Contributing Authors: Paul Bailey, Partner; Jay Boston, Consultant; Justin Meddings, Consultant; Shannon Waldron, Consultant; Taylor Welfley, Consultant; Matthew Strum, Consultant; Alex Boodram, Consultant; and Anastasia Ray
Contractors engaging in business with the U.S. Federal Government encounter a regulatory landscape shaped by the Cost Accounting Standards (CAS). These Standards serve as a cornerstone for ensuring consistency, accuracy, and fairness in allocating and reporting costs associated with Government contracts, and understanding CAS is essential for contractors to navigate the complexities of Cost Accounting Practices within federal contracting. From compliance requirements to the implications of noncompliance, contractors must grasp the fundamentals of CAS to effectively manage their cost accounting systems and maintain transparency and integrity in their financial reporting to the Government. The CAS are a collection of 19 standards contained within 48 CFR 9900 (FAR Part 99). The overall purpose of the Standards is to define how contractors measure, assign (to cost accounting periods), and allocate contract costs; and serve as guidelines for contractors’ Cost Accounting Practices. These guidelines are uniquely defined to allow contractors to establish practices unique and necessary to their individual business, while also serving the Government’s interests regarding consistency and transparency.
A contractor’s organization (or Business Unit) may be required to comply with many of the Cost Accounting Standards if their contracts are awarded on the basis of cost versus price. FAR Part 31, Contract Cost Principles and Procedures “read in” many of the Standards for allowability of costs, e.g., FAR 31.205-6(k) states that the costs of deferred compensation shall be measured, assigned, and allocated in accordance with CAS 415, Accounting for the Costs of Deferred Compensation. Other alignment occurs with the following Standards:
Contractors may be required to comply with the administrative requirements of CAS unless an exemption applies. In order for CAS administrative requirements to apply, the contract must contain FAR 52.230-2 – Cost Accounting Standards, and not meet one of the following exemptions as defined by 48 CFR 9903.201-1 CAS Applicability:
A contract containing FAR 52.230-2 and is not otherwise exempt may be subject to “full” or “modified” coverage. As the coverage descriptions indicate, full coverage requires compliance with all 19 CAS standards, while modified coverage requires compliance with:
Additional administrative requirements include:
Cost Accounting Practices may undergo changes to ensure compliance with regulatory standards, improve efficiency, or address discrepancies. Cost accounting changes are categorized into four descriptions that each hold distinct characteristics and implications for contractors and the Federal Government.
Required Changes
Desirable Changes
Unilateral Changes
Changes Due to Noncompliance
Corrections to Achieve Compliance: These changes occur when an organization transitions from a non-compliant practice to a compliant practice. The financial impact of the change is calculated from the date the noncompliance began until the date of compliance.
A contractor submits a detailed description of the Cost Accounting Practice (CAP) change to the Cognizant Federal Agency Official (CFAO) no later than 60 days before implementing the change. This ensures that the CFAO has adequate time to review and evaluate the proposed adjustments.
For required and unilateral changes, the contractor must conduct a cost impact assessment of all CAS covered contracts. This assessment is essential to determine the financial implications of the CAP change, ensure that cost adjustments are accurately accounted for, and that the government is not disadvantaged. The cost impact assessment should include:
There has been significant litigation on the proper method of calculating the financial impact of a change to a Cost Accounting Practice. The Defense Contract Audit Agency (DCAA) issued on October 3, 2023 a Memorandum for Regional Directors (MRD) on “Revised Audit Guidance on the Cost Impact Calculation for a Unilateral Cost Accounting Practice Change”. The memo is unlikely to resolve disputes where contract price adjustment, where applicable is estimated on relevant contracts between the Government and the contractor that are subject to the CAS so as to protect the Government from payment of increased costs in the aggregate as defined by the CAS Board.
In conclusion, the CAS establishes an indispensable framework for contractors engaging with the U.S. Federal Government. Contractors' comprehension of CAS is critical as they navigate compliance requirements and implications, safeguarding the reliability of their cost accounting systems and promoting trust in government procurement. CAS exemptions, modified, and full coverage delineate the scope of the application, with contractors obligated to adhere to the relevant Standards based on contract values and Business Unit thresholds. Compliance with CAS, spanning 19 distinct standards, is pivotal for contractors to qualify for and maintain government contracts, and in upholding financial stewardship and accountability in federal procurement. Moreover, understanding changes in Cost Accounting Practices and effectively disclosing them to the appropriate authorities is essential to ensuring continued compliance and transparency in contractor operations.
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.