Historical Context

The Cost Accounting Standards Board (“CASB” or “Board”), initially formed in 1970 by Congress under statutory authority codified at 41 U.S.C. 1501 et seq., is an independent board in the Office of Federal Procurement Policy. The formation of the CASB resulted from a two-step process.

First, Congressional hearings were conducted in 1968 regarding the renewal of the Defense Production Act of 1950 (Pub. L. 81-774), amidst Government concerns regarding Department of Defense (“DoD”) contractors’ lack of consistency in how they defined, accumulated, and allocated costs relevant to their DoD price proposals and contracts.

Second, and a direct outcome of these hearings, Congress in January 1970 directed the General Accounting Office (“GAO”) to perform a feasibility study to assess if a uniform and consistent set of accounting standards could be developed for use by DoD contractors. Based on their study, the GAO concluded that i) there was wide variation in cost accounting practices and methods used among contractors, ii) then-existing (i.e., 1970) financial accounting standards either did not include relevant content or were otherwise insufficient for government contracting purposes, and iii) based on i) and ii) above, it is feasible and desirable to develop a uniform and consistent set of accounting standards.

Hence, Congress created the CASB in August 1970 for the purpose of promulgating a set of cost accounting standards designed to achieve uniformity and consistency in cost accounting practices among federal (DoD) contractors. A crucial mechanism for enforcing these standards is the "CAS Clause," a contractual provision mandatorily included in DoD contracts. This clause binds contractors to adhere to the CAS, thereby operationalizing the Board's mandate to ensure consistent and uniform cost accounting practices across the defense industry. The CASB has:

 “[E]xclusive authority to prescribe, amend, and rescind cost accounting standards, and interpretations of the standards, designed to achieve uniformity and consistency in the cost accounting standards governing measurement, assignment, and allocation of costs to contracts with the Federal Government.”[2]

Since the Board’s 1970 formation, the Board’s activity has fluctuated significantly:

i)         1970s – significant activity with the development and promulgation of the current 19 Cost Accounting Standards (“CAS”), CAS applicability thresholds, and administration rules;

ii)        1980–1988 – no activity due to Congressional defunding and subsequent disbandment;

iii)       1988–present – upon the 1988 reestablishment of the Board, intermittent activity to address CAS interpretation matters, pension plan harmonization and CAS compliance revisions resulting from the Pension Protection Act of 2006 (Pub. L. 109-280), revised Board responsibilities mandated by the National Defense Authorization Act (“NDAA”) for fiscal years 2016 and 2017, and formally published recommendations from the Congressionally-created Section 809 Panel (advisory panel stood up pursuant to Section 809 of the NDAA for fiscal year 2016, Pub. L. 114-92).

To address the fiscal year 2016 and 2017 statutory mandates and subsequent final and published Section 809 Panel recommendations, the Board’s activity revived during the 2018-2020 period, wherein the Board:

i)         held several meetings;

ii)        evaluated opportunities to conform CAS to Generally Accepted Accounting Principles (“GAAP”) for purposes of reducing overlap to the maximum extent possible;

iii)       released for public comment three Staff Discussion Papers (“SDP”);

iv)       published in the Federal Register Advance Notice of Proposed Rulemaking. 

The SDPs each focused on separate instances to achieve the overarching statutory mandate of conforming CAS to GAAP, including general conformance of CAS to GAAP under a defined set of guiding principles; capitalization of tangible capital assets (CAS 404) and accounting for the acquisition costs of material (CAS 411); and operating revenue (CAS 403) and lease accounting (CAS 414, 417).   

Board activity since 2020 has been relatively static; however, in 2023 the Board gained new members and is resuming scheduled meetings and activities to further address and evaluate the open items arising from the subject NDAAs and Section 809 Panel recommendations. The Board formally published notice February 27, 2024, as required pursuant to 41 U.S.C. 1501(d) and via the Federal Register, of its first quarter 2024 scheduled meetings and planned agenda.[3]

The third scheduled meeting is March 11, 2024. The Board’s planned agenda includes four CAS-specific matters, two of which are discussed further below.

Section 809 Panel

The Advisory Panel on Streamlining and Codifying Acquisition Regulations (“Section 809 Panel” or “Panel”) was created pursuant to Section 809 of the NDAA for fiscal year 2016. The purpose of the Panel was to study the current DoD acquisition process, formulate observations, and administer recommendations to reform the DoD acquisition system to meet the challenges and demands of the 21st century.

The Panel was active from August 2016 to July 2019 and concluded its activities with the publication of five reports, including a three-volume final report. The final report contained 98 topic-specific recommendations pertaining to a variety of current administrative, procedural and compliance matters associated with the DoD acquisition life cycle.

Among the 98 recommendations, two focused on CAS-related matters:

Recommendation 29: Revise 41 U.S.C. § 1501-1506 to designate the Cost Accounting Standards Board as an independent federal organization within the executive branch.

Recommendation 30: Reshape CAS program requirements to function better in a changed acquisition environment.

A principal Congressional objective leading to creation of the Panel was to identify opportunities and actions to revise the current CAS requirements to better align with the financial accounting and reporting requirements in accordance with GAAP.

This movement to align government and commercial accounting requirements is expected to provide the Government wider access to overall industry technologies and capabilities, as non-traditional government contractors would face reduced compliance and infrastructure burdens typically required when contracting with the DoD, and, therefore, be more inclined to pursue DoD contracts.

The Panel’s conclusion stemming from their two-year evaluation was that the CASB had not reacted, and should react now, to required changes, as contractors will remain “overly burdened” without Board action to implement amendments to a variety of CAS requirements to better adapt to an evolving business landscape.

“Problem

There has long been a sentiment within the government and defense industry that CAS program requirements lack sufficient nimbleness to accommodate the evolving acquisition environment. Except for changes in monetary thresholds, CAS program requirements have remained relatively static since the 1970s. This condition exists despite substantial changes in what DoD purchases, how DoD conducts purchases, and what contract vehicles DoD uses.”[4]

“Conclusions

The individual issues discussed, taken as a whole, expose CAS program requirements that are out of touch with today’s business practices in the public and private sectors. CAS program requirements should be reshaped for the future as noted below:”[5]

Modern-Day Expectations

The five CAS matters noted below represent day-to-day challenges that we, our clients, and practitioners face on a recurring basis; and, that are frequently debated, or disputed, from all sides of the government contracting community, including—Government, industry, legal and advisory, and academia. These matters, also contained in the Panel’s Recommendation 30, provide the Board opportunities to prioritize statutory initiatives, continue work on prior and open initiatives, and further the resolution of Congressional objectives.  

The five CAS matters for which we believe the government contracting community is eager for resolution and is seeking the Board’s attention and activity are:

1.   Indefinite Delivery Contracts (IDC) – IDCs are contractual vehicles that allow the government to procure goods or services on an as-needed basis through the issuance of task or delivery orders under the overarching IDC. IDCs are relatively new in the government contracting world and began to gain popularity in use during the 1990s.

IDCs are typically awarded with a five-year duration, and include a maximum potential value and minimum obligated value over the entire period of performance. Task or delivery orders are issued at values specific to each order.  

The ongoing and years-long (more than 20) debate regarding which value, i.e., maximum potential or specific task or delivery order, triggers CAS coverage needs to be resolved. No authoritative (statutory or regulatory) source exists related to this matter and the Board maintains sole authority to resolve this issue. The CAS clause and requirements should be amended to clearly address CAS coverage under IDCs.

This item is included on the Board’s 2024 planned agenda.[6]    

2.   Hybrid Contracts – The CAS requirements prescribe that coverage applies to applicable contracts (presumably the entire contract and not portions thereof) and do not distinguish, among specific portions (e.g., CLINs) of contracts. Hybrid contracts frequently are structured to include specific elements that are subject to CAS coverage as well as elements that are otherwise exempt from CAS coverage (e.g., a separate CLIN for the purchase of commercial goods).

The CAS clause and requirements should be amended to clearly address how CAS coverage applies, and under what circumstances, in hybrid contract situations, as well as revision to or creation of relevant definitions (i.e., “contract” and “hybrid contract”) to remedy the current lack of clarity. Contracts then could be structured with clear definition regarding applicable CAS coverage, in whole or in part.

3.   General Conformance to GAAP – The Board’s 2019 – 2020 activity included an initial evaluation of selected CAS for purposes of identifying potential overlap or redundancy with current financial accounting and reporting requirements pursuant to GAAP.

The Board structured its evaluation by segregating the 19 CAS across four categories, defined by the purpose or objective of each CAS, and prioritized its efforts first on seven CAS that relate to the measurement and assignment of costs to accounting periods. The Board considered relevant data, including current GAAP requirements, frequency of prior contractor non-compliances, and parallel coverage under the FAR.[7]

In all, the Board evaluated several CAS under the framework above, including CAS 403, 404, 408, 409, 411, 414 and 417; CAS 403, 414 and 417 were evaluated because of recent GAAP changes related to operating revenue and lease accounting. The outcome of these specific CAS evaluations, including potential revisions or eliminations, is currently pending.

The Board should resume its activities to evaluate and resolve the above CAS, considering the reality of the timing to work through the rule-making and regulatory change process.

This item is included on the Board’s 2024 planned agenda.[8]

4.   Inclusion of CAS Clause – The CAS clause at FAR 52.230-2 incorporates by reference the requirements of 48 CFR Part 9903, unless the contract is exempt pursuant to the provisions at 48 CFR 9903.201-1(b). 

“(a) Unless the contract is exempt under 48 CFR 9903.201-1 and 9903.201-2, the provisions of 48 CFR Part 9903 are incorporated herein by reference and the Contractor, in connection with this contract, shall…..”[9]

This language serves as a self-deleting mechanism that makes the CAS clause inapplicable, notwithstanding its inclusion in the contract. However, the ultimate self-deletion is often not determined until after award and not documented in the formal record or resulting contract.

This lapse in formal contractual documentation is caused, in part, because the CAS clause is simply incorporated by reference to the FAR provision at 52.230-2 (Section I), rather than included in full text pursuant to 48 CFR 9903.201-4;

further, by agency instruction, the Government Contracting Officer does not physically include in the contract potentially pertinent information contained in Part IV (Sections L and M) of the solicitation that may be provide relevant information to form a determination if a valid exemption exists, therefore, making the contract exempt.

This contract construction likely leads to CAS coverage determinations well after contract award, requires forensic-type analysis to recreate the facts at time of contract award, and, importantly, presents issues which could have been avoided had a clear CAS coverage determination been made and documented at time of contract award.

The CAS clause and rules should be amended to require clear and affirmative Contracting Officer determination at the time of award that a contract will be CAS-covered or, after an award is determined to be exempt from coverage, that the CAS clause is not applicable. Further, the CAS clause should be removed from contracts when a valid exemption exists at the time of award.

5.   CAS Thresholds – Three monetary thresholds currently govern the level of a contract’s CAS coverage (i.e., full, modified or none):

i)         $50 million - full coverage,

ii)        $7.5 million - modified coverage (otherwise known as the “trigger contract”)

iii)       $2 million (i.e., contracts awarded with a value not exceeding $2 million are exempt from all CAS requirements) 

The $50 million and $7.5 million thresholds have been in effect since June 2000, and the $2 million threshold since July 2018.

The Section 809 Panel analyzed various historical government contract award data and found that a threshold increase from $2 million to $25 million pertaining to modified CAS coverage (and effectively eliminating the need for the “trigger contract” threshold) would significantly reduce the number of contracts and contractors subject to CAS (~80%), while modestly reducing the total CAS-covered contract dollars (~8%).[10]

Separately, GAO performed analyses and found similar results and trends.[11] The Panel also recommended an increase from $50 million to $100 million for the full CAS coverage threshold.

The Board should consider revising the current monetary thresholds and elimination of the requirement for “trigger contracts” as, based on the prior GAO and Panel analyses, such increased thresholds would continue to adequately protect the government’s interests from a total CAS-covered contract dollar perspective, while concurrently reducing the perceived and actual compliance burdens of many existing and potential government contractors.

Further and related CAS requirements will also need to be addressed, including the applicability of the prior fiscal year look-back regarding award of cumulative CAS-covered contracts; for example, does the look-back provision remain in effect with a simple substitution of the $50 million cumulative CAS-covered contract awards with a $100 million threshold?

Implications for Current and Prospective Government Contractors

Board focus and active participation regarding the furtherance and ultimate resolution of the matters discussed above will produce positive and meaningful benefits to both industry and the government.

The government contracting environment has changed significantly from the profile of the 1970s and 1980s and has gone through various acquisition reform and streamlining initiatives coupled with rule and procedural changes. The initial CAS objectives and legitimate cost accounting concerns present during these early periods have changed, thereby necessitating a revision of the standards to remain relevant in today’s government contracting world.

Existing contractors will benefit through reduced regulatory compliance and infrastructure requirements. The government will benefit with reduced administrative procedures and a more efficient (and potentially quicker) contract award and management process. If implemented effectively, this balanced industry and government risk and reward posture should result.    

Additionally, and importantly, prospective or non-traditional government contractors will benefit as reduced compliance requirements and perceived burdens (of which CAS is top of the list) should ease current industry concerns and hesitations regarding making an affirmative business decision to pursue CAS-covered or potentially CAS-covered contracts. Such anticipated reduced hesitation, followed by a potential increased participation in government contracting, will simultaneously benefit the government through enhanced access and ability to reach previously unavailable technologies and capabilities.         

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