``elements of cost''
be deleted since the composition of cost pools does not include
specific elements of cost. This comment also relates to the concern
that an individual employee could be an ``element of cost'' and if
transferred to another segment might be construed to be a change in
cost accounting practice, which would conflict with the proposed
illustration at 9903.302-(4)(h). The word ``specific'' in the phrase
``the accumulation of specific costs'' was also recommended for
deletion.
Response: Cost pools accumulate costs by elements of cost and if
required to disclose their cost accounting practices in a disclosure
statement, a contractor performing a CAS-covered contract is required
to disclose if an element of cost is to be treated as a direct cost or
an indirect cost and which elements of cost are included in each
indirect cost pool.
With the revised language change, made in response to the preceding
comment made by the same agency, and the retention of the cited
illustration, it should be clear that the Board does not expect the
contracting parties to treat employee transfers as a change in cost
accounting practice. This matter was also addressed in the SNPRM-I
preamble comments (62 FR 37660, 7/14/97). Accordingly, the words of
concern to the commenter were retained.
Comment: A Federal agency recommended deletion of the word
``measure'' from the proposed provision used to describe the
``allocation measurement activity'' at 9903.302-1(c)(3) to avoid
potential conflict with the cost ``measurement'' term found at
9903.302-1(a). Some contractor representatives recommended similar
changes.
Response: The words ``measurement,'' ``measure'' and ``activity''
were deleted as suggested in 9903.302-1(c)(3) and where they were used
in a similar manner in the illustrations proposed under 9903.302-3(c).
Comment: At 9903.302-2(a)(3), the proposed coverage on functional
transfers should not be limited to costs in indirect cost pools, and
intra-segment transfers.
Response: The proposed coverage was revised to address the
commenter's concerns.
Comment: A Federal agency recommended that the words ``home
office'' be added to the exception provision in the last sentence
proposed at 9903.302-2(b)(1), because functional transfers to or from
intermediate home offices were excluded from the proposed coverage.
Response: The recommended change was adopted.
Comment: Some commenters objected to the proposed reference to each
contract at 9903.302-2(c)(1) and recommended deletion of the proposed
coverage.
Response: The reference to each CAS-covered contract refers to the
terms and conditions contained in each contract. The proposed coverage
was retained.
Comment: A Federal agency and some contractors commented that the
proposed language at 9903.302-2(c)(2) referencing a noncompliant
practice change was not clear.
Response: The proposed coverage was revised to separately address
compliant and noncompliant actions.
Comment: Several commenters recommended a number of clarifying
edits to the proposed language included at 9903.302-3(c)(4), (6), (7),
(8), and (9).
Response: Where deemed appropriate, the referenced illustrations
were revised for clarity, and to reflect the use of consistent language
in similar circumstances.
Comment: Delete or revise the illustrations that mention
``intermediate cost objectives'' as the intent of the purpose of the
illustration may not be clearly understood.
Response: The primary purpose of the illustrated changes was to
clarify that a cost accounting practice change results if the costs of
an ongoing function (which were accumulated in an intermediate cost
objective established for that function) that are originally included
in one cost pool are subsequently transferred to and included in a
different cost pool. That concept can also be illustrated by stating if
the costs of an ongoing function are or are not included in the same
cost pool before and after a change is made. The illustrations at
9903.302-3(c)(7) and (9), and at 9903.302-4(h) were therefore so
revised. The references to intermediate cost objectives were deleted.
Comment: A Federal agency suggested deletion of the comment that
the change in cost accounting practice depicted in the proposed
illustrations at 9903.302-3(c)(8)(i) and (9)(v) are subject to the
acquired CAS-covered contract's contract price and cost adjustment
provisions. They opined that incorporation in the proposed
illustrations may cause potential confusion and disputes since similar
statements were not included in all of
[[Page 45713]]
the proposed illustrations of changes in cost accounting practices.
Response: All changes in cost accounting practice are subject to
the applicable contract clause provisions governing changes in cost
accounting practices. In the case of an acquired contract, the
additional comment was incorporated to emphasize that an acquiring
contractor must abide with the acquired CAS-covered contract's terms
and conditions governing changes in cost accounting practices in the
event any changes in cost accounting practices are made after the
effective date of the acquisition. If the commenter's suggestion were
adopted, an acquiring contractor might argue that the referenced
contract price and cost adjustment provisions do not apply since they
were subsequently deleted from the Board's proposed amendments. The
proposed provisions were retained.
Comment: A commenter recommended a number of clarifying edits to
the proposed language included at 9903.302-4(h), (i), and (j).
Response: Where deemed appropriate, the referenced illustrations
were revised for clarity.
Comment: Some commenters inquired if the use of a ``special
allocation'' method (e.g., 9904.410-50(j)) is an initial adoption of a
cost accounting practice or a change in cost accounting practice.
Response: If a contractor's established cost accounting practices
do not include the use of a special allocation methodology when
estimating and accumulating costs for CAS-covered contracts, and
subsequently the contractor decides to apply a special allocation
methodology while performing ongoing CAS-covered contracts, the
contractor would no longer be in compliance with the consistency
requirements of CAS 9904.401 and 9905.501. However, under the contract
clause terms of CAS-covered contracts, the contractor can make a
voluntary change to its established cost accounting practices. If
material, the resultant cost impact due to the change in cost
accounting practice could result in contract price or cost adjustments,
at no aggregate increased cost to the Government.
The Cost Impact Process
Comment: One commenter suggested changes to the definition for
``Increased cost to the Government due to a change in compliant cost
accounting practices' included at 9903.403 on the basis that, as
proposed, the definition incorrectly implies that increased costs exist
only when no action is taken to preclude payment of increased costs.
Response: The Board has revised the proposed language to clarify
that increased costs resulting from a voluntary change in cost
accounting practice represent the increase in cost to the Government
that occurs after a change is made, before any actions are taken to
preclude the payment of the resultant increased cost by the Government.
After a voluntary change in cost accounting practice is made, increased
cost to the Government occurs only when a greater amount of costs are
accumulated and claimed as contract costs under existing flexibly
priced contracts. For existing firm-fixed-price contracts, increased
costs to the Government only occur if a lesser amount of cost is
accumulated after the practice change is made, before the negotiated
contract prices are adjusted downward to reflect the aggregate
reduction in accumulated costs. If a downward adjustment is not made,
the Government will be charged the resultant increased cost in the form
of a higher fixed contract price that provided for the higher
allocation of cost to the contract that would have resulted had there
not been a change in cost accounting practice.
Comment: A Federal agency requested that the Board clearly state in
both the preamble and the rule which provisions represent mandates and
which provisions are intended to be applied at the discretion of the
cognizant Federal agency official.
Response: The Board has used the word ``shall'' when referring to
an action that is mandatory, and the terms ``may'' and ``should'' when
referring to an action that is discretionary.
Comment: A Federal agency requested that the Board provide more
flexibility with regard to the adjustment of individual contract prices
that exceed established materiality thresholds.
Response: The Board has eliminated use of words that suggest
absolute mandates such as ``required'', ``requirements'' and
``necessary.'' These words have been replaced with terms that make it
clear that the provisions included in the rule for adjusting individual
contract prices should be followed only when the cognizant Federal
agency official decides to resolve a cost impact action by modifying
contract prices.
Comment: A Federal agency requested that the Board add a provision
at 9903.405-2 covering ``Notification of changes in cost accounting
practices'' which would require that contractors notify the Government
of the proposed effective and applicability dates of a change in cost
accounting practice.
Response: The Board adopted the suggested change. The addition of
the ``effective date'' notification requirement will help clarify which
contracts were proposed and/or negotiated after the effective date of
the change in cost accounting practice and should therefore not be
subject to contract price and/or cost adjustment.
Comment: Many industry commenters requested that the Board
eliminate the proposed requirement, at 9903.405-4(a), that some
individual contract data be included in the General Dollar Magnitude
(GDM) settlement proposal. They suggested that the contracting parties
attempt to resolve the cost impact action based on the GDM aggregate
estimate before requiring the submission of any individual contract
data.
Response: The Board rejects this suggestion.
Under current Government procurement regulations governing the cost
impact process, the required GDM estimate is used solely to determine
whether or not the cost impact of a change in cost accounting practice
is not material and, therefore, no detailed cost impact proposal will
be required. If such an immateriality determination cannot be made,
then the contractor must submit a detailed cost impact proposal for all
existing covered contracts and subcontracts affected by the change in
cost accounting practice or the estimating noncompliance. Originally,
the procurement regulations required the submission of a GDM estimate
by contract type and Federal agency, with no instruction as to what
action the agencies should take based on the contractor's GDM estimate
data. Furthermore, the GDM estimate is currently required to be
submitted at the same time as the notification of the change in cost
accounting practices, with a cost impact proposal to be submitted at a
later date. Thus, it appears that the GDM estimate was never intended
to serve as the basis for making contract price or cost adjustments to
resolve a material cost impact action.
Under the Board's proposal, the contracting parties can resolve a
cost impact action based on a three step process. The cost impact
resulting from a change in cost accounting practice can be resolved
without the submission of any contract cost data if the change is
obviously immaterial (9903.405-3(d) in the SNPRM-I), or if not
obviously immaterial by the submission of a GDM Settlement Proposal or
a detailed cost impact proposal.
When not obviously immaterial, the cost impact of a practice change
can be
[[Page 45714]]
resolved by the submission of a GDM estimate and some individual
contract data, without having to resort to a detailed cost impact
proposal. The GDM estimate and Contractor Settlement Proposal were
previously proposed as two separate submission requirements in the
ANPRM. Based on a public commenter's suggestions, the two submission
requirements were proposed in the SNPRM-I as a combined ``GDM
Settlement Proposal.'' The Board continues to believe that when
material changes result in the amounts of accumulated contract costs,
either in the aggregate or for individual contracts, due to a change in
cost accounting practice, then the aggregate cost data included in the
GDM estimate is insufficient for the cognizant Federal agency official
to make an informed judgment on how to best resolve the cost impact. If
no individual contract data were required at the time of the GDM
estimate submission, the cognizant Federal agency official would need
to obtain individual contract data in order to protect the interests of
the Government, e.g., in order to: (1) evaluate the accuracy of the GDM
estimate amounts by contract type; (2) determine what adjustments may
be needed to resolve any resultant contract cost overrun and/or
underrun conditions, and/or (3) ascertain if a detailed cost impact
proposal should be requested.
The Board believes that the proposed three step process included in
this proposed rule provides the contracting parties with the best
opportunity to resolve the cost impact action with a minimum of
contract data. Under the GDM Settlement Proposal concept, a contractor
is expected to make the initial decision as to the number of individual
contracts, within each contract type, for which contract data is needed
to settle the cost impact action. If the cognizant Federal agency
official accepts the contractor's settlement proposal, no further
contract data need be submitted. Of course, if agreement to resolve the
cost impact action does not occur based on a contractor's proposed
settlement approach, then the cognizant Federal agency official may
still request data for some additional contracts or a detailed cost
impact statement, if deemed necessary. The Board's objective is to
permit the contracting parties to resolve the cost impact action
without having to resort to the current process which requires the
submission of detailed cost impact data for all contracts.
The Board believes that the commenter's suggested approach would
only serve to delay the proper resolution of the cost impact for CAS-
covered contracts. The suggestions were not adopted. However, the
provision at 9903.405-3(f) was revised to emphasize that a GDM
Settlement Proposal is not required if the cost impact of a change in
cost accounting practice is determined to be obviously immaterial.
Comment: One Federal agency recommended revising the provisions for
the offset process included at 9903.405-5(b) to be ``general
guidelines'' rather than ``rules.'' They stated that general guidelines
should normally be followed, but the cognizant Federal agency official
should be permitted to deviate from the guidelines, provided the
application of the offset process results in adjustments that
approximate, in the aggregate, the cost impact that would have resulted
had individual contracts been adjusted.
Response: Since all of the provisions promulgated by the CASB are
in essence and in fact ``rules,'' the Board has deleted the reference
to ``rules of offset'' from 9903.405-5(b). The Board believes that this
proposal when considered in its totality, including the offset
provisions, provides the cognizant Federal agency official with
sufficient flexibility to resolve a cost impact action in a manner
deemed most appropriate considering both individual circumstances and
protection of the Government's interests. The provisions which the
Board has included for use of the offset process are designed to insure
that the process, whenever used, is applied consistently and in such a
way that material cost impact amounts, both in the aggregate and for
individual contracts, are appropriately calculated in the prescribed
manner.
Comment: One commenter suggested that the Board sanction the use of
the final indirect expense rate settlement process rather than contract
price adjustments as a method to resolve the cost impact action. The
commenter expressed the opinion that contract adjustments should only
be used as a final resort.
Response: The Board's proposed rules provide significant
flexibility with regard to the method used by the cognizant Federal
agency official to resolve a cost impact action by inclusion of the
phrase ``other suitable technique.'' However, the Board would caution
the contracting parties with regard to use of any method which results
in further inconsistency between the contract price amounts and
accumulated contract costs due to the cost accounting practices used to
estimate proposed costs and to accumulate costs during contract
performance.
Adjustment of indirect expense rates to settle a cost impact action
can result in the adjustment of the wrong contracts for the impact of
the change in cost accounting practices. This method also results in
the establishment of final indirect expense rates that are not
consistent with a contractor's established and disclosed cost
accounting practices for allocating indirect costs to final cost
objectives. Adjusting indirect expense rates to resolve the cost impact
would in most cases require an adjustment to the indirect expense pool
that exceeds the amount of the actual cost impact adjustment amount in
order to ensure that the aggregate cost impact amount calculated for
all affected CAS-covered contracts is recovered on the open flexibly-
priced contracts being performed during the particular cost accounting
period to which the ``adjusted'' rates apply. Use of this approach
distorts the accumulation of costs used for contract cost and pricing
purposes, in that the resultant accumulated costs recognized for CAS-
covered contracts will be greater or less than the costs that would
have been accumulated as actual ``booked'' costs in accordance with a
contractor's established cost accounting practices had the indirect
cost pools, and the indirect cost rates used to allocate such costs to
final cost objectives, not been adjusted to reflect the cost impact of
a change in cost accounting practice. Such pool adjustments may further
distort the difference between the costs that would have originally
been allocated to the affected CAS-covered contracts as actual
``booked'' costs and the costs that will be allocated to those
contracts for contract costing purposes based on the adjusted final
rates if multiple cost accounting periods are involved and/or if the
Government's percent of participation in the allocation base is not
consistent. The Board therefore disagrees with the position presented
by the commenter. Adjustment of contract prices is the method which
most consistently reflects the requirements of both the applicable
contract clause and CAS 9904.401 or 9905.501, as applicable, regarding
consistency in the cost accounting practices used to both estimate and
accumulate costs on CAS-covered contracts. The Board finds
inappropriate the commenter's suggestion that the Board endorse a
position which holds that such adjustments should only be used as a
last resort. To the contrary, the Board believes that any method that
further distorts the Board's consistency requirements, such as the
adjustment of
[[Page 45715]]
indirect expense rates, should be a method that is only used as a last
resort. If the cognizant Federal agency official determines that
adjustment of contract prices is not warranted to resolve the cost
impact action, the Board is of the view that a transfer of funds
between the Government and a contractor is the most appropriate ``other
suitable technique'' that can be used to settle the action.
Comment: Federal agency and industry commenters expressed concerns
regarding the SNPRM-I prefatory comments stating that:
The Board is of the opinion that modification of contract and
subcontract prices * * * represents the preferred method to be used
to resolve material cost impacts due to a change in cost accounting
practice. Modification of contract prices enable the contracting
parties to establish contract prices for covered contracts that
correlate with the increased or decreased cost allocations to such
contracts that result due to practice changes * * *
The Federal agency advocated that maximum flexibility be provided
for the resolution of the cost impact resulting from a change in cost
accounting practice. The contractor commenters recommended that no
``preference'' be stated in the final rule.
Response: The Board's contract clauses included in individual CAS-
covered contracts require contractors to consistently apply their
established cost accounting practices when accumulating and reporting
the costs of performing CAS-covered contracts. However, the CAS
contract clause provisions also permit a contractor to make a voluntary
change to its established cost accounting practices, provided the cost
impact resulting from the change is addressed. For voluntary changes,
the contractor agrees to contract price and/or cost adjustments which
are limited to a no increased cost to the Government provision. If the
cognizant Federal agency official determines that the practice change
is desirable and not detrimental to the Government, the contract prices
can be adjusted to reflect the aggregate change in the amount of
accumulated contract costs that is expected to result due to the
practice change.
After contract price adjustment and/or actions taken to preclude
the payment of increased costs, the cost-based contract prices (FFP or
cost ceiling) are once again comparable with the increased or decreased
contract costs that will be accumulated consistently in accordance with
the changed cost accounting practices, after a voluntary practice
change is made. Such actions taken to resolve the cost impact of a
practice change also resolve any resultant potential contract cost
overrun or cost underrun conditions that are attributable to the
practice change. Thus, contract price and cost adjustments are
generally the required, not preferred, method for resolving the cost
impact resulting from a change in cost accounting practice.
In the SNPRM-I, the Board concluded that ``* * * the decision on
how to best achieve an equitable solution, in the aggregate, remains a
cognizant Federal agency official responsibility.'' The Board's
comments were intended to acknowledge that there may be circumstances
where the required contract price and/or cost adjustments need not be
made. For example, this might be the case where the cost impact, in the
aggregate, is considered material in and of itself, but the cognizant
Federal agency determines contract price and/or cost adjustments are
not warranted because contract performance would not be jeopardized (no
significant cost overrun condition resulted) and the increase or
decrease in expected cost accumulations would not distort or adversely
impair the usefulness of the contractor's reported contract cost
information (actual costs and estimated costs to complete) that is
included in contract status reports. However, to achieve equity, some
consideration for the cost impact should be obtained or granted. In
such cases, another suitable technique may be used to resolve the cost
impact, e.g., a monetary exchange between the contracting parties. This
alternate approach would also produce administrative cost savings since
the contracting parties would not have to process contract
modifications or take further actions to preclude the payment of
increased costs on individual contracts.
On the other hand, in a case where the cost impact, is considered
material and, by not processing contract price and/or cost adjustments,
the Government would pay increased costs (as defined by the Board), the
contractor's ability to perform the contract is adversely affected,
and/or the cost data included in the contractor's status reports would
not be meaningful, then the required contract price and/or cost
adjustments should be processed.
To address the commenters' expressed concerns, the Board is
proposing additional provisions at 9903.405-5(e) to emphasize that the
cognizant Federal agency official does have the flexibility to resolve
a cost impact due to a change made to a compliant cost accounting
practice by use of alternative actions, i.e., other than contract price
adjustment or actions taken to preclude the payment of increased costs.
Cautionary provisions pertaining to the use of such alternative actions
were also included.
Comment: A Federal agency recommended deleting the phrase ``and
negotiate'' from the description of a cost estimating noncompliance at
9903.406-1(a). They explained that an estimating noncompliance results
when the contractor estimates costs using a noncompliant accounting
practice. They further stated that under the proposed provision, an
estimating noncompliance would exist only if the noncompliance was used
for both estimating and negotiating the contract. Such a definition,
they believe, will result in significant disputes as to whether a
contractor's final price negotiation included or excluded the impact of
the change in cost accounting practice.
Response: Only those contracts that had their contract price based
on a noncompliant practice can be included in the universe of contracts
subject to adjustment as a result of an estimating noncompliance.
Therefore, it must be demonstrated that not only did the contractor
estimate costs using a noncompliant practice for a potential CAS-
covered contract, but also that the contract price was established
using data that was based on the use of a noncompliant practice. There
may be situations in which a contractor estimates costs using a
noncompliant practice, but either the Government rejects the use of
that practice to negotiate the contract amount or the contractor
voluntarily changes to a compliant practice prior to the negotiation of
the contract price. In such situations, the negotiated contract price
or cost ceiling would not have been based on the use of a noncompliant
cost accounting practice. Hence, it would not be appropriate to include
these contracts in a cost impact proposal for an estimating
noncompliance. For those contracts that were estimated using a
noncompliant practice and that noncompliant practice was used to
determine the contract price, the contracting parties must determine
the impact on those contracts as a result of the noncompliant practice.
In order to clarify the Board's position on this matter, the Board has
revised the proposed language at 9903.406-1(a).
Comment: One commenter recommended that, in order to avoid
duplication, the provision regarding situations where a noncompliant
practice is used for both cost estimating and cost accumulation
purposes be moved to 9903.406-1 rather than including this provision at
both 9903.406-3(g) and 9903.406-4(b).
[[Page 45716]]
Response: The Board agrees and has adopted this recommendation
(9903.406-1(b)).
Comment: One Federal agency recommended that the proposed table at
9903.406-3(d) address a cost impact due to a noncompliance in terms of
the change in allocation that resulted from using a noncompliant cost
accounting practice rather than in terms of the change in allocation
that would have resulted had a compliant accounting practice been used.
Through discussions with contracting officers, they determined that
most contracting officers address the cost impact in terms of the
change in allocation that resulted from using a noncompliant practice.
Response: The Board adopted this recommendation and has revised the
table at 9903.406-3(d) accordingly.
Comment: One commenter recommended adding the concept of computing
interest based on the midpoint of the period for a cost accumulation
noncompliance described at 9903.406-4(e) to cost estimating
noncompliances at 9903.406-3.
Response: Upon further review of this provision, the Board has
concluded that inclusion of a method to be used to calculate the amount
of interest due to increased costs paid as a result of a noncompliant
practice is overly instructional and prescriptive in nature and
therefore should not be included in this rule. The Board therefore has
deleted the prescribed method of computing interest from the rule.
Federal agencies should establish reasonable methods for determining
the amount of interest to be recovered based on increased costs paid
due to a noncompliant practice.
Comment: Several commenters recommended the deletion of the term
``technical'' from the provision at 9903.406-5 describing immaterial
noncompliances. A Federal agency recommended deletion of the proposed
provision at 9903.406-5(a)(2) which provides that a contractor is not
excused from the obligation to comply with the applicable Standards or
rules and regulations involved when an immaterial noncompliance exists.
An industry commenter further requested deletion of the proposed
requirement at 9903.406-5 which requires a contractor to notify the
cognizant Federal agency official within 60 days of when the technical
noncompliance becomes material.
Response: The Board has adopted all of the suggested revisions. The
Board agrees that a cost accounting practice is either compliant with
applicable Cost Accounting Standards or it is not. The term ``technical
noncompliance'' has acquired an accepted usage by various groups that
deal with CAS administration matters in referring to noncompliant
practices that do not result in material increased costs. However, in
order to avoid any confusion by parties not familiar with this
terminology, the Board has replaced the term ``technical'' with the
term ``immaterial'' in this proposed rule.
Since it should be apparent that, absent the granting of a waiver
or exemption, contractors are never ``excused'' from the obligation to
comply with applicable CAS Board rules and regulations, the Board
proposes to delete the SNPRM-I provision at 9903.406-5(a)(2). The
provision retained within 9903.406-5, which allows the cognizant
Federal agency official to recover any subsequent increased costs plus
applicable interest that may result from the currently immaterial
noncompliance, provides adequate protection to the Government in these
situations.
Comment: A Federal agency recommended deleting the specific reason
used by the contractor in the illustration at 9903.407-1(a)(1) as
justification for requesting a retroactive applicability date for the
change. They explained that inclusion of a specific reason could be
interpreted to mean that this specific reason should be determined
appropriate justification for approval of a retroactive applicability
date in all cases.
Response: The Board has deleted the specific reason included in the
illustration.
Educational Institutions
Comment: A Federal agency recommended that the last sentence
proposed at 9903.401-2(e) be revised to reflect a one time notification
requirement.
Response: The suggested language was adopted.
F. Additional Public Comments
Interested persons are invited to participate by submitting data,
views or arguments with respect to the proposed amendments contained in
this document. All comments must be in writing and submitted timely to
the address indicated in the ADDRESSES section of this document.
The Board is considering the establishment of certain new
``exemption'' and ``desirable changes'' provisions that it believes
would facilitate the overall process governing compliant changes in
cost accounting practices. Therefore, the Board invites interested
parties to specifically comment on the following amendments being
proposed today:
--Proposed 9903.201-6, Findings--Voluntary changes exempt from contract
price and cost adjustment, which proposes to exempt certain voluntary
changes to a cost accounting practice from contract price and cost
adjustment when specified criteria are met. The submission of specific
alternative criteria and/or procedural requirements that commenters
believe could result in the establishment of workable regulatory
exemption coverage are also welcome.
--Proposed 9903.201-7, Findings--Desirable changes, which proposes to
establish criteria for determining when a voluntary change to a cost
accounting practice, not otherwise exempt from contract price and cost
adjustment under 9903.201-6, can be deemed to be desirable and not
detrimental to the Government. Such determinations would permit the
equitable adjustment of existing CAS-covered contracts that are
materially affected by aggregate ``increased costs'' resulting from a
voluntary change made to a cost accounting practice.
--Proposed 9903.201-7(c)(2) which includes a proposal to establish
alternative processes for resolving the cost impact associated with a
``desirable'' change.
List of Subjects in 48 CFR Part 9903
Cost accounting standards, Government procurement.
Richard C. Loeb,
Executive Secretary, Cost Accounting Standards Board.
For the reasons set forth in this preamble, chapter 99 of title 48
of the Code of Federal Regulations is proposed to be amended as set
forth below:
1. The authority citation for part 9903 continues to read as
follows:
Authority: Pub. L. 100-679, 102 Stat. 4056, 41 U.S.C. 422.
PART 9903--CONTRACT COVERAGE
Subpart 9903.2--CAS Program Requirements
2. Section 9903.201-4 is proposed to be amended by revising
paragraphs (a)(1) and (c) and the contract clauses immediately
following paragraphs (a) and (c), to read as follows:
9903.201-4 Contract clauses.
(a) Cost Accounting Standards--Full Coverage. (1) The contracting
officer shall insert the following clause, Cost Accounting Standards--
Full Coverage,
[[Page 45717]]
in negotiated contracts, unless the contract is exempted (see 9903.201-
1), the contract is subject to modified coverage (see 9903.201-2), or
the clause prescribed in paragraphs (d) or (e) of this subsection is
used.
(2) * * *
Cost Accounting Standards--Full Coverage (August 1999)
(a) The provisions of part 9903 of 48 CFR chapter 99, including
the definitions and requirements contained therein, are incorporated
herein by reference and the Contractor, in connection with this
contract, shall--
(1) Disclosure. Disclose in writing the Contractor's cost
accounting practices by submission of a Disclosure Statement as
required by 9903.202. The cost accounting practices disclosed for
this contract shall be the same cost accounting practices currently
disclosed and applied to all other contracts and subcontracts being
performed by the Contractor and which contain a Cost Accounting
Standards (CAS) contract clause. If the Contractor has notified the
Contracting Officer that the Disclosure Statement contains trade
secrets, and commercial or financial information which is privileged
and confidential, the Disclosure Statement shall be protected and
shall not be released outside of the Government.
(2) Changes in Cost Accounting Practices. Follow consistently
the Contractor's cost accounting practices in accumulating and
reporting contract performance cost data concerning this contract.
If any change in cost accounting practices is made for the purposes
of any CAS-covered contract or subcontract, the change must be
applied prospectively from the date of applicability to this
contract and the Contractor's Disclosure Statement must be amended
accordingly. If the contract price or cost of this contract is
affected by such changes, adjustment shall be made in accordance
with subparagraph (a)(4) or (a)(5) of this clause, as appropriate.
(3) Compliance with Standards. Comply with all CAS contained in
part 9904, including any modifications and interpretations thereto,
in effect on the date of award of this contract or, if the
Contractor has submitted cost or pricing data, on the date of final
agreement on price as shown on the Contractor's signed Certificate
Of Current Cost Or Pricing Data. The Contractor shall also comply
with any CAS, including any modifications or interpretations
thereto, which become applicable because of a subsequent award of a
CAS-covered contract or subcontract to the Contractor. Such
compliance shall be required prospectively from the date of
applicability to such contract or subcontract.
(4) Compliant changes in cost accounting practices. As required
by subpart 9903.4, provide timely notification of changes in
disclosed or established cost accounting practices, provide data
concerning the cost impact of such changes and:
(i) Required change. Agree to an equitable adjustment of the
price of this contract as provided under this provision if the
contract cost is affected by a change to a disclosed or established
cost accounting practice which, pursuant to subparagraph (a)(3) of
this clause, the Contractor or a subcontractor is required to make.
(ii) Voluntary change. Agree to an adjustment in the price or
cost of this contract as provided under this provision if contract
cost is affected by a voluntary change made by the contractor or a
subcontractor; provided that no agreement may be made under this
provision that will result in the payment of any increased costs by
the United States in the aggregate for all of the contractor's or a
subcontractor's CAS-covered contracts and subcontracts affected by
the change.
(iii) Desirable change. Agree to an equitable adjustment of the
price of this contract as provided in this provision if contract
cost is affected by a change in cost accounting practice made by the
contractor or a subcontractor that the cognizant Federal agency
official finds to be a desirable change.
(5) Noncompliance. As required by subpart 9903.4, initiate
action to correct any noncompliance, provide data concerning the
cost impact of the noncompliance and agree to an adjustment of the
contract price or cost if the Contractor or a subcontractor fails to
comply with an applicable Cost Accounting Standard, including any
modifications or interpretations thereto, or to follow any cost
accounting practice consistently and such failure results or will
result in any increased costs paid by the United States. Also, agree
to the recovery of any increased costs paid by the United States,
together with interest thereon computed at the annual rate
established under section 6621(a)(2) of the Internal Revenue Code of
1986 (26 U.S.C. 6621(a)(2)) for such period, from the time the
payment by the United States was made to the time the increased cost
payment is recovered by the United States. In no case shall the
Government recover costs greater than the increased cost to the
Government, in the aggregate, on the relevant contracts subject to
price or cost adjustment, unless the contractor made a change in its
cost accounting practices of which it was aware or should have been
aware at the time of price negotiations and which it failed to
disclose to the Government.
(b) Disputes. If the cognizant Federal agency official and the
Contractor disagree as to whether the Contractor or a subcontractor
has complied with an applicable CAS in part 9904, including any
modifications or interpretations thereto, an applicable provision or
requirement in part 9903 or as to any resulting price or cost
adjustment demanded by the United States, such failure to agree will
constitute a dispute under the Contract Disputes Act (41 U.S.C.
601).
(c) Access to records. The Contractor shall permit any
authorized representatives of the Government to examine and make
copies of any documents, papers, or records, regardless of type and
regardless of whether such items are in written form, in the form of
computer data or in any other form, relating to compliance with the
requirements of this clause.
(d) Flowdown to Subcontracts. The Contractor shall include in
all negotiated subcontracts which the Contractor enters into, the
substance of this clause, except paragraph (b), and shall require
such inclusion in all other subcontracts, of any tier, including the
obligation to comply with all applicable CAS in effect on the
subcontract's award date or if the subcontractor has submitted cost
or pricing data, on the date of final agreement on price as shown on
the subcontractor's signed Certificate of Current Cost or Pricing
Data. If the subcontract is awarded to an entity which pursuant to
9903.201-2 is subject to other types of CAS coverage, the substance
of the applicable clause set forth in 9903.201-4 shall be inserted.
This requirement shall apply only to negotiated subcontracts in
excess of $500,000, except that the requirement shall not apply to
negotiated subcontracts otherwise exempt from the requirement to
include a CAS clause as specified in 9903.201-1.
(End of clause)
* * * * *
(c) Cost Accounting Standards--Modified Coverage. (1) The
contracting officer shall insert the following clause, Cost Accounting
Standards--Modified Coverage, in negotiated contracts when the contract
amount is over $500,000, but less than $25 million, and the offeror
certifies it is eligible for and elects to use modified CAS coverage
(see 9903.201-2), unless the clause prescribed in paragraphs (d) or (e)
of this subsection is used.
(2) The following clause requires the contractor to comply with
9904.401, 9904.402, 9904.405 and 9904.406, to disclose (if it meets
certain requirements) actual cost accounting practices, and to follow
disclosed and established cost accounting practices consistently.
Cost Accounting Standards--Modified Coverage (August 1999)
(a) The provisions of part 9903 of 48 CFR chapter 99, including
the definitions and requirements contained therein, are incorporated
herein by reference and the Contractor, in connection with this
contract, shall--
(1) Disclosure. Disclose in writing the Contractor's cost
accounting practices by submission of a Disclosure Statement, if it
is a business unit of a company required to submit a Disclosure
Statement, pursuant to 9903.202. The cost accounting practices
disclosed for this contract shall be the same cost accounting
practices currently disclosed and applied to all other contracts and
subcontracts being performed by the Contractor and which contain a
Cost Accounting Standards (CAS) contract clause. If the Contractor
has notified the Contracting Officer that the Disclosure Statement
contains trade secrets and commercial or financial information which
is privileged and confidential, the Disclosure Statement shall be
protected and shall not be released outside of the Government.
(2) Changes in Cost Accounting Practices. Follow consistently
the Contractor's cost accounting practices in accumulating and
[[Page 45718]]
reporting contract performance cost data concerning this contract.
If any change in cost accounting practices is made for the purposes
of any CAS-covered contract or subcontract, the change must be
applied prospectively from the date of applicability to this
contract and the Contractor's Disclosure Statement must be amended
accordingly. If the contract price or cost of this contract is
affected by such changes, adjustment shall be made in accordance
with subparagraph (a)(4) or (a)(5) of this clause, as appropriate.
(3) Compliance with Standards. Comply with the requirements of
9904.401, Consistency in Estimating, Accumulating and Reporting
Costs; 9904.402, Consistency in Allocating Costs Incurred for the
Same Purpose; 9904.405, Accounting For Unallowable Costs; and
9904.406, Cost Accounting Period; including any modifications or
interpretations thereto, in effect on the date of award of this
contract, or, if the Contractor has submitted cost or pricing data,
on the date of final agreement on price as shown on the Contractor's
signed Certificate Of Current Cost Or Pricing Data. The Contractor
shall also comply with any modifications or interpretations to such
CAS which become applicable because of a subsequent award of a CAS-
covered contract or subcontract to the Contractor. Such compliance
shall be required prospectively from the date of applicability to
such contract or subcontract.
(4) Compliant changes in cost accounting practices. As required
by subpart 9903.4, provide timely notification of changes in
disclosed or established cost accounting practices, provide data
concerning the cost impact of such changes and:
(i) Required change. Agree to an equitable adjustment of the
price of this contract as provided under this provision if the
contract cost is affected by a change to a disclosed or established
cost accounting practice which, pursuant to subparagraph (a)(3) of
this clause, the Contractor or a subcontractor is required to make.
(ii) Voluntary change. Agree to an adjustment in the price or
cost of this contract as provided under this provision if contract
cost is affected by a voluntary change made by the contractor or a
subcontractor; provided that no agreement may be made under this
provision that will result in the payment of any increased costs by
the United States in the aggregate for all of the contractor's or a
subcontractor's CAS-covered contracts and subcontracts affected by
the change.
(iii) Desirable change. Agree to an equitable adjustment of the
price of this contract as provided in this provision if contract
cost is affected by a change in cost accounting practice made by the
contractor or a subcontractor that the cognizant Federal agency
official finds to be a desirable change.
(5) Noncompliance. As required by subpart 9903.4, initiate
action to correct any noncompliance, provide data concerning the
cost impact of the noncompliance and agree to an adjustment of the
contract price or cost if the Contractor or a subcontractor fails to
comply with an applicable Cost Accounting Standard, including any
modifications or interpretations thereto, or to follow any cost
accounting practice consistently and such failure results or will
result in any increased costs paid by the United States. Also, agree
to the recovery of any increased costs paid by the United States,
together with interest thereon computed at the annual rate
established under section 6621(a)(2) of the Internal Revenue Code of
1986 (26 U.S.C. 6621(a)(2)) for such period, from the time the
payment by the United States was made to the time the increased cost
payment is recovered by the United States. In no case shall the
Government recover costs greater than the increased cost to the
Government, in the aggregate, on the relevant contracts subject to
price or cost adjustment, unless the contractor made a change in its
cost accounting practices of which it was aware or should have been
aware at the time of price negotiations and which it failed to
disclose to the Government.
(b) Disputes. If the cognizant Federal agency official and the
Contractor disagree as to whether the Contractor or a subcontractor
has complied with an applicable CAS in part 9904, including any
modifications or interpretations thereto, an applicable provision or
requirement in part 9903 or as to any resulting price or cost
adjustment demanded by the United States, such failure to agree will
constitute a dispute under the Contract Disputes Act (41 U.S.C.
601).
(c) Access to records. The Contractor shall permit any
authorized representatives of the Government to examine and make
copies of any documents, papers, or records, regardless of type and
regardless of whether such items are in written form, in the form of
computer data or in any other form, relating to compliance with the
requirements of this clause.
(d) Flowdown to Subcontracts. The Contractor shall include in
all negotiated subcontracts which the Contractor enters into, the
substance of this clause, except paragraph (b), and shall require
such inclusion in all other subcontracts, of any tier, including the
obligation to comply with all applicable CAS in effect on the
subcontract's award date or if the subcontractor has submitted cost
or pricing data, on the date of final agreement on price as shown on
the subcontractor's signed Certificate of Current Cost or Pricing
Data. If the subcontract is awarded to an entity which pursuant to
9903.201-2 is subject to other types of CAS coverage, the substance
of the applicable clause set forth in 9903.201-4 shall be inserted.
This requirement shall apply only to negotiated subcontracts in
excess of $500,000, except that the requirement shall not apply to
negotiated subcontracts otherwise exempt from the requirement to
include a CAS clause as specified in 9903.201-1.
(End of clause)
* * * * *
3. Section 9903.201-6 is proposed to be revised to read as follows:
9903.201-6 Findings--Voluntary changes exempt from contract price and
cost adjustment.
(a) Prior to making any contract price or cost adjustment under the
provisions of paragraph (a)(4)(ii) of the contract clauses set forth in
9903.201-4(a), 9903.201-4(c) or 9903.201-4(e), the cognizant Federal
agency official shall make a finding that the voluntary change in cost
accounting practice can or can not be exempted from contract price and
cost adjustment under the exemption criteria specified in this
subsection. The cognizant Federal agency official may, however, make a
finding that the voluntary change in cost accounting should not be
exempted from contract price and cost adjustment under the exemption
criteria specified in this subsection when such action would otherwise
be detrimental to the Government's interests.
(b) The determination as to whether or not a voluntary change in
cost accounting practice should be exempted from contract price and
cost adjustment requirements specified in CAS-covered contracts and
subcontracts shall be made on a case-by-case basis in accordance with
the exemption criteria specified in paragraph (c) or (d) of this
subsection.
(c) Exemption For Voluntary Cost Accounting Practice Changes
Associated With Contractor Restructuring Activities That Are Made By
Management To Reduce Personnel or Facilities. Changes in the methods
and techniques used for the ``allocation of cost to cost objectives,''
including the transfer of functions from an existing cost pool, cost
pool split-outs or cost pool combinations, that are associated with
restructuring activities (see 9904.406-61(b)) which are undertaken to
improve future operations and reduce overall cost levels in future
periods through work force reductions and/or physical realignment or
reduction of facilities, including plant relocations, shall not be
subject to the contract price or cost adjustment requirements of part
9903, the cognizant Federal agency official determines, in writing,
that:
(1) The voluntary change in cost accounting practice is being made
concurrently with planned restructuring activities and would not be
made but for the restructuring actions being taken.
(2) Future ``cost savings'' to the Government (i.e., the
accumulation of less contract costs), in the aggregate, for existing
flexibly priced CAS-covered contracts and anticipated and reasonably
predictable future CAS-covered contracts, are expected to result from
the planned restructuring activities.
(3) The ``cost savings'' calculation(s) represented the difference
between:
(i) The total amount of costs that would be accumulated for
existing flexibly priced CAS-covered contracts
[[Page 45719]]
and reasonably predictable future CAS-covered contracts, in accordance
with the contractor's established cost accounting practices, at the
estimated operating cost levels that would continue if the planned
restructuring activities were not made, and
(ii) The total amount of costs that would be accumulated for such
CAS-covered contracts, in accordance with the contractor's new changed
cost accounting practices, at the estimated new cost levels that would
result if the planned restructuring activities were made.
(d) An agency ``cost savings'' determination, made in accordance
with the agency's promulgated regulations, resulting in the approval of
proposed contractor restructuring activities may be used in lieu of the
cost savings determinations required under paragraph (c) of this
subsection.
(e) When a determination is made to grant an exemption, the
cognizant Federal agency official shall notify the contractor that the
voluntary change(s) to established cost accounting practices required
to implement the planned restructuring activities will be exempt from
the contract price and cost adjustment provisions contained in existing
CAS-covered contracts that are affected by the changes.
(f) When the cognizant Federal agency official determines that a
voluntary change to the contractor's cost accounting practices does not
meet the exemption criteria specified in this subsection or is
otherwise determined detrimental to the Government's interests, the
cognizant Federal agency official shall inform the contractor of the
determination and initiate the cost impact process in accordance with
9903.405-3 or otherwise proceed to resolve the cost impact pursuant to
9903.201-7(c)(2), if applicable. The contractor may request a desirable
change determination in accordance with 9903.201-7 and subpart 9903.4
prior to the submission of a requested cost impact submission.
(g) If a voluntary change in cost accounting practice is made for
any reason, even if the voluntary change is exempted from contract
price and cost adjustment, the resultant changed cost accounting
practices must comply with all applicable Cost Accounting Standards and
notification of the change in cost accounting practice must be provided
as required by 9903.405-2.
4. Section 9903.201-7 is proposed to be revised to read as follows:
9903.201-7 Findings--Desirable changes.
(a) Prior to making any equitable adjustment under the provisions
of paragraph (a)(4)(iii) of the contract clauses set forth in 9903.201-
4(a), 9903.201-4(c) or 9903.201-4(e), the cognizant Federal agency
official shall make a finding that the voluntary change in cost
accounting practice is desirable, as defined at 9903.403, i.e.,
desirable and not detrimental to the interests of the Government, and,
if the voluntary change in cost accounting practice is associated with
contractor restructuring activities, a finding that the change in cost
accounting practice should not be exempted from contract price or cost
adjustment process under the provisions of 9903.201-6(a).
(b) The determination as to whether or not a voluntary change in
cost accounting practice is desirable should be made on a case-by-case
basis in accordance with, but not limited to, one or more of the
criteria specified in paragraph (c) of this subsection. The cognizant
Federal agency official may, however, determine that a change in cost
accounting practice is not desirable under the criteria specified in
this subsection when such action would otherwise be detrimental to the
Government's interests. Normally, a desirable change determination is
only necessary if a voluntary change results in aggregate increased
costs to the Government, for existing CAS-covered contracts, and the
cognizant Federal agency official contemplates making potential
contract price adjustments that would increase, in the aggregate, the
existing contract prices that the Government would be obligated to pay.
Pending receipt of a written notification that the cognizant Federal
agency official has determined that a voluntary change in cost
accounting practice will or will not be treated as desirable and not
detrimental to the Government, the change shall be considered to be a
voluntary change for which the Government will pay no increased costs,
in the aggregate.
(c) A voluntary change in cost accounting practice shall be deemed
to be desirable and not detrimental to the interests of the Government
if the cognizant Federal agency official determines that:
(1) For a Cost Accounting Standard with which the contractor has
complied, the change is necessary in order for the contractor to remain
in compliance with that Standard.
(2) Cost savings to the Government, in the aggregate, will occur
under existing flexibly priced and reasonably predictable future CAS-
covered contracts and subcontracts as a result of management changes,
and associated cost accounting practice changes where there is a
reasonable expectation that more efficient and economical operations
will result. In such cases, the contracting officer may proceed to
equitably resolve the cost impact of the practice change on all
existing individual CAS-covered contracts (i.e., shifts in accumulated
contract costs attributable to the practice change) by obtaining a
contractor cost impact proposal and negotiating equitable contract
price and/or cost adjustments pursuant to 9903.4. Alternatively, the
contracting officer may otherwise resolve the matter based on the
contractor's previously submitted contract cost accumulation data that
was included in the contractor's written request for a desirable change
determination (see 9903.405-2(e)). In that case, the contracting
officer may forgo the submission of a cost impact proposal and related
adjustments of individual contract prices and/or cost allowances,
provided a determination is made that an alternate resolution
adequately protects the Government's interests.
(3) Circumstances, other than those listed in paragraph (c)(1) and
(c)(2) of this subsection, included as justification in the
contractor's written request for a desirable change determination,
which clearly demonstrate that the change in cost accounting practice
is otherwise desirable and not detrimental to the interests of the
Government.
(d) The cognizant Federal agency official's finding should not be
made solely because of the cost impact that a proposed practice change
will have on a contractor's or subcontractor's current CAS-covered
contracts. A voluntary change in cost accounting practice may be
determined to be desirable and not detrimental to the Government's
interest even though existing contract prices and/or cost allowances
may increase. However, the amount of increased costs recognized by the
Government when making equitable adjustments under paragraph (c)(2) of
this subsection will be limited to the estimated amount of cost
accumulation reductions that are expected to occur under reasonably
predictable future CAS-covered contracts because of the practice change
(See illustration at 9903.407-1(h)). To what degree such expected cost
accumulation reductions for forecasted CAS-covered contracts may be
considered requires case-by-case determinations. Such consideration
should be based on data that fully supports such a condition and
discussions held with the contractor, the cognizant auditor and
affected Federal agency officials. Cognizant Federal agency official
determinations of expected future contract cost
[[Page 45720]]
reductions shall not be subject to the disputes provisions of CAS-
covered contracts.
5. Section 9903.201-8 and is proposed to be added to read as
follows:
9903.201-8 Cognizant Federal agency responsibilities.
(a) The requirements of 48 CFR chapter 99, shall, to the maximum
extent practicable, be administered by the cognizant Federal agency
responsible for a particular contractor organization or location,
usually the Federal agency responsible for negotiating indirect cost
rates on behalf of the Government. The cognizant Federal agency should
take the lead role in administering the requirements of chapter 99 and
coordinating CAS administrative actions with all affected Federal
agencies. When multiple CAS-covered contracts and/or subcontracts or
more than one Federal agency are involved, the cognizant Federal agency
official and affected agencies shall coordinate their activities in
accordance with applicable agency regulations. Coordinated
administrative actions will provide greater assurances that individual
contractors follow their cost accounting practices consistently under
all their CAS-covered contracts and that aggregate contract price and
cost adjustments required under CAS-covered contracts for changes in
cost accounting practices or CAS noncompliance issues are determined
and resolved, equitably, in a uniform overall manner.
(b) Federal agencies shall prescribe regulations and establish
internal policies and procedures governing how agencies will administer
the requirements of CAS-covered contracts, with particular emphasis on
inter-agency coordination activities. Procedures to be followed when an
agency is and is not the cognizant Federal agency should be clearly
delineated. Agencies are urged to coordinate on the development of such
regulations.
(c) Internal agency policies and procedures shall provide for the
designation of the agency office(s) or officials responsible for
administering CAS under the agency's CAS-covered contracts and
subcontracts at each contractor and subcontractor business unit and the
delegation of necessary contracting authority to agency individuals
authorized to negotiate cost impact settlements under CAS-covered
contracts, e.g., Contracting Officers, Administrative Contracting
Officers (ACO's) or other agency officials authorized to perform in
that capacity.
(d) Processing changes in cost accounting practices. (1) The
cognizant Federal agency official shall, in accordance with applicable
agency regulations:
(i) Make all required determinations for all CAS-covered contracts
and subcontracts affected by a change in cost accounting practice,
including cost impact materiality determinations, in the aggregate.
(ii) Coordinate with affected agencies on the potential
modification of CAS-covered awards, prior to actual negotiations.
(iii) Negotiate the cost impact settlement, in the aggregate, for
all CAS-covered contracts and subcontracts materially affected by the
change in cost accounting practice.
(iv) Inform the affected agencies of the negotiation results, by
distribution of the negotiation memorandum.
(v) When contract and/or subcontract price adjustments are
negotiated:
(A) Request affected agencies to prepare implementing contract
modifications and to obtain implementing subcontract modifications from
the next higher-tier contractor, as appropriate. The modifications
shall be predicated on the negotiated cost impact settlement reflected
in the negotiation memorandum and are to be forwarded for signature by
the contractor through the cognizant Federal agency official.
(B) Concurrently, obtain contractor signatures for all contracts
and subcontracts to be modified and distribute the executed
modifications to the awarding agencies.
(2) Awarding agencies shall, in accordance with applicable agency
regulations:
(i) Coordinate with and support the cognizant Federal agency
official.
(ii) Prepare and/or obtain contract modifications needed to
implement negotiated cost impact settlements, as requested by the
cognizant Federal agency official.
(iii) When the cognizant Federal agency official has properly
determined a cost impact settlement on behalf of the Government, make
every effort to provide funds required for increased contract price
modifications to affected Contracting Officers for obligation so that
the cognizant Federal agency official can concurrently execute all the
requested contract modification(s) needed to settle the cost impact
action in a timely manner.
(3) If the cognizant Federal agency official makes a written
determination that funding needed to execute required modifications is
not expected to be available, an equitable solution by use of any other
suitable technique which resolves the negotiated cost impact settlement
may be used (see 9903.405-5(c)(3)).
Subpart 9903.3--CAS Rules and Regulations
6. Section 9903.301 is proposed to be amended by adding two
definitions in alphabetical order to read as follows:
9903.301 Definitions.
(a) * * *
* * * * *
Function, as used in this part, means an activity or group of
activities that is identifiable in scope and has a purpose or end to be
accomplished. Examples of functions include activities such as
accounting, marketing, research, product support, drafting, assembly,
inspection and field services.
* * * * *
Intermediate cost objective means a cost objective that is not a
final cost objective. Intermediate cost objectives are used to
accumulate the costs of specific functions or groups of functions.
Costs allocated to specific intermediate cost objectives are
accumulated in specific cost pools that include overhead pools, general
and administrative expense (G&A) pools, and service center or other
expense pools. These accumulated costs are then allocated as pooled
cost to other intermediate and/or to final cost objectives.
Intermediate cost objectives may also be used to accumulate direct
costs that are included in a cost pool and allocated to final cost
objectives as a direct charge.
* * * * *
7. Section 9903.302-1 is proposed to be amended by revising
paragraph (c) to read as follows:
9903.302-1 Cost accounting practice.
* * * * *
(c) Allocation of cost to cost objectives as used in this part,
refers to the cost accounting methods or techniques used to accumulate
and distribute costs to intermediate and final cost objectives. The
allocation of cost to cost objectives includes both the direct and
indirect allocation of costs.
(1) Examples of cost accounting practices involving the allocation
of cost to cost objectives are the accounting methods and techniques
used to:
(i) Accumulate cost for cost objectives and cost pools,
(ii) Determine whether a cost is to be directly or indirectly
allocated to intermediate or final cost objectives,
(iii) Determine the selection and composition of cost pools, and
[[Page 45721]]
(iv) Determine the selection and composition of the appropriate
allocation bases.
(2) The selection of cost pools involves the determination to
establish one or more cost pools for the accumulation of specific costs
to be allocated to other intermediate and/or to final cost objectives
for a particular segment, home office, or business unit. The
composition of cost pools involves the determinations to accumulate, by
elements of cost, the costs of the specific functions or groups of
functions to be included within each established cost pool.
(3) The selection of an allocation base involves the determination
on what type of allocation base for a cost pool (e.g., labor hours,
square footage, labor dollars, total cost input) will be used as the
basis for the allocation of the total costs accumulated in each
selected pool to intermediate and/or final cost objectives for a
particular segment, home office, or business unit. The composition of
an allocation base involves the determination to accumulate the
selected allocation base data associated with each selected pool that
was established. The composition of an allocation base includes the
specific functional groupings within the base. The composition of a
home office allocation base includes the grouping of segments within
the applicable base. Examples of allocation bases include direct
engineering labor hours for a specific direct engineering function
performed at a specified location, total cost input of a particular
segment, total payroll costs for specific segments reporting to the
same group or home office.
8. Section 9903.302-2 is proposed to be revised to read as follows:
9903.302-2 Change to a cost accounting practice.
(a) Change to a cost accounting practice, as used in this part,
including the contract clauses prescribed at 9903.201-4, means any
alteration in a cost accounting practice, as defined in 9903.302-1,
whether or not such practices are covered by a Disclosure Statement,
including the following changes in cost accumulation:
(1) Pool combinations. The merging of existing indirect cost pools.
(2) Pool split-outs. The expansion or breakdown of an existing
indirect cost pool into two or more pools.
(3) Functional transfers. The transfer of an existing ongoing
function in its entirety from an existing cost pool to another cost
pool, segment or home office.
(b) Exceptions. (1) The initial adoption of a cost accounting
practice for the first time a cost is incurred, or a function is
created, is not a change in cost accounting practice. This exception
shall be applied at the segment or home office level, depending upon
the nature of the cost or the function involved. At the segment level,
different segments can establish different cost accounting practices
for the same type of cost when the cost is incurred for the first time
or a function is created by each segment. This exception does not apply
to transfers of ongoing functions, e.g., from one pool, segment, or
home office to another pool, segment or home office.
(2) The partial or total elimination of a cost or the cost of a
function is not a change in cost accounting practice.
(3) The revision of a cost accounting practice for a cost which
previously had been immaterial is not a change in cost accounting
practice.
(c) Mergers and acquisitions. (1) Each CAS-covered contract
requires that the performing contractor consistently follow its
established or disclosed cost accounting practices over the contract's
entire period of performance.
(2) When a business unit or a segment performing a CAS-covered
contract is acquired by a different contractor through a merger or
acquisition, the acquired business unit or segment shall accumulate and
report costs incurred from the effective date of acquisition or merger
through completion of the acquired contract consistently in accordance
with the cost accounting practices established by the acquired business
unit or segment. Compliant changes made to such established and/or
disclosed cost accounting practices after the effective date of the
merger or acquisition by the acquiring contractor shall be processed as
changes in cost accounting practice in accordance with the requirements
of part 9903. If a cost accounting practice previously used to
estimate, accumulate or report costs of the acquired covered
contract(s) before or after the effective date of the merger or
acquisition is found to be noncompliant, the cost impact of the
noncompliance shall be resolved in accordance with the requirements of
part 9903.
(3) This paragraph (c) applies equally to CAS-covered subcontracts
acquired by a contractor or subcontractor.
9. Section 9903.302-3 is proposed to be amended by adding a new
introductory paragraph, revising introductory paragraphs (a), (b) and
(c), revising the illustration at (c)(3) and by adding new
illustrations (c)(4) through (c)(9) to read as follows:
9903.302-3 Illustrations of changes which meet the definition of
``change to a cost accounting practice.''
The following illustrations are not intended to cover all possible
changes in cost accounting practices nor are the illustrations to be
used as limitations for determining if an accounting change has
occurred. Further, each illustration is not intended to be all-
inclusive. Accordingly, the lack of a mentioned change in cost
accounting practice does not mean that there is not a change in cost
accounting practice. The decision as to whether a change in cost
accounting practice has or has not occurred, requires a thorough
analysis of the circumstances of each individual situation based on the
definitions and exceptions specified in 9903.302-1 and 9903.302-2.
(a) The cost accounting practice used for the measurement of cost
has been changed.
* * * * *
(b) The cost accounting practice used for the assignment of cost to
cost accounting periods has been changed.
* * * * *
(c) The cost accounting practice used for the allocation of cost to
cost objectives has been changed.
* * * * *
------------------------------------------------------------------------
Description Accounting treatment
------------------------------------------------------------------------
* * * *
* * *
(3) The contractor changes to a (3)(i) Before change: The
different allocation base. contractor used a direct
manufacturing labor hours base
to allocate costs accumulated
in the manufacturing overhead
pool to final cost objectives.
(ii) After change: The
contractor uses a direct
manufacturing labor dollars
base to allocate costs
accumulated in the
manufacturing overhead pool to
final cost objectives.
[[Page 45722]]
(iii) The described change from
a direct labor hours base to a
direct labor dollars base
represents a change in the
selection of the allocation
base .
(4) A Segment combines the cost pools (4)(i) Before change: The
of two similar ongoing functions. Segment established separate
(i) The ongoing assembly operations at assembly overhead pools to
Plants A and B are merged. accumulate the indirect costs
applicable to Plant A's and
Plant B's respective assembly
functions. Pooled costs were
allocated to individual final
cost objectives based on Plant
A's and Plant B's respective
assembly direct labor dollars
allocation bases.
(ii) After change: The indirect
costs of the two ongoing
assembly functions are
combined and accumulated in
one indirect assembly cost
pool. Pooled costs are
allocated to individual final
cost objectives based on a
single assembly direct labor
dollars allocation base that
is generated by the two plant
locations.
(iii) The methods and
techniques used to accumulate
cost changed because the
indirect cost pools selected
by the segment to accumulate
the cost of specific
activities changed from two
pools to one pool. The
composition of the pools
changed because the specific
activities originally included
in the two indirect cost pools
are now included in one pool.
The composition of the
allocation base changed
because the selected
allocation base originally
accumulated separately for
Plants A and B is now
accumulated in one combined
base .
(5) Assume the same circumstances as in (5)(i) Before change: Segments
(c)(4) of this illustration, except A and B each established an
that Plants A and B are separate assembly overhead pool to
Segments A and B that are combined as accumulate the indirect costs
Segment C. applicable to their respective
assembly functions. Pooled
costs were allocated to final
cost objectives based on
Segment A's and B's respective
assembly direct labor dollars.
(ii) After change: Segment C
establishes a single assembly
overhead pool to identify and
accumulate the costs of
Segment A's and Segment B's
ongoing indirect assembly
functions. Pooled costs are
allocated to final cost
objectives based on Segment
C's total assembly direct
labor dollars generated by the
two ongoing but separate
assembly operations.
(iii) For the same reasons
cited in (c)(4) (iii) of this
illustration, a cost
accounting practice change has
occurred.
(6) The contractor changes how the (6)(i) Before change: The
ongoing indirect costs of the indirect costs applicable to
manufacturing and assembly operations the manufacturing and assembly
are accumulated and allocated to final functions were accumulated in
cost objectives by a segment. a plant-wide indirect cost
pool and allocated to final
cost objectives by use of a
direct labor dollars base
comprised of manufacturing and
assembly direct labor dollars.
During each cost accounting
period, a single plant-wide
indirect cost rate was used to
allocate the accumulated
indirect costs to individual
final cost objectives.
(ii) After change: The ongoing
indirect costs of the
manufacturing and assembly
functions are split-out and
accumulated separately in a
manufacturing cost pool and an
assembly cost pool. The costs
accumulated in each pool are
allocated to final cost
objectives by use of a
manufacturing direct labor
dollars base and an assembly
direct labor dollars base,
respectively. Two indirect
cost rates are now used to
allocate the ongoing indirect
costs to individual final cost
objectives.
(iii) The methods and
techniques used to accumulate
costs have changed because the
indirect cost pools selected
to accumulate the costs of
specific functions have
changed from one pool to two
pools. The composition of the
pools changed because the two
specific functions originally
included in one pool are now
split-out and included in two
pools. The composition of the
allocation base changed
because the selected
allocation base previously
accumulated in one plant-wide
base is now accumulated
separately, in two allocation
bases, for the manufacturing
and assembly operations.
(7) The contractor transfers the (7)(i) Before change: The cost
incoming materials inspection function. of performing the incoming
(i) Incoming materials are inspected in inspection function was
the same manner before and after the accumulated in the Segment's
change. manufacturing overhead expense
pool. Accumulated pool costs
were allocated to final cost
objectives based on
manufacturing direct labor
dollars.
(ii) After change: The
accumulated cost of the
incoming inspection function
is included in the Segment's
materials handling overhead
pool. These pooled costs are
allocated to final cost
objectives based on direct
material costs.
[[Page 45723]]
(iii) The decision to include
the accumulated cost of the
ongoing inspection function in
a different cost pool
represents a change in the
methods and techniques used to
accumulate indirect cost
because the incoming
inspection function is now
included in a different pool,
i.e., the composition of each
pool has changed. The decision
to allocate incoming
inspection costs to final cost
objectives by use of a
material cost base rather than
a labor dollars base
represents a change in the
selection of the allocation
base for the incoming
inspection function.
(8) A contractor establishes a new (8) As of the effective date of
product line by acquiring another acquisition, the contractor
company. Both entities are performing requires the new segment to
CAS-covered contracts. accumulate and report the
(i) The acquired company will be continuing costs of the
treated as a new segment. The acquired acquired ongoing functions
segment will complete the CAS-covered differently, e.g., the
contracts that were novated from the acquired company's single
prior company to the contractor. It overhead pool is split into
will not perform any work associated two new pools. The pool split-
with the contractor's existing lines out resulted in changes to the
of business. acquired segment's previously
established cost accounting
practices.
(i) The cost accounting
practice changes are subject
to the contract price and cost
adjustment provisions of the
acquired CAS-covered
contracts.
(ii) The initial adoption
exception provided by 9903.302-
2(b)(1) would not apply
because this is not a first
time incurrence of cost or
creation of a function, with
regard to the ongoing acquired
CAS-covered contracts.
(9) A contractor expands the existing (9)(i) As of the effective date
product line of Segment A by acquiring of acquisition, Segment A
another company. Both entities are merges the continuing
performing CAS-covered contracts. functions of the acquired
(i) Segment A will operate and manage company with Segment A's
the acquired company's ongoing similar functions and merges
operations the indirect costs of the
(ii) Segment A will complete the acquired company's ongoing
acquired CAS-covered contracts that functions into Segment A's
were novated from the prior company to indirect cost pools, in
the contractor. accordance with Segment A's
established cost accounting
practices. The acquired
company's allocation base is
similarly merged into Segment
A's allocation base.
(ii) The cost accounting
practices that will be used to
accumulate and report costs of
Segment A's existing and
acquired contracts will be
different than the practices
that were previously used to
estimate, accumulate and
report contract costs.
(iii) The methods and
techniques used to accumulate
costs changed because the
indirect cost pools selected
for the accumulation of costs
has changed from two pools to
one pool. The composition of
Segment A's pool changed
because the specific functions
originally included in the two
indirect cost pools are now
included in the one pool. The
composition of the allocation
base changed because the
selected allocation base
originally accumulated
separately for Segment A and
the acquired company is now
accumulated in one combined
allocation base.
(iv) The cost accounting
practice changes are subject
to the contract price and cost
adjustment provisions of the
existing and acquired CAS-
covered contracts.
------------------------------------------------------------------------
10. Section 9903.302-4 is proposed to be amended by adding an
introductory paragraph, and illustrations (h) through (j) to read as
follows:
9903.302-4 Illustrations of changes which do not meet the definition
of ``Change to a cost accounting practice.''
The following illustrations are not intended to cover all possible
events that are not changes in cost accounting practice nor are the
illustrations to be used as limitations for determining that an
accounting change has not occurred. The decision as to whether a change
in cost accounting practice has or has not occurred, requires a
thorough analysis of the circumstances of each individual situation
based on the definitions and exceptions specified in 9903.302-1 and
9903.302-2.
* * * *
* * *
------------------------------------------------------------------------
Description Accounting treatment
------------------------------------------------------------------------
* * * *
* * *
(h) The contractor transfers an (h)(1) Before the transfer, the
inspection department employee from employee's salary was
Plant A to Plant B. accumulated as indirect
inspection labor and was
included in Plant A's overhead
pool.
(2) After the transfer, the
employee's salary is similarly
accumulated in Plant B's
overhead pool. The salaries of
all employees performing the
inspection function at Plants
A and B continue to be
accumulated in their
respective overhead pools.
(3) Since the cost of the
ongoing inspection functions
at Plants A and B continue to
be accumulated within the same
indirect cost pools and the
selection and composition of
the pools has not changed,
before and after the employee
transfer, no change in cost
accounting practice has
occurred.
[[Page 45724]]
(i) A contractor with a corporate home (i)(1) After change: The costs
office creates a new segment for the of the contractor's home
purpose of entering a new line of office continue to be
business. The new segment will not accumulated and allocated to
perform any work associated with the segments in accordance with
contractor's existing CAS-covered the contractor's established
contracts. cost accounting practices. The
new segment is added to the
applicable home office
allocation base or bases used
to allocate home office costs
to segments.
(2) The addition of the new
segment to the applicable home
office allocation base
represents an initial adoption
of a cost accounting practice
for the segment when it was
created (see exception at
9903.302-2(b)(1)). Since the
selection and composition of
the home office pool and
applicable allocation bases
were not otherwise changed,
the described increase in the
base for the allocation of
home office costs represents
an initial adoption of a cost
accounting practice that is
not subject to the contract
price or cost adjustment
process.
(j) Assume the same circumstances as in
(i) of this illustration, except that:
(1) The contractor acquired a new (j)(1) For the reasons stated
segment from another company that in (i) of this illustration,
is performing CAS-covered the described home office
contracts.. change is not a cost
accounting practice change.
(2) The acquired segment will (2) At the segment level, the
continue to estimate, accumulate first time incurrence of the
and report costs in accordance acquiring contractor's home
with the original company's office cost allocation is an
compliant and previously disclosed initial adoption of a cost
cost accounting practices for that accounting practice (see
segment. A new Disclosure exception at 9903.302-2(b)(1).
Statement is filed to that effect. Since the contractor adopted
Also disclosed is the contractor's the acquired segment's
home office cost allocation to the previously established cost
segment. accounting practices, no
change in established cost
accounting practices occurred
for the acquired CAS-covered
contracts.
------------------------------------------------------------------------
11. Section 9903.306 is proposed to be revised to read as follows:
9903.306 Applicable interest rate
The interest rate applicable to any contract price or cost
adjustment shall be the annual rate of interest established under
section 6621(a)(2) of Title 26 (26 U.S.C. 6621(a)(2)) for such period.
Such interest shall accrue from the time the payment by the United
States was made to the time the increased cost payment is recovered by
the United States.
12. A new subpart 9903.4 is proposed to be added to read as
follows:
Subpart 9903.4--Contractor Cost Accounting Practice Changes and
Noncompliances
9903.401 Applicability of subpart.
9903.401-1 CAS-covered contracts and subcontracts.
9903.401-2 Educational institutions.
9903.402 Purpose.
9903.402-1 Changes in cost accounting practice.
9903.402-2 Failure to comply (noncompliances) with an applicable
cost accounting standard or to follow any cost accounting practice
consistently.
9903.403 Definitions.
9903.404 Materiality determination for making adjustment.
9903.405 Changes in cost accounting practice.
9903.405-1 General.
9903.405-2 Notification of changes in cost accounting practices.
9903.405-3 Determinations, approvals and initiating the cost impact
process.
9903.405-4 Contractor cost impact submissions.
9903.405-5 Negotiation and resolution of the cost impact.
9903.406 Noncompliances.
9903.406-1 General types of noncompliances.
9903.406-2 Noncompliance determinations and initiating the cost
impact process.
9903.406-3 Cost estimating noncompliance.
9903.406-4 Cost accumulation noncompliance.
9903.406-5 Immaterial noncompliances.
9903.407 Illustrations.
9903.407-1 Changes in cost accounting practice--illustrations.
9903.407-2 Noncompliance illustrations.
Subpart 9903.4--Contractor Cost Accounting Practice Changes and
Noncompliances
9903.401 Applicability of subpart.
9903.401-1 CAS-covered contracts and subcontracts.
(a) This subpart 9903.4 applies uniformly to all CAS-covered
contracts and subcontracts affected by a compliant change in cost
accounting practice and/or a noncompliant cost accounting practice. By
accepting the first CAS-covered contract or subcontract that
incorporates part 9903, which includes this subpart 9903.4, the
contractor agrees to process cost accounting practice changes and
noncompliance actions occurring after the award of that contract or
subcontract in accordance with this subpart for all existing CAS-
covered contracts and subcontracts affected by the change or
noncompliance.
(b) To aid in meeting the requirements set forth in this subpart
9903.4 for processing cost accounting practice changes and
noncompliance actions, the contractor shall maintain a system for
identifying all existing CAS-covered contracts and subcontracts, and
their periods of performance.
9903.401-2 Educational institutions.
(a) This subpart 9903.4 applies to all CAS-covered contracts and
subcontracts awarded to educational institutions. Such CAS-covered
contracts and subcontracts incorporate part 9903 by reference and
contain specific terms and conditions that require the educational
institution to disclose its cost accounting practices (if specified
criteria are met), provide notification if a change to a cost
accounting practice is made and to agree to contract price or cost
adjustments for material cost impacts attributable to compliant changes
in cost accounting practices and/or to noncompliant practices. This
subpart 9903.4 establishes procedures for providing such notifications,
the submission of requested cost impact data, and determining the
required adjustments.
(b) On April 26, 1996, the Office of Management and Budget (OMB)
incorporated in OMB Circular A-21, Cost Principles for Educational
Institutions (61 FR 20880, May 8, 1996), the Disclosure Statement (Form
CASB DS-2) and the CAS applicable to educational institutions that were
promulgated by the Board at 48 CFR chapter 99 (59 FR 55746, November 8,
1994). As amended, Circular A-21 also contains certain requirements and
guidance regarding the notification to be provided when an educational
institution changes a cost accounting practice and the cost adjustments
that may be required or other actions to be taken by the cognizant
Federal agency
[[Page 45725]]
when Federally sponsored agreements (contracts, grants and cooperative
agreements) are affected by compliant practice changes or noncompliant
practices.
(c) The amended CASB and OMB requirements were intended to be
compatible and are to be administered by the cognizant Federal agency
official in a uniform and cost effective manner. To the maximum extent
feasible, the cognizant Federal agency official should apply a single
set of procedures when obtaining notifications, cost impact data and
when determining the adjustments that may be required for individual
CAS-covered contracts and other Federally sponsored agreements subject
to amended OMB Circular A-21 that are affected by the same practice
change or noncompliance. The procedures applied to all Federally
sponsored agreements, including CAS-covered contracts and subcontracts,
should be consistent with this subpart 9903.4 requirements and
objectives. The cognizant Federal agency official may use applicable
portions of this subpart 9903.4 as guidance and, if mutually agreed to
by the educational institution, the contracting parties may elect to
apply the 9903.4 provisions as deemed appropriate in the circumstances.
(d) Waiver Authority. When an educational institution changes a
compliant cost accounting practice or fails to comply with an
applicable Cost Accounting Standard that affects CAS-covered contracts
and other Federally sponsored agreements, the cognizant Federal agency
official may waive or modify, on a case-by-case basis, applicable
subpart 9903.4 requirements for affected CAS-covered contracts and
subcontracts as deemed necessary in order to establish appropriate
alternative procedures or methods for obtaining notifications of
practice changes, the submission of cost impact data or determining
contract price or cost adjustments in a uniform manner for all
Federally sponsored agreements. The basis for the waiver and the
alternate procedures utilized shall be documented in a written
determination. This waiver authority does not apply to the adequacy and
compliance determinations required by 9903.405-3(a).
(e) A written determination to apply the provisions of this subpart
9903.4, OMB Circular A-21, or other appropriate procedural guidance to
educational institutions shall be made by the cognizant Federal agency
official. Educational institutions should contact their cognizant
Federal agency for specific instructions within 60 days after receipt
of the first CAS-covered contract that is subject to this subpart.
9903.402 Purpose.
9903.402-1 Changes in cost accounting practice.
The contract clauses prescribed in 9903.201-4, Contract clauses,
set forth the requirements for changes in cost accounting practices
that a contractor may be required to make in order to comply with a
standard, modification or interpretation thereof that becomes
applicable to existing covered contracts for the first time due to the
subsequent award of a covered contract or may otherwise decide to make,
e.g., a voluntary change from an established or disclosed compliant
cost accounting practice to another compliant cost accounting practice.
Section 9903.405 establishes the specific actions to be taken by the
contracting parties for such compliant cost accounting practice
changes. Section 9903.405 also establishes procedures for adjusting
contract amounts that are materially affected by compliant changes in
cost accounting practices, while not requiring adjustment of all
contracts that are affected by such changes.
9903.402-2 Failure to comply (Noncompliances) with an applicable Cost
Accounting Standard or to follow any cost accounting practice
consistently.
The contract clauses prescribed in 9903.201-4, Contract clauses,
require the contractor or subcontractor to agree to an adjustment of
the contract price or cost if the contractor or subcontractor fails to
comply with an applicable Cost Accounting Standard, modification or
interpretation thereto, or to follow any cost accounting practice
consistently, and such failure results or will result in any increased
cost paid, in the aggregate, by the United States, under CAS-covered
contracts and subcontracts. Section 9903.406 establishes the actions to
be taken by the contracting parties in order to resolve the
noncompliant condition and/or effect recovery of any increased costs
paid as a result of the noncompliance.
9903.403 Definitions.
This section 9903.403 defines terms as used in this part 9903,
including the contract clauses prescribed at 9903.201-4. Where the
defined terms refer to a ``contractor'' or ``contract'' the definition
is intended to apply equally, as applicable, to a ``subcontractor'' or
``subcontract.''
Applicability date means--
(1) For required cost accounting practice changes, the date on
which a contractor is first required to accumulate and report costs in
accordance with an applicable Standard, modification or interpretation
thereto; or
(2) For voluntary cost accounting practice changes, the date on
which a contractor begins to use a new cost accounting practice for
cost accumulation and reporting purposes.
Contracts subject to adjustment means CAS-covered contracts and
subcontracts, including definitized contract options, that:
(1) Have contract performance beyond the applicability date of a
change in cost accounting practice, and have their current contract
prices based on a previous cost accounting practice; or
(2) Are affected by the application of a noncompliant practice that
was used to estimate or accumulate costs.
Cost impact means the increase or decrease in estimated or actual
costs allocable to a CAS-covered contract or subcontract due to a
compliant change in cost accounting practices, a noncompliance with a
Cost Accounting Standard, or a failure to follow cost accounting
practices consistently.
Desirable change means a voluntary change to a contractor's
established or disclosed cost accounting practices that the cognizant
Federal agency official finds is desirable and not detrimental to the
Government pursuant to 9903.201-7 and is therefore not subject to the
voluntary change--no increased cost prohibition provisions of CAS-
covered contracts affected by the change.
Detailed cost impact proposal means a proposal that shows the cost
impact of a change in cost accounting practice for contracts subject to
adjustment that have an estimate-to-complete which exceeds a threshold
amount specified by the cognizant Federal agency official.
Effective date means:
(1) For compliance with Standards, modifications and
interpretations thereto, the date on which a contractor is first
required to estimate proposed contract costs in accordance with an
applicable standard, modification or interpretation, as specified by
the CAS Board; or
(2) For voluntary cost accounting practice changes, the date on
which a contractor begins using a new cost accounting practice for cost
estimating purposes.
General dollar magnitude estimate means an estimate of the
aggregate cost impact, by contract type, of a change in cost accounting
practice, or a noncompliant practice on contracts subject to
adjustment.
Immaterial noncompliance means a noncompliant cost accounting
practice
[[Page 45726]]
that does not currently result in material increased costs to the
Government.
Increased costs due to a cost accumulation noncompliance means the
increase in cost to the Government that results from a contractor's
failure to comply with applicable Cost Accounting Standards,
modifications or interpretations thereto, or to follow its disclosed or
established cost accounting practices consistently when accumulating
costs under CAS-covered contracts, and such failure results in a higher
amount of costs allocated to these CAS-covered contracts than would
have been allocated to the contracts had the contractor complied with
applicable Standards, modifications or interpretations thereto, or
followed its cost accounting practices consistently.
Increased costs due to a cost estimating noncompliance means the
increased costs to the Government resulting from a contractor's failure
to comply with applicable standards, modifications or interpretations
thereto, or to follow its disclosed or established cost accounting
practices consistently when estimating proposal costs for a
contemplated CAS-covered contract, and such failure results in a higher
contract price than would have been negotiated had the contractor
complied with applicable Standards, modifications or interpretations
thereto, or followed its cost accounting practices consistently.
Increased costs due to a voluntary change in cost accounting
practice means the increase in cost to the Government that occurs:
(1) For flexibly priced CAS-covered contracts, when a greater
amount of cost will be allocated to the contract than would have been
allocated to it had the contractor not changed its cost accounting
practice, before any actions are taken to preclude the payment of the
increased costs; or
(2) For firm-fixed-price CAS-covered contracts, when the costs to
be allocated to the contract are less than the amount of costs that
would have been allocated to it had the contractor not changed its cost
accounting practice, before any contract price adjustment is made to
reflect the contractor's lesser allocation of cost to the contract.
Increased costs paid means the amount the Government actually pays,
in the aggregate, for increased costs resulting from compliant cost
accounting practice changes or noncompliant cost accounting practices
used to estimate or accumulate costs.
Notification date means the date on which the contractor formally
notifies the cognizant Federal agency official of a planned change in
cost accounting practices.
Offset process means the combining of cost increases to one or more
affected contracts of a given type with cost decreases to one or more
affected contracts of the same type, for the purpose of mitigating
action that needs to be taken due to changes in cost accounting
practices.
Required change means a change in cost accounting practice that a
contractor is required to make in order to comply with applicable
Standards, modifications or interpretations thereto, that subsequently
become applicable to an existing CAS-covered contract due to the
receipt of another CAS-covered contract or subcontract.
Voluntary change means a change in cost accounting practice from
one compliant practice to another that a contractor with CAS-covered
contracts elects to make that has not been deemed desirable by the
cognizant Federal agency official and for which the Government will pay
no increased costs.
9903.404 Materiality determination for making adjustment.
Contract price adjustments or actions to preclude or recover the
payment of increased costs resulting from compliant changes in cost
accounting practice, or failure to comply with an applicable Cost
Accounting Standard, modification or interpretation thereto, or to
follow any cost accounting practice consistently, shall only be
required if the amounts are material. In determining materiality, the
cognizant Federal agency official shall use the criteria specified in
9903.305. The cognizant Federal agency official should forego
contractor cost impact submissions (9903.405-4), and not adjust
contracts, if the cognizant Federal agency official determines that the
amounts involved are immaterial.
9903.405 Changes in cost accounting practice.
9903.405-1 General.
A CAS-covered contractor shall make changes to its established or
disclosed cost accounting practices when required in order to comply
with applicable Cost Accounting Standards, including any modification
and interpretations promulgated thereto. A contractor may change its
established cost accounting practices voluntarily, provided the
cognizant Federal agency official is notified of the change and the new
practice complies with applicable Cost Accounting Standards. CAS-
covered contracts and subcontracts affected by changes in cost
accounting practices that are either required to comply with Cost
Accounting Standards, modifications or interpretations thereto, or are
made voluntarily for which the cognizant Federal agency official has
made a finding that the change is desirable in accordance with
9903.201-7 are subject to equitable contract price adjustments. For all
other voluntary accounting changes, disclosed in accordance with
9903.405-2, the cognizant Federal agency official shall take action to
preclude the payment of increased costs by the United States as a
result of the change, as prescribed in 9903.405-5(d). With the
exception of such action to preclude the payment of increased costs for
voluntary changes, the administrative procedures for handling potential
contract price or cost adjustments will be consistent for all compliant
accounting changes, as set forth in subsections 9903.405-2 through
9903.405-5. Implementation of any change in cost accounting practice
without submission of the notification required under 9903.405-2 shall
be considered a failure to follow a cost accounting practice
consistently, and shall be processed as a noncompliance condition in
accordance with 9903.406.
9903.405-2 Notification of changes in cost accounting practices.
(a) The contractor shall submit to the cognizant Federal agency
official a description of any planned change in cost accounting
practices. Such notification shall include the proposed effective and
applicability dates. The date of submission is hereafter referred to as
the notification date.
(b) The contractor shall notify the cognizant Federal agency
official in accordance with the following:
(1) Required changes shall be disclosed as soon as it becomes known
that a required change must be made, but no later than the date of
submission of the price proposal in which the contractor must first use
the required change to estimate costs for a potential CAS-covered
contract.
(2) Voluntary changes (including those ultimately deemed desirable)
shall be disclosed as soon as the contractor decides to change an
established or disclosed cost accounting practice. Notification shall
be provided no later than 60 days before the applicability date or on
the date of submission of the price proposal in which the contractor
first uses the changed practice to estimate costs for a potential CAS-
covered contract.
(c) If a contractor proposes to make the applicability date of a
voluntary change (including those ultimately deemed desirable)
retroactive to the beginning of the current fiscal year in
[[Page 45727]]
which the notification is made, the contractor must submit rationale
for such action and obtain the cognizant Federal agency official's
approval. The rationale must state the reasons for making a retroactive
change.
(d) When providing notification of a voluntary change, the
contractor shall provide sufficient information to support the
cognizant Federal agency official's determination that the planned
voluntary change should or should not be exempted from contract price
and cost adjustment (9903.201-6). The contractor shall state if the
cost accounting practice change is or is not associated with
restructuring activities; and if it is, the contractor shall:
(1) Submit a comprehensive description of the planned restructuring
activities.
(2) Demonstrate, in summary fashion, to what extent the
contractor's total operating cost levels are expected to decrease (or
increase) as a result of the planned restructuring activities.
(3) Demonstrate that changes to the contractor's established cost
accounting practices are associated with the planned restructuring
activities and the resultant practice changes would not be made but for
the management actions being taken.
(4) Demonstrate that aggregate cost accumulations for existing CAS-
covered contracts and reasonably predictable future CAS-covered
contracts, by contract types, will decrease, increase or remain the
same after the planned restructuring activities are implemented. The
required cost comparison calculation methodology is summarized as
follows:
----------------------------------------------------------------------------------------------------------------
Flexibly priced contracts, by
Fixed-price contracts contract type
----------------------------------------------------------------------------------------------------------------
1. Total amount of costs that would be accumulated
for existing and future CAS-covered contracts, in
accordance with established cost accounting
practices, at the estimated operating cost levels
that would continue if the contemplated
restructuring activities were not made.
2. Total amount of costs that would be accumulated
for existing and future CAS-covered contracts, in
accordance with the new changed cost accounting
practices, at the estimated new cost levels that
would result if the planned restructuring
activities were made.
3. Difference (1. minus 2.).
----------------------------------------------------------------------------------------------------------------
(5) In lieu of the methodology in paragraph (d)(4) of this section,
the contractor may refer the cognizant Federal agency official to its
``cost savings'' proposal otherwise submitted in accordance with
applicable agency regulations governing restructuring activities.
(e) When requesting that a voluntary change be deemed desirable,
the contractor shall provide rationale and data demonstrating that the
accounting change is desirable and not detrimental to the Government's
interests or that the change in cost accounting practice was necessary
to remain in compliance with an applicable Cost Accounting Standard
(9903.201-7). The contractor shall state if the cost accounting
practice change is or is not associated with planned management
changes; and if it is, the contractor shall:
(1) Submit a comprehensive description of the planned management
changes.
(2) Demonstrate, in summary fashion, to what extent the
contractor's total operating cost levels are expected to decrease (or
increase) as a result of the planned management changes.
(3) Demonstrate that changes to the contractor's established cost
accounting practices are associated with the planned management changes
and the resultant practice changes would not be made but for the
management actions being taken.
(4) Demonstrate that aggregate cost accumulations for existing CAS-
covered contracts and reasonably predictable future CAS-covered
contracts, by contract type, will decrease, increase or remain the same
after the planned management changes are implemented. The required cost
comparison calculation methodology is summarized as fellows:
----------------------------------------------------------------------------------------------------------------
Flexibly priced contracts, by
Fixed-price contracts contract type
----------------------------------------------------------------------------------------------------------------
1. Total amount of costs that would be accumulated
for existing and future CAS-covered contracts, in
accordance with established cost accounting
practices, at the estimated operating cost levels
that would continue if the contemplated management
changes were not made.
2. Total amount of costs that would be accumulated
for existing and future CAS-covered contracts, in
accordance with the new changed cost accounting
practices, at the estimated new cost levels that
would result if the planned management changes
were made.
3. Difference (1. minus 2.).
----------------------------------------------------------------------------------------------------------------
(f) Data submission requirements: The contractor shall submit a
complete description of any change in cost accounting practice,
including the relevant Disclosure Statement page revisions and
amendments required to disclose the new practice (9903.202-3); any
additional information which will help the cognizant Federal agency
official make a determination of adequacy and compliance; and if
applicable, data demonstrating that the change is:
(1) Obviously immaterial because the change in practice will not
result in a greater or lesser allocation of cost to individual CAS-
covered contracts affected by the change, i.e., after the change, the
amounts of cost allocated to individual covered contracts will
approximate the amounts that would have been allocated if the change
were not made,
(2) A voluntary change that is or is not exempt from contract price
and cost adjustment,
(3) Desirable and not detrimental to the interests of the
Government, and/or
(4) One that warrants retroactive implementation.
9903.405-3 Determinations, approvals and initiating the cost impact
process.
(a) Adequacy and compliance determination. Upon receipt of the
[[Page 45728]]
contractor's notification, the cognizant Federal agency official, with
the assistance of the auditor, shall review the planned cost accounting
practice change concurrently for adequacy and compliance. If the
cognizant Federal agency official identifies any area of inadequacy, a
revised description of the new accounting practice shall be requested.
Problems of adequacy should be resolved between the parties as soon as
possible after the initial notification of the accounting change. If
the cognizant Federal agency official determines that the disclosed
practice is noncompliant with any Cost Accounting Standards,
modifications or interpretations thereto, and the contractor implements
the practice, the accounting change will be handled as a noncompliance
under the provisions of 9903.406. Once the cognizant Federal agency
official has determined that the accounting change is both adequate and
compliant, the cognizant Federal agency official shall immediately
notify the contractor.
(b) Voluntary change exemption determinations. When a contractor
provides notification of a planned voluntary change and submits the
data required by 9903.405-2, the cognizant Federal agency official
should, in accordance with 9903.201-6, determine if the voluntary
change can be exempted from contract price and cost adjustment, and
notify the contractor of the determination made. Notification should be
made promptly after the change is determined to be adequate and
compliant.
(c) Desirable change determinations. When the contractor's
notification includes a request that a planned voluntary change be
deemed desirable and not detrimental, the cognizant Federal agency
official should, in accordance with 9903.201-7, make a decision with
regard to this finding promptly after the change is determined to be
adequate and compliant. The cognizant Federal agency official shall
notify the contractor in writing regarding the decision of
desirability, and concurrently request the contractor to submit a GDM
Settlement Proposal, or initiate actions required to otherwise resolve
the matter (see 9903.201-7(c)(2)). The notification shall also include
a statement indicating that the potential modification of CAS-covered
contracts are subject to the availability of funds.
(d) Approval of retroactive application date. When a contractor
notification pertains to a planned voluntary change with a retroactive
applicability date, the cognizant Federal agency official should review
the contractor's submitted rationale and promptly determine if the
requested retroactive application date should be approved or rejected.
The cognizant Federal agency official shall notify the contractor in
writing regarding the decision made.
(e) Obviously immaterial changes. If the cognizant Federal agency
official determines that the cost impact of a change in cost accounting
practice is obviously immaterial based on data submitted by the
contractor pursuant to 9903.405-2(f)(1), or otherwise decides that the
cost impact is immaterial, the decision will be documented, the
contractor will be so notified, and the cost impact process will be
concluded.
(f) Request for GDM Settlement Proposal. When the cost impact of a
change in cost accounting practice is not determined to be obviously
immaterial, the cognizant Federal agency official will request a GDM
Settlement Proposal, as described in 9904.405-4(a), after the
determination of adequacy and compliance has been made. The request
should specify a date for submission of the GDM Settlement Proposal.
The contractor shall submit the GDM Settlement Proposal on or before
the date specified or other mutually agreeable date. The cognizant
Federal agency official will use the contractor's GDM Settlement
Proposal to resolve the cost impact of a change in cost accounting
practice on existing CAS-covered contracts and subcontracts, without
requiring a detailed cost impact proposal, provided the official
determines that the GDM Settlement Proposal is adequately supported and
contains sufficient data.
9903.405-4 Contractor cost impact submissions.
(a) General Dollar Magnitude (GDM) Settlement Proposal. (1) The
purpose of the GDM Settlement Proposal is to provide information to the
cognizant Federal agency official on the estimated overall impact of a
change in cost accounting practice on affected CAS-covered contracts
and subcontracts that were awarded based on the previous accounting
practice. It provides the contractor an opportunity to propose specific
adjustments to settle the cost impact of changes in cost accounting
practices. It also provides a sufficient number of individual contract
and/or subcontract cost impact estimates to support the general dollar
magnitude aggregate estimate by contract type and to assist the
cognizant Federal agency official in determining whether any individual
contract or subcontract price adjustments will be required. The GDM
Settlement Proposal is used to determine if the change in cost
accounting practice has resulted in material increased or decreased
costs to existing contracts, and to attempt to resolve the cost impact
of the change in cost accounting practice without requiring a detailed
cost impact settlement proposal as described in paragraph (b) of this
subsection.
(2) The contractor, in the GDM Settlement Proposal, shall show a
reasonable estimate of the aggregate impact of the change on CAS-
covered contracts and subcontracts subject to adjustment, by contract
type, from the applicability date of the change to completion of the
contracts subject to adjustment. The individual contracts selected by
the contractor for inclusion in the GDM Settlement Proposal shall be
those contracts with the largest dollar impact. The contractor should
submit specific adjustments to settle the cost impact of the cost
accounting practice change(s). The proposed adjustment amounts shall be
determined in accordance with the requirements of this subpart and may
include proposed revisions to the profit, fee or incentive provisions
of affected contracts.
(3) In computing the cost impact, the contractor shall use a
consistent cost data baseline for the before and after change amounts.
The cost impact data should generally be based on the latest forecasted
direct and indirect cost data used for forward pricing purposes unless
other data is considered preferable and agreed to by both the
contractor and cognizant Federal agency official. In most cases, the
after change cost data baseline should be used because this is the same
cost data baseline that will be used to determine the revised forward
pricing rates and current contract estimates-to-complete based on the
new cost accounting practice.
(4) Any format which reasonably shows the aggregate impact by
contract type and provides sufficient contract data to settle the cost
impact is acceptable. In most situations, the grouping of the CAS
covered contracts by contract type within the GDM Settlement Proposal
may be limited to the following contract types: firm-fixed-price (FFP);
time-and-material (T&M); incentive-type (FPI/CPIF); and other cost-
reimbursement contracts (CPFF, CPAF, CR, etc). One acceptable GDM
Settlement Proposal format is illustrated as follows:
BILLING CODE 3110-01-U
[[Page 45729]]
[GRAPHIC] [TIFF OMITTED] TP20AU99.001
[[Page 45730]]
[GRAPHIC] [TIFF OMITTED] TP20AU99.002
BILLING CODE 3110-01-C
(5) The illustrated GDM Settlement Proposal format is an example of
one method and does not preclude the use of any other format or method
that displays a reasonable estimate of the cost impact by contract type
and provides sufficient contract data to settle the cost impact. The
GDM Settlement Proposal shall be adequately supported. If a GDM
Settlement Proposal is not adequately supported, or cannot be
adequately supported by the contractor, the cognizant Federal agency
official shall request a detailed cost impact proposal in accordance
with paragraph (b) of this subsection.
(6) The cognizant Federal agency official should attempt to use the
contractor's GDM Settlement Proposal to resolve the cost impact to the
maximum extent possible. If additional individual contract data is
determined necessary to resolve the cost impact, the cognizant Federal
agency official should request the contractor to submit a revised GDM
Settlement Proposal that includes the specific additional data needed,
e.g., contracts with a dollar impact exceeding a specific dollar
amount. The contractor should then submit the revised GDM Settlement
Proposal on or before the date specified by the cognizant Federal
agency official or other mutually agreeable date.
(7) If the cognizant Federal agency official determines that the
cost impact is immaterial in both the aggregate by contract type and
for the individual contracts included in the GDM Settlement Proposal,
the cost impact process may be concluded without any adjustments. If
the cost impact either in the aggregate by contract type or on
individual contracts is determined to be material, the procedures in
9903.405-5, Negotiation and Resolution of the Cost Impact, should be
followed.
(8) Upon receipt, the cognizant Federal agency official should
promptly evaluate the contractor's GDM Settlement Proposal and, if the
cost impact is determined to be material, proceed to either negotiate
and resolve the cost impact, request additional data or request a
detailed cost impact proposal in a timely manner.
(b) Detailed cost impact proposal. (1) A detailed cost impact
proposal will be requested by the cognizant Federal agency official
when the GDM Settlement Proposal cannot be adequately supported or does
not contain sufficient data to resolve a cost impact due to a change in
cost accounting practice. It will be used by the cognizant Federal
agency official in lieu of the GDM Settlement Proposal to determine the
magnitude of the impact of the change on existing CAS-covered contracts
and subcontracts subject to adjustment and to determine which, if
[[Page 45731]]
any, should be adjusted for the impact of the change. The determination
by the cognizant Federal agency official of the need for a detailed
cost impact proposal is final and binding, and not subject to the
Disputes clause of the contracts affected by the practice changes.
(2) The detailed cost impact proposal need not include every
contract and subcontract subject to adjustment as a result of the
change in cost accounting practices. It typically will include all
contracts and subcontracts having an estimate-to-complete, based on the
old accounting practice, exceeding a specified amount established by
the cognizant Federal agency official. The specified individual
contract impact amount should be high enough so that the detailed cost
impact proposal does not contain an excessive number of contracts and
subcontracts. However, it should contain a sufficient number so that it
includes a reasonably high percentage of both the backlog of these
contracts and the aggregate impact amount by contract type. The
established individual contract estimate-to-complete amount should be
specified in the formal written request for a detailed cost impact
proposal.
(3) A detailed cost impact proposal will normally include the
following:
(i) Cost estimates-to-complete based on the old (established) and
new (changed) cost accounting practice and the resultant cost impact,
grouped by contract type, for each CAS-covered contract and subcontract
exceeding the specified amount.
(ii) Aggregate cost estimates to complete based on the old and new
cost accounting practice and the aggregate cost impacts, by contract
type, for ``all other'' CAS-covered contracts and subcontracts that are
below the specified amount. The ``all other contract'' amounts are the
difference between the aggregate amounts by contract type and the net
sum totals of the impact of the submitted individual contracts by
contract type.
(iii) Aggregate cost estimates to complete based on the old and new
cost accounting practice and the aggregate cost impacts, by contract
type, for all CAS-covered contracts and subcontracts that are affected
by the change in cost accounting practice.
(4) The contractor shall submit the detailed cost impact proposal
on or before the date specified by the cognizant Federal agency
official or other mutually agreeable date.
(5) After analysis of the cost impact proposal, with the assistance
of the auditor, the cognizant Federal agency official shall promptly
negotiate and resolve the cost impact.
9903.405-5 Negotiation and resolution of the cost impact.
(a) General. (1) The cognizant Federal agency official shall
negotiate any required contract price or cost adjustments due to
changes in cost accounting practices or noncompliances on behalf of all
Government agencies. Negotiation of price and cost adjustments may be
based on a GDM Settlement Proposal or a detailed cost impact proposal.
(2) The Cost Accounting Standards Board's rules, regulations and
Standards do not in any way restrict the capacity of the contracting
parties to select the method by which the cost impact attributable to a
change in cost accounting practice is resolved. A cost impact may be
resolved by modifying a single contract, several but not all contracts,
or all contracts subject to adjustment, or any other suitable technique
which resolves the cost impact in a way that approximates the amounts
that would have resulted if individual contracts had been adjusted.
(b) Offset process. The offset process of combining cost impact
increases with cost impact decreases may be used to reduce the number
of individual contract price or cost adjustments or preclusion of
increased cost actions required as a result of a change in cost
accounting practice. In applying this process, the following provisions
apply:
(1) Use of the offset process shall not result in aggregate cost to
the Government which is materially different from that which would
result if individual contract prices had actually been adjusted to
reflect the aggregate impact of the practice change.
(2) The offset process shall only be applied to contracts that are
of the same contract type, e.g., FFP, T&M, incentive (FPI/CPIF) or
other cost-reimbursement contracts.
(3) The offset process should not be used to materially reduce the
amount of the price adjustment to any one contract that exceeds the
individual contract cost impact materiality threshold established for
individual contract price adjustments (9903.405-5(c)(1)). It also
should not be used to reduce the adjustment for these contracts to an
amount below the established threshold. The offset process is used to
determine the action required for contract adjustment purposes for the
``all other contract'' category.
(4) Within a segment, the effect of several changes may be combined
in the offset consideration if the changes all take place at the same
time. Such offsets may be used to determine:
(i) If the aggregate impact within the same contract exceeds the
individual contract's materiality threshold;
(ii) On an overall basis, the aggregate ``all other contract''
amounts by contract type for all changes; or
(iii) If any action is required to preclude increased costs for
concurrent voluntary changes.
(5) Offsets affecting incentive contracts may be applied, provided
that the incentive provisions of these contracts are retained or not
materially altered.
(6) To minimize action required to resolve cost impacts, cost
increases at one segment of a company may be offset by decreases at
another segment within the same contract types if the change causes
costs to flow between segments either directly or via a higher
organizational level such as a home office, or is made simultaneously
at the direction of a higher organizational level such as a home
office. For such changes, the cost impact proposal should generally be
submitted at the home office level so that the cognizant Federal agency
official may determine the appropriate course of action.
(c) Contract price and cost adjustments. (1) Once the GDM
Settlement Proposal or detailed cost impact proposal has been analyzed,
the cognizant Federal agency official shall determine, with the
auditor's assistance, whether contract price or cost adjustments are
warranted. Any adjustments should be limited to amounts that are
material. The determination to require or not to require adjustments
should be based on separate materiality thresholds for: individual
contracts; the ``all other contracts'' amounts; and the aggregate by
contract type. The threshold for individual contract price adjustments
may be based on cost impact dollar thresholds, a percentage of the
contract price, or a combination of the two criteria, e.g., contracts
with cost impacts exceeding a certain dollar amount provided that the
impact exceeds a certain percentage of the contract price. The
materiality thresholds, as used in this paragraph, are the amounts
below which no adjustments are required.
(2) If the accounting change produces a material cost increase or
decrease in the aggregate by contract type, it may be necessary to
adjust the prices of one or more contracts of each contract type
affected by the change. The required adjustments to contract prices
(including fixed-price contracts) may increase or decrease contract
prices depending on whether estimated contract costs increase or
decrease. For voluntary changes, the sum of the
[[Page 45732]]
adjustments of all contract prices shall not result in net increased
costs paid, in the aggregate, by the Government or net upward
adjustments to contracts. Even if a change produces a zero aggregate
impact on the costs of all affected contracts, it still may be
necessary to adjust the prices of one or more contracts of each
contract type. Such adjustments may be made to:
(i) Maintain consistency between the negotiated contract costs and
the costs to be allocated to the contract using the new practice, while
at the same time reducing potential contract cost overrun and underrun
conditions resulting from the change in cost accounting practices;
(ii) Preclude increased cost payments under affected flexibly
priced contracts;
(iii) Preclude an enlargement of profit on affected firm-fixed-
price contracts beyond the level negotiated; or
(iv) Avoid distortions of incentive provisions and relationships
between target costs, ceiling costs and actual costs on incentive type
contracts.
(3) Whether the cognizant Federal agency official decides to
resolve the cost impact by adjusting the price of one or more contracts
of each contract type, or selects some other method for settlement in
accordance with paragraph (a)(2) of this subsection, the negotiated net
adjustment for each contract type should approximate the amounts that
would result if the individual contract prices were adjusted to reflect
the cost impact of the change in cost accounting practice.
(4) If the resolution of the cost impact action will be
accomplished by means of contract price adjustments, the cognizant
Federal agency official should analyze the contractor's cost impact
submission to determine if the proposed adjustment amounts exceed the
materiality thresholds established in accordance with paragraph (c)(1)
of this subsection, and adjust individual contract prices accordingly.
(5) The cognizant Federal agency official, with the assistance of
the auditor, should evaluate the aggregate amount by contract type, as
well as the ``all other contracts'' amount, to determine if these
amounts exceed the aggregate or ``all other contracts'' materiality
thresholds established. If these amounts exceed the threshold,
adjustments may be made by either adjusting contract prices or use of
an alternate technique which accomplishes the same approximate result
as if all individual contracts were adjusted. If these amounts do not
exceed the established aggregate or ``all other contracts'' threshold,
no adjustments are required, unless individual contracts exceed the
established individual contract cost impact threshold or adjustments
are otherwise considered necessary to achieve equity.
(6) Whenever contract price adjustments are anticipated, the
cognizant Federal agency official should coordinate the Government cost
impact resolution plan with affected Procuring Contracting Officers,
Contracting Officers or other authorized officials performing in that
capacity within each affected Federal agency.
(7) At the discretion of the cognizant Federal agency official,
contract fee or profit may be adjusted when resolving the cost impact
through contract price adjustments. Whether fee or profit is or is not
considered, in addition to the cost impact, in making contract price
adjustments, is a matter to be determined by the cognizant Federal
agency official based on the circumstances surrounding the particular
change in accounting practices, terms of the contract, and requirements
of law.
(d) Action to preclude increased costs paid for voluntary changes.
(1) In the absence of a finding pursuant to 9903.201-7 that a voluntary
change is desirable, no agreement may be made with regard to a
voluntary change in cost accounting practice that will result in the
payment of increased costs by the United States. For these changes, the
cognizant Federal agency official shall, in addition to the procedures
specified in 9903.405-2 through 9903.405-5(c) which apply to all
compliant accounting changes, take action to ensure that increased
costs are not paid as a result of a change.
(2) For individual CAS-covered firm-fixed-price contracts,
increased costs are precluded by adjusting the contract price downward
by the amount of the estimated lower allocation of costs to the
contracts as a result of a voluntary change in cost accounting
practice.
(3) To decide if action is required to preclude the payment of
increased costs, the cognizant Federal agency official shall determine,
with the assistance of the auditor, to what extent the United States
would pay a higher level of costs, in the aggregate, once all potential
contract price adjustments are considered. This occurs when the
estimated aggregate higher allocation of costs to contracts subject to
adjustment exceeds the estimated aggregate lower allocation of costs to
other contracts subject to adjustment.
(4) The cognizant Federal agency official may preclude the payment
of increased costs resulting from voluntary changes by limiting any
upward contract price adjustments to affected contracts to the amount
of any downward contract price adjustments to other affected contracts,
i.e., no net upward contract price adjustments. The Government may also
preclude increased costs by not paying the estimated amount of
increased costs to be allocated to affected flexibly-priced contracts
that exceeds the estimated reduction of costs to be allocated to
affected firm-fixed-price contracts. The following illustrates the
actions required so that increased costs are not paid by the
Government.
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(5) As stated in 9903.404, action to preclude or recover increased
costs due to changes in cost accounting practices are required only if
the amounts are material. If materiality dictates that action needs to
be taken to preclude increased costs paid, in the aggregate,
adjustments of contract prices or any other suitable technique which
precludes payment of the increased costs may be used.
(6) For required or desirable changes, the sum of all adjustments
to prices of affected contracts may result in an aggregate increase or
decrease in CAS-covered contract prices because such changes are
subject to equitable adjustments.
(e) Use of another suitable technique. The cognizant Federal agency
official may otherwise resolve the cost impact of a change in cost
accounting practice (e.g., by a monetary exchange between the
contracting parties), when the cognizant Federal agency official
determines, in writing, that contract price and/or cost adjustments or
actions to preclude the payment of increased costs are not warranted
because:
(1) Contract performance would not be jeopardized (the contractor
agrees to absorb any resultant contract cost overrun conditions),
(2) Cost ceilings or target price reductions for flexibly priced
contracts are not desired by the Government,
(3) The impact on incentive fee or profit that results from failure
to adjust the target cost on incentive contracts is not material, or is
otherwise considered in the cost impact settlement, and
(4) The increase or decrease in expected contract cost
accumulations would not distort or adversely impair the usefulness of
the contractor's reported contract cost information (actual costs and
estimated costs to complete) that is included in contract status
reports.
(f) Failure to agree. If the parties fail to agree on the price or
cost adjustments, the cognizant Federal agency official may make
unilateral adjustments, subject to appeal as provided in the Disputes
provision of each affected contract's CAS contract clause.
9903.406 Noncompliances.
9903.406-1 General types of noncompliances.
(a) A contractor's cost accounting practices may be in
noncompliance with applicable Cost Accounting Standards, modifications
or interpretations thereto, as a result of using a noncompliant cost
accounting practice to estimate
[[Page 45734]]
proposed costs on CAS-covered contracts and the noncompliant practice
was used to determine the contract prices, i.e., a cost estimating
noncompliance; or by using a noncompliant cost accounting practice to
accumulate and report costs on CAS-covered contracts, i.e., a cost
accumulation noncompliance.
(b) Noncompliant cost accounting practices that result in material
increased costs to the Government require correction and may result in
contract price and/or cost adjustments as specified in 9903.406-3 for a
cost estimating noncompliance or 9903.406-4 for a cost accumulation
noncompliance. If the noncompliance requires a change in a disclosed or
established cost accounting practice that was used for estimating and
cost accumulation, two distinct actions are required, one to resolve
the cost estimating noncompliance in accordance with 9903.406-3 and one
to resolve the cost accumulation noncompliance in accordance with
9903.406-4.
(c) Noncompliant cost accounting practices that do not result in
material increased cost to the Government should be processed as an
immaterial noncompliance in accordance with 9903.406-5.
9903.406-2 Noncompliance determinations and initiating the cost impact
process.
(a) When a Government representative encounters a potential
noncompliance, the representative should, after sufficient discussion
with the contractor to ensure all relevant facts are known, immediately
issue a report to the cognizant Federal agency official describing the
cost accounting practice and the basis for the opinion of
noncompliance. The representative's opinion on whether correction of
the potential noncompliant practice would or would not have a material
cost impact on existing or future CAS-covered contract costs, if known,
should also be expressed in the report.
(b) The cognizant Federal agency official should make an initial
finding of compliance or noncompliance and advise the cognizant auditor
and contractor in a timely manner after the receipt of the audit report
of potential noncompliance.
(c) If the cognizant Federal agency official makes a determination
of compliance, no further action is necessary other than to notify the
contractor and the cognizant auditor of the determination.
(d) If an initial finding of noncompliance is made, the cognizant
Federal agency official should immediately notify the contractor in
writing of the exact nature of the noncompliance. The contractor will
either agree to the noncompliance determination, or disagree and submit
reasons why the existing practices are considered to be compliant. The
contractor shall respond by a date specified by the cognizant Federal
agency official or other mutually agreeable date.
(e) If the contractor agrees with the initial finding of
noncompliance, the contractor shall correct the noncompliance and
submit a noncompliance cost impact submission as requested by the
cognizant Federal agency official.
(f) If the contractor disagrees with the initial noncompliance
finding, the contractor shall provide the cognizant Federal agency
official with reasons why it disagrees with the initial finding. The
cognizant Federal agency official shall evaluate the reasons why the
contractor considers the existing practice to be compliant and again
make a determination of compliance or noncompliance, and notify the
contractor and auditor in writing. If the cognizant Federal agency
official makes a determination of compliance, no further action is
necessary other than to notify the contractor and auditor.
(g) Once the cognizant Federal agency official reaches a final
position that a noncompliance exists, the official shall issue a final
determination to inform the contractor of the Government's position and
that failure to agree will constitute a dispute under the Disputes
provision included in each affected contract's CAS contract clause. A
final determination of noncompliance should also include a request for
corrective action and a noncompliance cost impact submission showing
the impact of the noncompliance on CAS-covered contracts and
subcontracts. If the contractor agrees with the noncompliance
determination, the procedures in paragraph (e) of this subsection shall
be followed.
(h) If the cognizant Federal agency official issues an initial
determination of noncompliance on a revised accounting practice, and
ultimately determines that the practice is compliant, the revised cost
accounting practice should be handled in accordance with the procedures
established in 9903.405.
(i) Contractor cost impact submissions. The cognizant Federal
agency official shall normally request a GDM Settlement Proposal and
attempt to resolve the noncompliance without requiring a detailed cost
impact proposal. If a GDM Settlement Proposal is not adequately
supported, or cannot be adequately supported by the contractor, the
cognizant Federal agency official shall request a detailed cost impact
proposal for the CAS-covered contracts materially affected by the
noncompliance. The contractor's cost impact submission shall show the
impact of the noncompliance on the affected CAS-covered contracts. It
may be in a format that is similar to the GDM Settlement Proposal shown
at 9903.405-4(a)(4), the detailed cost impact proposal specified at
9903.405-4(b) or it may be in another mutually agreeable format. The
chosen format must result in the submission of cost impact data that
will enable the cognizant Federal agency official to accomplish the
objectives of 9903.406-3(c) and (d) for a cost estimating noncompliance
or of 9903.406-4(c) and (d) for a cost accumulation noncompliance. The
following illustration is one acceptable GDM Settlement Proposal format
that may be used for a noncompliant action. The illustrated format is
only one example of a noncompliance cost impact submission and does not
preclude the use of any other mutually agreeable cost impact submission
format.
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9903.406-3 Cost estimating noncompliance.
(a) After a final determination of a cost estimating noncompliance
is issued by the cognizant Federal agency official, the contractor
shall correct the practice by changing to a compliant cost accounting
practice. If the contractor believes the cost impact of the
noncompliance is obviously immaterial, the contractor shall submit data
demonstrating the immateriality. If the cognizant Federal agency
official agrees that the noncompliance does not result in a material
impact on CAS-covered contracts, the procedures in 9903.406-5 shall be
followed. Otherwise, paragraphs (b) through (f) of this subsection
shall be followed.
(b) If the noncompliance occurs because the cost accounting
practice used for estimating purposes is different than the disclosed
and established cost accounting practice used for cost accumulation
purposes, and the cognizant Federal agency official has found the cost
accumulation practice to be compliant, the contractor shall first
correct the noncompliance by replacing the noncompliant practice used
to estimate costs with the compliant cost accounting practice used to
accumulate and report actual contract costs. Where a previously
submitted contract cost proposal based on the noncompliant cost
estimating practice has not yet been negotiated, the contractor shall
also take action to ensure that any subsequent contract cost
negotiations of such proposals will be based on cost estimates that
reflect the corrected and compliant cost accounting practice.
(c) Once the cognizant Federal agency official determines that the
contractor's cost accounting practices used to estimate and accumulate
costs will henceforth be consistent and compliant, the cognizant
Federal agency official shall request the contractor to submit a
noncompliance cost impact submission (9903.406-2(i)), for CAS-covered
contracts that were negotiated based on the noncompliant practice. The
cost impact submission will show the estimated contract cost amounts
that were predicated upon the application of the noncompliant cost
accounting practice, by contract type, and the estimated contract cost
amounts that would have resulted had the compliant practice been used.
The cognizant Federal agency official may establish contract thresholds
so that any contracts with an immaterial cost impact may be omitted
from the cost impact submission. The cost impact submission shall be in
sufficient detail for the cognizant Federal agency official to
determine whether:
(1) Any individual contracts are significantly overstated or
understated as a result of the estimating noncompliance;
(2) The affected CAS-covered contract prices, by contract type,
are, in the aggregate materially overstated; and
(3) Any net increased costs were paid under CAS-covered contracts
as a result of the noncompliant practice, and if so, the period of
overpayment.
(d) The cognizant Federal agency official should use the
materiality guidelines established in 9903.305 and
[[Page 45737]]
9903.404 to determine whether any individual contract price
adjustments, or adjustments for the net overstatement or understatement
of contract amounts by contract type, due to use of the noncompliant
practice are warranted. Adjustments should be limited to amounts that
are material. In no case shall the Government recover costs greater
than the increased costs, in the aggregate, on the relevant contracts.
While individual contract prices, including cost ceilings or target
costs, as applicable, may be increased as well as decreased to resolve
an estimating noncompliance, the aggregate value of all contracts
affected by the estimating noncompliance shall not be increased. The
following schedule illustrates how to determine the contract price
adjustments to be required.
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9903.406-4 Cost accumulation noncompliance.
(a) After a final determination of a cost accumulation
noncompliance is issued by the cognizant Federal agency official, the
contractor shall correct the practice by changing to a compliant cost
accounting practice. If the contractor believes the cost impact of the
noncompliance is obviously immaterial, the contractor shall submit data
demonstrating the immateriality. If the cognizant Federal agency
official agrees the noncompliance does not result in a material impact
on Government contracts, the procedures in 9903.406-5 shall be
followed. Otherwise, paragraphs (b) through (e) of this subsection
shall be followed.
(b) Once the corrective action has been implemented, and the
cognizant Federal agency official has determined that the accounting
change, if any, meets the test of adequacy and compliance, the
cognizant Federal agency official will request the contractor to submit
a noncompliance cost impact submission (9903.406-2(i)). The submission
shall identify the cost
[[Page 45738]]
impact on CAS-covered contracts and any increased costs paid as a
result of the cost accumulation noncompliance. Although overpayments
due to cost accumulation noncompliances are generally recovered when
the actual costs are adjusted to reflect a compliant practice (except
for closed contracts), the cost impact submission must show the total
overpayments made by the United States during the period of
noncompliance, so that the proper interest amount can be calculated and
recovered as required by paragraph (d) of this subsection.
(c) The level of detail to be submitted with a cost impact
submission for a cost accumulation noncompliance will vary with the
circumstances. Normally, the cost impact submission will identify the
aggregate costs by contract type that were accumulated under the
noncompliant cost accounting practice and the costs that would have
been accumulated if the compliant cost accounting practice had been
applied from the time the noncompliant practice was first applied until
the date the noncompliant practice was replaced with a compliant
practice. The cost impact submission for a cost accumulation
noncompliance is primarily used by the cognizant Federal agency
official to determine if, and to what extent, increased costs were paid
in the aggregate on covered contracts during the period of
noncompliance. The level of detail required to adequately support this
determination should be based on discussions between the contractor and
the cognizant Federal agency official, with assistance from the
auditor, and included in the cognizant Federal agency's official
request for the cost impact submission.
(d) Interest applicable to the increased costs paid to the
contractor as a result of the noncompliance shall be computed at the
annual rate established under section 6621(a)(2) of the Internal
Revenue Code of 1986 (26 U.S.C. 6621(a)(2)) for such period, from the
time the payments by the United States were made to the time the
increased cost payments are recovered.
(e) Negotiation and resolution of the cost impact should be
accomplished in accordance with 9903.405-5(a).
9903.406-5 Immaterial noncompliances.
If a noncompliance cost impact is not material in the aggregate,
the cognizant Federal agency official shall notify the contractor in
writing that:
(a) The practice is noncompliant via a final determination of
noncompliance;
(b) Corrective action should be taken; and
(c) If the noncompliant practice subsequently results in materially
increased costs to the Government, action will be taken to recover the
increased costs plus applicable interest.
9903.407 Illustrations.
The following illustrations are not intended to cover all possible
situations, but rather to provide some guidelines in applying the
procedures specified in 9903.405 and 9903.406. The illustrations are
intended to be considered only as examples. In actual cases, the
individual circumstances need to be reviewed and considered to ensure
equity for both parties.
9903.407-1 Change in cost accounting practice--Illustrations.
(a) Notification. (1) The contractor provides notification of a
change in cost accounting practice in April with a proposed retroactive
applicability date of the beginning of the current year. In accordance
with 9903.405-2(c), the contractor provides rationale for the beginning
of the current year applicability date. The cognizant Federal agency
official approves of the proposed applicability date (9903.405-3(d)).
After determination of adequacy and compliance, the cognizant Federal
agency official requests a GDM Settlement Proposal for contracts
negotiated based on the previous accounting practice, including those
negotiated after the applicability date of the change.
(2) The contractor provides notification of a voluntary change in
cost accounting practice in June with a planned retroactive
applicability date of the beginning of the current year. The cognizant
Federal agency official finds that the rationale for the retroactive
applicability date does not justify retroactive implementation
(9903.405-3(d)). The contractor is informed that for cost accumulation
purposes the new practice can be applied no earlier than 60 days after
the contractor's notification of the accounting change, and that a
retroactive applicability date will result in a noncompliance with
disclosed practices and disallowance of any resulting increased costs.
The contractor notifies the cognizant Federal agency official that, to
avoid a noncompliance condition, it will change the applicability date
to the beginning of its next cost accounting period.
(b) GDM Settlement Proposal. (1) In accordance with 9903.405-3(f),
the cognizant Federal agency official requests a GDM Settlement
Proposal by contract type, which would include the impact on a
sufficient number of contracts of each contract type to negotiate the
impact of a change in cost accounting practice. The contractor supports
the GDM Settlement Proposal by using a contract cost profile which
shows the percentage of the three year forward pricing rate base data
which consists of existing CAS-covered contracts subject to adjustment,
and the percentage of the CAS-covered contracts subject to adjustment
for each contract type. No contracts other than some of the individual
contracts submitted with the GDM Settlement Proposal extend out beyond
the three year period. The cognizant Federal agency official, with the
assistance of the auditor and using the GDM Settlement Proposal
individual contract data, determines that the general dollar magnitude
estimate developed by the contractor reasonably approximates the
aggregate impact, by contract type, of the accounting change on
contracts subject to adjustment, i.e., contracts negotiated based on
the previous practice. Pursuant to 9903.405-4(a)(6), the Government and
contractor resolve the impact without a detailed cost impact proposal.
(2) The contractor reports a change in accounting practice which
changes a direct cost element to an indirect expense. The cognizant
Federal agency official, with the assistance of the auditor, determines
that the GDM Settlement Proposal data submitted by the contractor does
not adequately support the aggregate cost impact, by contract type, of
the change in accounting practice. Therefore, in accordance with
9903.405-4(b)(1) and (2), the cognizant Federal agency official
requests a detailed cost impact proposal to include a sufficient number
of contracts, by contract type, to resolve the cost impact.
(3) The contractor submits a GDM Settlement Proposal which includes
several contracts of each contract type showing the cost impact of the
change in accounting practice. The impact is developed by computing the
difference in the estimate-to-complete on these contracts using the old
and new accounting practices. The cost impact settlement proposal
includes all contracts that have a cost impact in excess of $1,000,000.
The cognizant Federal agency official determines that the cost impact
on each submitted contract was accurately computed. In accordance with
9903.405-4(a)(6), the cognizant Federal agency official decides that,
based on the circumstances, contracts having an impact in excess of
$500,000 are significant enough to require adjustment. The cognizant
Federal agency official requests the contractor to submit a revised GDM
Settlement
[[Page 45739]]
Proposal that includes contracts having an impact in excess of $500,000
so that the cost impact can be resolved without a detailed cost impact
proposal. The cost impact is ultimately negotiated based on the
contractor's revised GDM Settlement Proposal.
(4) The same situation described in paragraph (b)(3) of this
subsection occurs except that the aggregate impact by contract type in
the GDM Settlement Proposal can not be reconciled with the aggregate
net impact of the individual contracts by contract type submitted with
the proposal. In accordance with 9903.405-4(a)(5), the cognizant
Federal agency official requests a detailed cost impact proposal to
include a sufficient number of contracts by contract type to resolve
the cost impact.
(5) After reviewing the GDM Settlement Proposal for a change in a
cost allocation practice, the cognizant Federal agency official decides
in accordance with 9903.405-4(a)(7) that, due to materiality, no
additional data is needed and no contract price or cost adjustments are
warranted.
(c) Detailed cost impact proposal. (1) In accordance with 9903.405-
4(b)(2), the cognizant Federal agency official submits a written
request for a detailed cost impact proposal to include all contracts
with an estimate-to-complete based on the old practice in excess of
$5,000,000 summarized by contract type. After evaluation of the
detailed cost impact proposal, the cognizant Federal agency official
determines whether contract price and/or cost adjustments are required
in accordance with 9903.405-5(c).
(2) [Reserved]
(d) Offset Process. (1) In analyzing the contractor's cost impact
proposal, the cognizant Federal agency official determines that one
firm-fixed-price contract is the only contract that exceeds the
threshold established for contract price adjustment purposes. The
impact on that contract is a reduced allocation of $1,000,000,
requiring a downward adjustment to the contract price. When the
cognizant Federal agency official applies the offset process to all
other firm-fixed-price contracts subject to adjustment by combining the
increases and decreases, the result is a higher allocation in the
aggregate amount of $400,000 on all other firm-fixed-price contracts.
Although no individual contracts making up this aggregate amount exceed
the established threshold, the cognizant Federal agency official
decides, in accordance with 9903.405-5(c)(5), that to achieve equity,
an upward adjustment in the amount of $400,000 is warranted. Rather
than offset this amount against the one contract exceeding the
individual contract cost impact threshold, the cognizant Federal agency
official, in accordance with 9903.405-5(b)(3), selects two firm-fixed-
price contracts for upward adjustment, in addition to the $1,000,000
downward adjustment to the contract exceeding the threshold.
(2) The same situation exists as described in paragraph (d)(1) of
this subsection except that the cost impact on the one individual firm-
fixed-price contract has a cost impact showing a reduced allocation of
$10,000,000 which significantly exceeds the individual contract
threshold established. The cognizant Federal agency official decides to
offset the $400,000 impact on the ``all other'' contracts against the
impact on the contract exceeding the threshold and makes a downward
adjustment of $9,600,000 thereby reducing the number of contracts
requiring adjustment, while still following the provisions of 9903.405-
5(b)(3).
(3) The contractor makes simultaneous accounting practice changes
at three of its business units at the direction of the next higher tier
home office. The cognizant Federal agency official at the home office
segment decides to handle this change as a voluntary change which
cannot result in increased costs paid by the United States. Business
Unit A has a cost impact on contracts subject to adjustment which
results in a higher level of costs on flexibly-priced contracts of
$1,000,000 in excess of the lower level of costs on firm-fixed-price
contracts. The impact on flexibly-priced contracts at Business Unit B
and Business Unit C is a combined lesser allocation of costs of
$1,200,000 in excess of the higher level of costs on firm-fixed-price
contracts, resulting in net decreased costs on Government flexibly-
priced contracts at the three business units. To demonstrate that the
accounting change did not result in aggregate increased costs to the
Government, the contractor submits a consolidated GDM Settlement
Proposal for the three business units at the home office level. As a
result of considering the aggregate impact at the three business units
at the home office level, the cognizant Federal agency official, in
accordance with 9903.405-5(b)(6), takes no action to preclude the
increased costs on flexibly-priced contracts at Business Unit A.
Individual contracts at each business unit that had cost impacts
exceeding established thresholds were adjusted upward or downward, as
appropriate, for the amount of the cost impact in accordance with
9903.405-5(c)(2)(i).
(4) After determining the individual contracts subject to
adjustment where the cost impact exceeded the established threshold for
a change in an actuarial cost method for computing pension costs, the
contractor computes an aggregate impact for ``all other contracts''
amounting to $1,000,000 of lesser allocation of costs for flexibly-
priced contracts and $1,200,000 of lesser allocation of costs on firm-
fixed-price contracts. The cognizant Federal agency official considers
these amounts significant enough to warrant an adjustment. Since the
impact on the flexibly-priced contracts represents decreased costs to
the Government and the impact on the firm-fixed-price contract
represents increased costs to the Government, the contractor asks the
cognizant Federal agency official to offset the increases and decreases
and make a downward adjustment on the fixed-price contracts for only
$200,000. The cognizant Federal agency official determines that by
doing this, the cost to the Government of a lesser pension cost paid of
$1,200,000 would be materially different than if the individual
contracts making up these aggregate amounts had been individually
adjusted downward resulting in a lesser cost paid of $2,200,000 (the
sum of the $1,000,000 cost impact on the flexibly-priced contract and
the $1,200,000 cost impact on the fixed-priced contract). Therefore the
contractor's proposed resolution would not result in the same aggregate
cost impact as the amount that would result from adjustment of
individual contracts. To achieve the desired result, the cognizant
Federal agency official, in accordance with 9903.405-5(b) (1) and (2),
selects a number of high dollar contracts and adjusts flexibly-priced
contracts downward by $1,000,000 and firm-fixed-price contracts
downward by $1,200,000. In accordance with 9903.405-5(a)(2), an
alternative technique, in lieu of adjusting contract prices, which
achieves the same result of lesser cost paid of $2,200,000 could also
have been used for the aggregate ``all other contract'' cost impact
adjustment.
(e) Contract price and cost adjustments. (1) After considering the
materiality criteria in 9903.305, the cognizant Federal agency official
decides that only contracts that have an impact that exceeds both
$500,000 and .5% of the contract value will be subject to adjustment
based on the impact of the accounting change. Of the individual
contracts submitted with the GDM Settlement Proposal, only nine
contracts exceed this threshold. The aggregate
[[Page 45740]]
impact of all other contracts by contract type is considered
insignificant. In accordance with 9903.405-5(c)(4), the cognizant
Federal agency official resolves the cost impact by adjusting only
those contracts that exceed the individual contract cost impact
threshold, and making no other adjustments, without the need for a
detailed cost impact proposal.
(2) The same situation described in paragraph (e)(1) of this
subsection occurs except that the aggregate amount for all other
contracts not exceeding the established individual contract cost impact
threshold is considered significant enough by the Government to warrant
adjustment. The Government had established $500,000 as the ``all other
contract'' threshold. The cognizant Federal agency official selects two
of the largest contracts that do not exceed the threshold, for each
contract type, for adjustment in the amount of the aggregate ``all
other contract'' impact. In order to avoid additional contract price
adjustment action, the contractor, in accordance with 9903.405-5(a)(2),
proposes an alternative adjustment technique to resolve the aggregate
``all other contract'' impact amount. The cognizant Federal agency
official determines that the proposed alternative adjustment technique
accomplishes the same approximate result as adjusting the two selected
contracts. The cognizant Federal agency official, in accordance with
9903.405-5(c)(3), agrees to use the alternative technique, in addition
to adjusting the individual contracts that exceed the threshold, to
resolve the impact of the change in cost accounting practice.
(f) Increased cost. (1) In analyzing the contractor's cost impact
proposal, the cognizant Federal agency official determines that only
two firm-fixed-price contracts exceed the threshold for contract price
adjustment purposes. All other amounts related to the cost impact are
considered immaterial. The change is a voluntary change, i.e., the no
increased cost limitation applies. The impact on the two contracts are
a lower allocation of costs in the amount of $1,000,000 for contract A
and a higher allocation of costs of $2,000,000 for contract B. In order
to preclude increased costs paid by the United States as a result of
the change, the cognizant Federal agency official, in accordance with
9903.405-5(d)(4), adjusts Contract A downward by $1,000,000, and limits
the upward adjustment on Contract B to $1,000,000. This action adjusts
the contracts to reflect the impact of the change to the maximum extent
possible, while precluding a higher level of costs being paid by the
United States.
(2) The same situation described in paragraph (f)(1) of this
subsection occurs except that contract B is a CPFF contract. In
accordance with 9903.405-5(d)(4), the cognizant Federal agency official
adjusts the firm-fixed-price contract downward by $1,000,000, and the
estimated contract cost ceiling on the CPFF contract upward by
$1,000,000. In accordance with 9903.405-5(d)(1), action must be taken
to preclude the additional $1,000,000 of increased cost on the CPFF
contract. An appropriate adjustment technique is used to preclude the
payment of the additional $1,000,000 of increased costs in accordance
with 9903.405-5(d)(4).
(3) After analyzing the contractor's GDM Settlement Proposal for a
voluntary change, the cognizant Federal agency official determines that
five contracts exceed the threshold established for contract price
adjustment purposes. The cost impact on all other contracts, both
individually and in the aggregate, is considered insignificant. The
five contracts requiring adjustment are 3 firm-fixed-price contracts
and 2 CPFF contracts. The total impact on the 3 firm-fixed-price
contracts is a lower allocation of costs amounting to $3,000,000. The
total impact on the 2 CPFF contracts is a higher allocation of costs of
$2,000,000. The cognizant Federal agency official adjusts the contracts
upward and downward for the amount of the impact. In accordance with
9903.405-5(d)(1) and (3), no further action is needed to preclude
increased costs paid, since the impact to the Government after contract
price adjustments are made is a lesser cost paid in the amount of
$1,000,000.
(g) GDM Settlement Proposal based on contractor cost model and
profile. (1) The contractor has developed a cost model and profile
which is used for the GDM Settlement Proposal. The cost model and
profile data are updated whenever circumstances change and dictate
revision to the data.
(2) For a voluntary accounting change, the contractor's cost model
and profile is based on same three year forecast of direct and indirect
cost data that supports the contractor's forward pricing rates used to
estimate indirect costs in price proposals. The profile shows that 80%
of the forecasted allocation base amounts in year 1 are comprised of
existing covered contracts subject to adjustment, 50% of the amounts in
year 2 are comprised of existing covered contracts subject to
adjustment, and 20% of the amounts in year 3 are comprised of existing
covered contracts subject to adjustment. Of the amounts applicable to
CAS-covered contracts subject to adjustment, the contractor's cost
model and profile shows the following breakdown by contract type:
[GRAPHIC] [TIFF OMITTED] TP20AU99.007
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(3) The voluntary accounting change, which the cognizant Federal
agency official has determined to be adequate and compliant, results in
a transfer of a $5 million activity from the G&A pool to the overhead
pool. The cognizant Federal agency official has determined that only
individual contracts that have a cost impact in excess of $100,000 will
be considered for adjustment, provided that the impact exceeds .5% of
the contract value. The cognizant Federal agency official has also
determined that $500,000 will be the adjustment threshold for the ``all
other contracts'' amounts by contract type. To support the GDM
Settlement Proposal, the contractor includes three (3) contracts having
the largest estimate-to-complete, by contract type. Based on the cost
model and profile the contractor computes the following general dollar
magnitude impact by contract type:
[GRAPHIC] [TIFF OMITTED] TP20AU99.008
(4) The aggregate impact amounts show a higher allocation of
$693,000 on flexibly-priced contracts and a lesser allocation of
$517,000 on firm-fixed-price contracts. Only one contract of each
contract type submitted with the GDM Settlement Proposal exceeds the
threshold established. K1 is a CPFF contract with an impact of a higher
allocation of $200,000. K2 is a CPIF contract having an impact of a
higher allocation of $300,000. And, K3 is an FFP contract having an
impact of a lesser allocation of $400,000. After deducting the impact
of the three contracts exceeding the threshold, the ``all other
contracts'' amounts are a higher allocation of $115,000 for CPFF
contracts, a higher allocation of $78,000 for incentive type contracts,
and a lesser allocation of $117,000 for FFP contracts.
(5) Since the ``all other contracts'' amounts are less than the
threshold for each contract type, the cognizant Federal agency official
requires no adjustments for these amounts. The cognizant Federal agency
official adjusts the FFP contract downward by $400,000 to preclude the
increased costs on this contract. Because this is a voluntary change
with no increased costs to be paid by the Government, the upward
adjustments to the flexibly-priced contracts must be limited to
$400,000. The cognizant Federal official decides to adjust the target
cost on the CPIF contract upward by $300,000, with an appropriate
upward adjustment of the target fee, in order to avoid distortions of
contract incentive provisions based on the estimated higher allocation
of costs (9903.405-5(b)(5)). The cognizant Federal agency official then
limits the upward adjustment to the CPFF contract to $100,000. Action
must also be taken to preclude payment of the additional $100,000 of
costs on the CPFF contract in accordance with 9903.405-5(d)(4).
(h) Desirable change determination. A contractor provides
notification of a proposed voluntary change in cost accounting practice
and requests a cognizant Federal agency official determination that the
change is desirable and not detrimental to the Government. The request
is supported with data that demonstrates that aggregate cost
accumulations for existing flexibly priced CAS-covered contracts and
reasonably predictable future CAS-covered contracts will decrease after
the planned management changes are implemented. The cost impact of the
practice change on all existing individual CAS-covered contracts (i.e.,
shifts in accumulated contract costs attributable to the practice
change) results in $500,000 of increased cost to the Government. There
are expected cost reductions of $200,000 on future CAS-covered
contracts. The cognizant Federal agency official determines that there
is a continuing long-term relationship with the contractor and that,
after the change is made, there is a reasonably predictable expectation
that the estimated costs of anticipated future CAS-covered contracts,
as reflected in the contractor's forecasted business base used to
develop the projected indirect cost rates applied in contract cost
proposals, will be lower than the estimated future contract costs that
would result if the voluntary change were not made. In accordance with
9903.201-7(d), the cognizant Federal agency official determines the
voluntary change is desirable and not detrimental to the Government and
provides equitable adjustments in the aggregate amount of $200,000 to
resolve the increased costs on existing CAS-covered contracts caused by
the voluntary change.
9903.407-2 Noncompliance illustrations.
(a) Estimating noncompliance. (1) The cognizant Federal agency
official determines that a cost accounting practice that the contractor
has used for estimating and negotiating costs on CAS-covered contracts
is noncompliant with an applicable Cost Accounting Standard. The
practice is also different than the compliant, disclosed and
established practice used for cost accumulation purposes. Therefore,
the impact of the noncompliance only affects negotiated contract
amounts under which the contractor used the noncompliant practice to
estimate contract costs and any outstanding cost proposals not yet
negotiated. The cognizant Federal agency official directs the
contractor to change its estimating practices so that costs will be
estimated, accumulated and reported consistently based on the
contractor's established cost accounting practices, and not use as a
basis for the negotiation of contract prices any previously submitted
contract cost estimates which were predicated on the noncompliant cost
accounting practice. The cognizant Federal agency official then
proceeds to request a cost impact submission for the impact of the
noncompliant practice on covered contracts, as well as the amount of
the increased costs paid as a result of the noncompliance. In
accordance with 9903.406-3(d), the cognizant Federal agency official
determines that the impact on contracts valued at less than $10,000,000
would be immaterial, and limits the cost impact submission to contracts
of $10,000,000 or more in amount. The contractor's cost impact
submission shows that the contract amounts are overstated (in the
[[Page 45742]]
aggregate) by a significant amount due to use of the noncompliant
practice. The contracts are adjusted downward in the aggregate to
reflect use of the compliant practice. Of the total amount of the
overstatement in contract prices, the cognizant Federal agency official
determines that 50 percent had been paid as of the date of the
adjustment of the contract values. The cognizant Federal agency
official, with the assistance of the auditor, computes and recovers
interest applicable to the increased costs paid, for the period from
date of payment to date of recovery of the increased costs paid.
(2) The cognizant Federal agency official determines that the cost
accounting practice used by the contractor to estimate costs is
noncompliant and different than the contractor's compliant, disclosed
and established cost accounting practice. An analysis of the
noncompliance cost impact submission developed by the contractor shows
that, except for two large fixed-price contracts, the effect on
negotiated contract values is immaterial. The cognizant Federal agency
official determines that the impact on the two large fixed-price
contracts is material enough to warrant an adjustment to reflect the
application of the compliant disclosed practice. Since the amount of
the understatement of the one contract exceeds the amount of the
overstatement of the other contract, the cognizant Federal agency
official, in accordance with 9903.406-3(d), limits the upward
adjustment of the understated contract to the amount of the downward
adjustment of the overstated contract. The cognizant Federal agency
official further determines that the noncompliant practice did not
result in increased cost paid by the United States. Therefore, no
action was required to recover increased cost paid and applicable
interest.
(b) Cost accumulation noncompliance. (1) The cognizant Federal
agency official makes a final determination that the contractor is
using an accounting practice for cost accumulation purposes that is
noncompliant with an applicable Cost Accounting Standard. The cognizant
Federal agency official further determines that the cost accounting
practices used for cost estimating purposes are compliant. The
noncompliant practice relates to the accumulation of actual indirect
expenses. The contractor implements the same compliant practice used to
estimate costs for cost accumulation and reporting purposes. The change
to the compliant method for cost accumulation and reporting purposes
results in automatic adjustment of actual costs and recovery of all
increased cost paid due to the noncompliance. The contractor submits a
noncompliance cost impact submission showing the amount of the
increased cost paid during the period of noncompliance by using a
method that does not require submission of individual contract data.
The cognizant Federal agency official, with the assistance of the
auditor, determines that the cost impact submission reasonably reflects
the extent of the increased costs paid. It is also determined that the
increased costs were paid evenly over the period of the noncompliance
and the interest on the increased costs paid is computed using the
midpoint of the noncompliance as a baseline. Since the increased costs
have already been recovered through the adjustment of actual costs, the
Government takes action only to recover the applicable interest by
requesting a payment for the amount of the interest from the
contractor.
(2) The cognizant Federal agency official determines that the
contractor has accumulated costs based on a cost accounting practice
that is not compliant with CAS 9904.402 and is not consistent with its
disclosed and established practice for its CAS-covered contracts. Since
the noncompliance involves accounting for direct costs as indirect
costs on some but not all of its CAS-covered contracts, the cognizant
Federal agency official determines that individual contract data is
required in order to compute the extent of increased costs paid, if
any, as a result of the noncompliance. In accordance with 9903.406-
4(c), the cognizant Federal agency official, with the assistance of the
auditor, determines and discusses with the contractor the level of
detail needed to compute the impact on costs paid as a result of the
noncompliance. The cognizant Federal agency official submits a written
request to the contractor for a noncompliance cost impact submission
that specifies the level of detail required. After analyzing the cost
impact submission, the cognizant Federal agency official determines
that the amount of the increased costs paid is immaterial and does not
warrant action to recover the increased costs, plus applicable
interest. The cognizant Federal agency official takes action in
accordance with 9903.406-5, Immaterial noncompliances.
(3) The cognizant Federal agency official determines that the
contractor is using a practice for cost accumulation purposes that is
noncompliant with an applicable Cost Accounting Standard. The cognizant
Federal agency official further determines that the noncompliant
practice was also used for estimating purposes. In order to determine
the extent of increased costs, if any, due to both overstated contract
prices and billings of costs accumulated on CAS-covered contracts, the
official, in accordance with 9903.406-1(b), requests two separate
contractor cost impact submissions (9903.406-2(i)). The cost impact
submission for the overstated contract prices will be as described in
9903.406-3(c), and the cost impact proposal for the overbilled
accumulated costs will be as described in 9903.406-4(c).
[FR Doc. 99-21334 Filed 8-19-99; 8:45 am]
BILLING CODE 3110-01-U
