[Federal Register Volume 61, Number 182 (Wednesday, September 18, 1996)]
[Proposed Rules]
[Pages 49196-49229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23409]



[[Page 49195]]


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Part II





Office of Management and Budget





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Office of Federal Procurement Policy



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48 CFR Part 9903



Cost Accounting Standards Board; Changes in Cost Accounting Practices; 
Proposed Rules

  Federal Register / Vol. 61, No. 182 / Wednesday, September 18, 1996 / 
Proposed Rules  

[[Page 49196]]



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: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Cost Accounting Standards Board (CASB) invites public 
comments on proposed amendments to the regulatory provisions contained 
in Chapter 99 of Title 48. The proposed amendments would, when issued 
as a final rule, 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 add a new Subpart 
9903.4, Contractor Cost Accounting Practice Changes and Noncompliances. 
The proposed subpart would establish contractor notification 
requirements for changes in compliant cost accounting practices and 
delineate the process for determining and resolving the cost impact due 
to a compliant change in cost accounting practice or a noncompliant 
practice on CAS-covered contract and subcontract prices and/or costs. 
The proposed subpart also includes unique applicability and agency 
waiver provisions for educational institutions.

DATES: Comments must be in writing and should be received by December 
2, 1996.

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 9001, Washington, DC 
20503. Attn: CASB Docket No. 93-01N. To facilitate the CASB's review of 
your submitted comments, please furnish a three point five inch (3.5'') 
computer diskette copy of your comments in a format that is compatible 
with WordPerfect 6.1 or 5.1.

FOR FURTHER INFORMATION CONTACT: Rudolph J. Schuhbauer, Project 
Director, Cost Accounting Standards Board (telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    The CASB's rules, regulations and Standards are codified at 48 CFR 
Chapter 99. Section 26(g)(1) of the Office of Federal Procurement 
Policy Act, 41 U.S.C. Sec. 422(g), requires that the Board, prior to 
the establishment of any new or revised Cost Accounting Standard (CAS), 
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).
    (2) Promulgate an Advance Notice of Proposed Rulemaking.
    (3) Promulgate a Notice of Proposed Rulemaking.
    (4) Promulgate a Final Rule.
    This proposal is step three of the four step process.

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. On April 9, 1993, the CASB 
published a Notice in the Federal Register, 58 FR 18428, requesting 
public comments from interested parties concerning a Staff Discussion 
Paper on that topic. After consideration of the public comments 
received in response to the Staff Discussion Paper, the CASB published 
an Advance Notice of Proposed Rulemaking (ANPRM) on April 25, 1995 (60 
FR 20252) which proposed certain amendments to Chapter 99 of Title 48 
that, when issued as a final rule, would revise the current definitions 
and illustrations governing changes in cost accounting practices. The 
ANPRM also included (1) proposed revisions regarding the language 
contained in the contract clauses for ``Full'' and ``Modified'' 
coverage, Federal agency responsibilities, and desirable change 
determinations; and (2) the proposed addition of a new Subpart that 
would establish contractor notification requirements for changes in a 
contractor's cost accounting practices and set forth the process for 
determining and resolving the cost impact on covered contract prices 
and/or contract costs when a contractor makes a change to a compliant 
cost accounting practice or follows a noncompliant practice.

Public Comments

    Twenty-two sets of public comments were received in a timely manner 
from contractors, professional associations, Federal agencies, 
accounting organizations, and other individuals. A number of commenters 
supported the proposed amendments contained in the ANPRM. Some did not.
    The more significant comments and concerns expressed by commenters 
are summarized below.

--The proposed definitions are too broad.

    Several contractors and contractor industry associations opined 
that the proposed ANPRM definitions of the terms ``cost accounting 
practice'' and a ``change to a cost accounting practice'' are too 
broad. They believed that if the proposed definitions were adopted, the 
number of cost impact submissions would increase significantly in 
comparison to current levels. This, in turn, would dramatically 
increase administrative costs for contractors and the Government.

--No consensus on an acceptable definition.

    Some commenters in the contractor community recommended retention 
of the existing definitions. Others acknowledged that a change in cost 
accounting practice occurs when existing pools and bases that contain 
different functions are combined but that an accounting change would 
not occur if two pools that contained similar functions were combined. 
Such contractors argued that an accounting change occurs only if 
ongoing functions are combined with dissimilar ongoing functions.
    On the other hand, Federal commenters agreed with and supported the 
CASB's proposed amendments which specified that pool combinations, pool 
split-outs and transfers of functions were cost accounting practice 
changes.

--Cost impact process.

    Both the contractor community and the Government agency 
representatives generally supported the Board's proposal to establish a 
new Subpart to delineate the notification and cost impact process.
    The various comments, as well as the concerns, expressed by the 
commenters are discussed in greater detail under Section E, Public 
Comments. The Board Members and the CASB staff express their 
appreciation for the divergent views and constructive suggestions 
provided by the commenters. Their expressed concerns and suggestions 
aided the CASB's deliberations and formed the basis for the development 
of the new and/or revised proposed amendments which the Board has 
included in the Notice of Proposed Rulemaking (NPRM) being promulgated 
today.

[[Page 49197]]

Conclusion

    After consideration of the public comments timely received, the 
Board concluded that contractors and Federal officials continue to 
interpret the Board's rules and regulations governing changes in cost 
accounting practice under CAS-covered contracts differently. There 
appears to be general support for the proposed cost impact process. 
However, even with the proposed promulgation of a more explicit and 
flexible cost impact process, some commenters remain concerned that the 
administrative costs associated with that process may still deter CAS-
covered entities from initiating organizational changes that could 
result in more efficient and effective operations. They believed that 
if an organizational change were to also result in a change in cost 
accounting practice, the administrative costs that would still be 
required to initiate and conclude contract price and/or cost 
adjustments for existing contracts and subcontracts could negate the 
anticipated cost savings. Thus, it is argued, some contractors may not 
make the changes. The higher cost levels being experienced would 
continue to be passed on to their Federal customers in the form of 
higher proposed costs for future contracts.
    As further explained in Section E, Public Comments, the Board 
proposes to resolve the described issues and concerns by amending 
Chapter 99 as follows:

--Definitions: Revise the definitions and illustrations governing cost 
accounting practice changes, for purposes of making it explicit that a 
change in the manner in which ongoing costs are accumulated in cost 
pools for allocation to final cost objectives constitutes a change in 
cost accounting practice, including the combination of existing pools, 
the split-out of an existing pool, or the transfer of an existing 
function from one pool to one or more different cost pools.
--Exceptions: Retain, with certain modifications, the existing 
exceptions for circumstances that are not considered to be a change in 
cost accounting practice, and, by adding a new exception for the 
transfer of an existing function to a different pool when the costs of 
that function are directly allocated back to the original pool for 
reallocation to final cost objectives.
--Exemptions: Establish new exemptions from the Board's contract price 
and cost adjustment requirements and cost impact process for changes in 
cost accounting practices that result from:

    (i) Organizational changes involving changes in cost accumulation 
practices that result due to the transfer of functions or merger of 
cost pools which are undertaken for improved management efficiencies 
and effectiveness and which involve the physical realignment or 
reduction of facilities or personnel.
    (ii) The consolidation of existing pools or the expansion of an 
existing pool into two or more pools when the merged or split-out pools 
accumulated pooled costs and the respective pools' accumulated 
allocation base activity amounts involve similar proportional and 
homogeneous relationships, before and after the change.

--Cost Impact Process: Add a new Subpart 9903.4 to establish the 
notification process to be followed by a contractor making compliant 
changes in cost accounting practices, the process for the submission of 
cost impact data for complaint changes and noncompliances, and the 
contract price and cost adjustment process for resolving the resulting 
cost impacts on individual CAS-covered contracts and subcontracts due 
to changes in compliant cost accounting practices and noncompliant 
practices.

Benefits

    In the Board's judgment, regulatory guidance is needed to encourage 
consistency in the treatment of cost accounting practice changes and to 
reduce the amount of time required to resolve these actions. The Board 
believes that the application of the proposed provisions, as set forth 
in this NPRM, will clarify what constitutes a change in cost accounting 
practice and facilitate the notification, cost impact and contract 
price and cost adjustment processes attributable to changes in 
compliant cost accounting practices and noncompliant practices.
    Consequently, the potential for disagreements over what constitutes 
a change in cost accounting practices will be significantly reduced.
    Although the added rules and regulations proposed for Subpart 
9903.4 are detailed and extensive, the Board remains convinced that 
they are necessary to promote consistency, equity and timeliness in the 
handling of cost impact proposal actions related to changes in 
accounting practices and noncompliances. The Board's proposal is 
expected to result in the reduction of administrative costs currently 
being experienced by contractors and Federal officials when contractor 
changes in cost accounting practices and noncompliances are processed.
    Significant administrative cost savings should also evolve from the 
Board's proposal to exempt from the current contract price and cost 
adjustment requirements, changes in cost accounting practices that 
result from organizational changes made by management to attain more 
efficient and effective operations. This exemption should encourage, 
not discourage, such organizational changes in the future. Also, the 
proposed exemption for routine cost pool combinations or split-outs of 
ongoing functions that are not undertaken to primarily improve the 
economies and efficiencies of existing operations but meet the Board's 
proposed similarity criteria should further mitigate the administrative 
cost concerns expressed by commenters. As a result, these proposed 
regulatory amendments should generally further the goal of acquisition 
streamlining and reform, and should lead to much greater simplification 
of the contract administration process as related to the administration 
of the Cost Accounting Standards. These goals have been endorsed by the 
so-called ``Section 800'' Panel (Report of the Acquisition Law Advisory 
Panel to the United States Congress, January 1993).

Proposed Amendments

    A brief description of the proposed amendments follows:

Part 9903, Contract Coverage

    Changes in Cost Accounting Practices. 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 
Section 9903.302-1, Cost Accounting Practice, the definition is amended 
to incorporate proposed language changes and to add clarifying 
guidance. Section 9903.302-2, Change to a cost accounting practice, is 
revised to make explicit the types of changes that are a change in cost 
accounting practice, a new exception from the definition of a change in 
cost accounting practice is added and new exemptions from the contract 
price or cost adjustment provisions of CAS-covered contracts and the 
cost impact process for certain specified changes in cost accounting 
practices are added. 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 are proposed to 
provide additional guidance regarding the revised definitions of the 
terms

[[Page 49198]]

``cost accounting practice'' and ``change in cost accounting 
practice.''
    Contract Price and Cost Adjustments. 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 establish 
criteria on when the Government can determine that a contractor 
proposed change in cost accounting practice is desirable and not 
detrimental. Section 9903.201-7 is revised to further clarify cognizant 
Federal agency responsibilities for administering CAS-covered contracts 
and subcontracts. 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

    Changes in Cost Accounting Practices. Proposed for inclusion in 
9903.301, are two definitions to clarify the terms ``Function'' and 
``Intermediate cost objective'' as used in Part 9903. The proposed 
amendments to 9903.302-1(c), allocation of cost to cost objectives, 
specify that the systematic manner in which the costs of specific 
activities are accumulated and distributed to intermediate and final 
cost objectives constitutes a cost accounting practice. Additional 
subparagraphs are proposed to precisely set forth and amend the 
existing examples of cost accounting practices and to clarify what is 
meant by the selection and composition of the pools and the 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. 
The transfer of an existing ongoing function from an existing indirect 
cost pool to a different pool when the costs are directly allocated 
back to the original pool for reallocation to final cost objectives and 
the costs of the function continue to be separately identified and 
accumulated in the original pool is proposed to be added as a new 
exception. A new subparagraph is added to exempt from the contract 
price or cost adjustment provisions of CAS-covered contracts and the 
cost impact process those changes in cost accounting practices that 
result from (1) organizational changes that involve improved management 
efficiencies and economies, and the physical realignment or reductions 
of facilities or personnel and (2) overhead and general and 
administrative (G&A) expense pool combinations or split-outs that meet 
proposed ``similarity'' criteria.
    Within 9903.302-3, an introductory paragraph is added regarding the 
use of the illustrations provided, and introductory paragraphs (a), (b) 
and (c) are revised to clarify that the illustrations involve ``cost 
accounting practices'' that have changed. The illustration at 9903.302-
3(c)(3) is proposed to be replaced by new illustrations depicting 
changes in cost accounting practice, consistent with the revised 
definitions. One illustrating the use of a different base for the 
allocation of indirect costs to final cost objectives. Additional 
illustrations are proposed to be 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.
    Contract Price and Cost Adjustments. The proposed amendments, when 
promulgated as a final rule, will:
    Contract Clause Provisions. 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 and the corrective actions required if a 
contractor's estimated cost proposal was based on a noncompliant 
practice and/or actual contract cost accumulations were based on a 
noncompliant practice.
    Desirable Changes. Provide criteria for determining when a 
contractor proposed change in cost accounting practice can be 
determined to be a desirable change that is not detrimental to the 
Government.
    Cognizant Federal Agency Responsibilities. Require Federal agencies 
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 official responsible for administering each CAS-
covered contract and subcontract performing under agency awards,
--Delegate contracting authority to designated agency officials, as 
required, for the negotiation of cost impact settlements and associated 
contract price or cost accumulation adjustments, under the agency's 
CAS-covered awards.
--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.
    Cost Impact Process. Establish a new Subpart 9903.4, Contractor 
Cost Accounting Practice Changes and Noncompliances, that 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 the 
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 proposed 
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 illustrations 
section is also added to clarify the procedures set forth in Subpart 
9903.4.
    Proposed section 9903.405, Changes in Cost Accounting Practices, 
includes subsections on the following areas: notification on changes in 
cost accounting practices; determinations of adequacy and compliance; 
contractor cost impact submissions; and negotiation and resolution of 
the cost impact action.
    Section 9903.405 includes required and suggested time frames by 
which the various actions in the cost impact resolution process should 
be completed. It 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 flexibility to the cognizant Federal agency official in 
determining the level

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of detail required for a cost impact proposal and materiality 
thresholds for required contract price and cost adjustments. To this 
end, it creates a two-step process to include (1) a general dollar 
magnitude estimate of the accounting change by contract type along with 
a cost impact settlement proposal, and if required, (2) a detailed cost 
impact proposal for contracts exceeding Government determined 
materiality thresholds. The proposed procedure encourages settlement of 
the cost impact process based on the cost impact 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.
    The Board has included clarifying rules for 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 is 
material. The rules clarify that offsets of increased costs against 
decreased costs should 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 as a result of a voluntary 
change in cost accounting practice. It clarifies how increased costs 
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 of 
firm fixed-price contracts subject to adjustment as a result of a 
voluntary change in accounting practice.
    Proposed section 9903.406, Noncompliances, provides detailed rules 
and regulations for handling noncompliant actions. It outlines 
procedures for when the parties agree and disagree on whether a 
noncompliant condition exists. The Board has added separate sections on 
estimating practice noncompliances and cost accumulation practice 
noncompliances to clarify the actions, particularly to recover 
increased costs, that need to be taken under these different 
noncompliant conditions. It also provides procedures to be followed 
when the noncompliant condition does not result in material increased 
costs paid.

C. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this proposal because this proposal would impose 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. Sec. 3501, et 
seq. The purpose of this proposal is to decrease the current burdens 
(including current paperwork burdens) associated with the 
administration of the Cost Accounting Standards by covered Government 
contractors and subcontractors.

D. Executive Order 12866 and the Regulatory Flexibility Act

    This proposal would serve to clarify the Board's requirements and 
eliminate burdens associated with the administration of the Cost 
Accounting Standards by covered Government contractors and 
subcontractors. The economic impact on contractors and subcontractors 
is therefore expected to be minor. As a result, the Board has 
determined that this NPRM 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 NPRM is based upon proposed amendments to the CASB's rules and 
regulations that were made available for public comment through the 
Board's ANPRM that was published in the Federal Register on April 25, 
1995, 60 FR 20252, wherein public comments were invited. The comments 
received and the Board's actions taken in response thereto are 
summarized in the paragraphs that follow:

Cost Accounting Practice Definitions, Exceptions, Exemptions

    Comment: Changes in make or buy decisions do not equate to changes 
in cost accounting practice changes.
    Response: Changes in make or buy decisions are not a change in cost 
accounting practice. This response presumes that the segment 
responsible for administering and performing the covered contract 
affected by a make or buy change will accumulate and report the actual 
costs of contract performance for in-house production and for goods and 
services acquired from other sources consistently in accordance with 
the performing segment's established and/or disclosed cost accounting 
practices. Changes in make or buy decisions are not subject to the 
CASB's rules, they are subject to applicable procurement regulations.
    Comment: Changes in the place of contract performance do not equate 
to changes in cost accounting practice.
    Response: The CASB's rules and regulations pertain to the 
performing contractor's or segment's established and, if required, 
disclosed cost accounting practices. The Board's rules and regulations 
presume that the proposed contract (or subcontract) work will be 
performed by the segment (or segments) identified in the contractor's 
cost proposal as the performing segment and that the costs of contract 
performance will be estimated, accumulated and reported by that 
proposed segment in accordance with that segments' established and, if 
required, disclosed cost accounting practices. Any change in a 
compliant cost accounting practice, failure to comply with an 
applicable CAS or failure to consistently follow established cost 
accounting practices, experienced by that performing segment may result 
in contract price or cost adjustments under the Board's rules and 
regulations.
    When the proposed segment and performing segment are different 
because the contractor transfers the responsibility for administering 
and performing a covered contract to a different segment, the 
commenters are correct in that neither segment's cost accounting 
practices may have changed. However, the cost accounting practices used 
by the original segment to estimate, accumulate and report the costs of 
contract performance before the transfer will not necessarily be the 
same as the practices used by the different performing segment after 
the transfer. Of more importance is the fact that the specific costs 
being allocated to the transferred contract will be different.
    Such changes in the place of contract performance are subject to 
applicable procurement regulations which may require consideration and/
or Government approval for such transfers. Where the Government 
negotiates the conditions for and approves the complete transfer of 
responsibility for performing a covered contract from one segment to 
another segment, any contractor submission of estimated costs to 
complete the transferred contract or the subsequent submission of costs

[[Page 49200]]

incurred to complete the transferred contract would be estimated, 
accumulated and reported in accordance with the applicable performing 
segments' compliant cost accounting practices. In such cases, the 
contract price and cost adjustment provisions of the CAS contract 
clause contained in the transferred contract would not apply. Rather, 
the Board believes that the contracting parties must resolve the cost 
implications of such changes in the place of contract performance in 
accordance with applicable procurement regulations.
    Comment: The Board's proposal should be treated as a rule change, 
not as a ``clarification.''
    Response: The proposed amendments contained in this NPRM, when 
promulgated as a final rule, would apply prospectively to covered 
contracts and subcontracts awarded after promulgation of the final 
rule. However, the Board is also proposing that Subpart 9903.4 be 
applied to preexisting CAS-covered contracts and subcontracts if the 
contractor or subcontractor receives a CAS-covered contract or 
subcontract after Subpart 9903.4 becomes effective. Then, for compliant 
changes in cost accounting practices or noncompliant practices that 
occur after Subpart 9903.4 becomes effective, Subpart 9903.4 would 
apply to such preexisting contracts. The proposed coverage is intended 
to facilitate the resolution of the cost impact of compliant and 
noncompliant cost accounting practice changes affecting CAS-covered 
contracts awarded after the proposed Subpart 9903.4 is in effect. Where 
such changes in cost accounting practices and/or noncompliances also 
affect covered contracts awarded prior to the promulgation of Subpart 
9903.4 as a final rule, the Board does not expect the contracting 
parties to comply with two separate cost impact processes for changes 
that occur after the effective date of the Board's anticipated final 
rule. Where changes in cost accounting practices and/or noncompliances 
do not become subject to Subpart 9903.4, the contracting parties would 
normally continue to follow the ``cost impact process'' incorporated in 
the preexisting covered contracts and subcontracts unless the 
contracting parties mutually agree to follow the Subpart 9903.4 
procedures.
    Comment: A number of commenters suggested that the terms 
``function'' and ``intermediate cost objective'' be modified.
    Response: The ANPRM definitions have been revised.
    Comment: A number of commenters recommended that the proposed 
amendments to the introductory paragraph at 9903.301-1 be revised or 
deleted.
    Response: The proposed ANPRM language has been deleted.
    Comment: Several commenters suggested revision or deletion of the 
ANPRM proposed amendments to 9903.301-1(c) that would have changed the 
paragraph heading and content to highlight the importance of the term 
accumulation of cost. One commenter advocating that the basic 
definition not be revised stated:

* * * The triumvirate of measurement, assignment and allocation have 
served * * * well over the years. If changes are needed make them in 
the subparagraphs that follow.

    Response: The proposed ANPRM language changes have been deleted. 
The proposed amendments being promulgated in the NPRM retain the 
traditional term ``allocation of cost to cost objectives'' in 9903.301-
1(c). However, the Board continues to hold the opinion that the manner 
in which costs are accumulated is an essential cost accounting practice 
that is integral to the concept of cost allocation. Therefore, the 
Board is proposing certain modifications to make explicit that cost 
accumulation and the selection of pools used to accumulate specific 
costs are cost accounting practices. Additional subparagraphs are 
proposed to further explain what is meant by the selection and 
composition of the pools and bases.
    Comment: Federal and industry commenters disagreed on whether the 
combination of existing pools or the transfer of an existing function 
from one pool to a different new or existing pool did or did not 
constitute a change in cost accounting practice. Several industry 
commenters acknowledged that a change in cost accounting practice 
occurs when existing pools and bases that contain different functions 
are combined but that an accounting change would not occur if two pools 
with similar functions were combined.
    Such contractors argued that an accounting change occurs only if 
ongoing functions are combined with dissimilar functions.
    Response: Although some industry commenters appeared to agree that 
a cost accounting practice change may occur when dissimilar functions 
are combined, the reason why a change in cost accounting practice 
occurred was not attributed to change in how specific costs were 
accumulated for subsequent allocation to specific final cost 
objectives. Assuming overhead Pool A accumulated the costs of two 
functions and overhead Pool B accumulated the cost of two other but 
relatively very similar types of functions, the commenters reasoned 
that there would be no change in a contractor's cost accounting 
practices if the two pools were combined. A corollary assumption was 
that the costs accumulated in both pools were allocated to final cost 
objectives by use of the same type of base activity accumulated at the 
two locations. Since the disclosure statement descriptions of the two 
pools before the change and the one pool after the change would be 
``identical,'' the commenters appeared to infer that there was no 
change in cost accounting practice.
    The arguments presented appear centered more on the commenters' 
limited interpretations of the Board's existing regulatory language 
which is used for determining when contract price or cost adjustments 
are required due to a change in a contractor's cost accounting 
practices rather than on the actual manner by which contractors 
accumulate specific costs in individual pools for their subsequent 
allocation to the specific final cost objectives included in the pools 
respective allocation bases.
    The commenters did not acknowledge that the use of two pools would 
result in the allocation of the specific costs accumulated in each pool 
to only the specific final cost objectives included in each of the 
separate allocation bases that were applicable to each pool. Pool A 
costs would be allocated to only those individual final cost objectives 
that pass through Pool A's allocation base. After the pools are 
combined, the specific costs originally included in the two cost pools 
will now be allocated to different groupings of final cost objectives. 
Consequently, the specific costs would be allocated differently to 
individual final cost objectives. The specific indirect costs 
originally included in Pool A would be allocated proportionately to 
both the final cost objectives that would have been included in the 
allocation base for Pool A as well as to all of the final cost 
objectives that would have been included in the allocation base for 
Pool B. Pool B costs would experience the same type of change in cost 
allocation. It is the Board's opinion that the described type of change 
in cost accumulation (the use of one pool instead of two) is a cost 
accounting practice change because the method used to accumulate cost 
for the ``allocation of cost to cost objectives'' has changed. The 
change is that the specific ongoing costs that would previously have 
been accumulated and included in Pool A and allocated only

[[Page 49201]]

to the individual final cost objectives included in the Pool A 
allocation base would now be allocated to all of the individual final 
cost objectives that previously would have been included in the 
allocation base for Pools A and B. The specific costs that would 
previously have been accumulated and included in Pool B would 
experience the same type of change.
    Furthermore, the commenters' concepts of ``similar'' and/or 
``identical'' functions would prove difficult to establish and 
administer. To be similar, must the functional operations be identical? 
Must the product being fabricated or the service being performed be 
identical? How would disparate levels of cost incurred by separate 
functions be considered? If the costs accumulated in the original pools 
were not proportionally similar to the amounts of activity accumulated 
in their respective allocation bases would the functions being combined 
still be judged similar? Would the combination of the pools and their 
respective allocation bases be considered compliant under applicable 
Standards (e.g., under the homogeneity requirements of CAS 9903.418)?
    The Board continues to believe that the combining of pools, whether 
they contain similar or dissimilar functions, constitutes a change in 
cost accounting practice. To avoid potential disputes and endless 
debate on what constitutes ``similar'' functions and when a change in 
cost accounting practice should require the adjustment of contract 
prices or costs, the Board, in the NPRM being promulgated today, 
proposes to resolve this matter by establishing definitions, exceptions 
and exemptions as follow:
    1. Definitions. Amend the definitions of a cost accounting practice 
and a change to a cost accounting practice to state that the 
combination or split-out of an existing pool and/or the transfer of an 
existing function from one pool to a different pool, constitutes a 
change in cost accounting practice.
    2. Exceptions. Retain the existing exceptions to a change in cost 
accounting practice but add a modification to indicate that different 
segments may apply different cost accounting practices when the same 
type of cost is incurred for the first time at each location. Add a new 
exception indicating the transfer of an existing function when the cost 
of that function is directly allocated back to the original pool for 
cost accumulation and reallocation to final cost objectives is not a 
change in cost accounting practice.
    3. Exemptions. Add two exemptions from contract price and cost 
adjustments, for cost accounting practice changes resulting from:
    (i) Functional combinations and transfers resulting from 
significant organizational changes made to achieve economies and 
efficiencies. This provision is proposed to provide a clear distinction 
between changes in operations and changes in cost accounting practices. 
It also responds to commenters' concerns that the Board's rules and 
regulations governing contract price and cost adjustments are viewed by 
some as an impediment to the implementation of more efficient and 
economical operations.
    Where significantly lower levels of operating costs resulting from 
the physical realignment or reduction in facilities or personnel are 
reasonably expected to occur due to operational changes, attendant 
savings will normally be experienced in the long run under all of a 
contractor's work affected by the change, including existing and future 
CAS-covered contracts. Accordingly, the Board is considering the 
establishment of the proposed exemption based on the concept that if a 
cost accounting practice change results in such circumstances, it may 
not be necessary to require contract cost or price adjustments under 
existing CAS-covered contracts that are immediately affected by such 
operational changes. Whether specific operational changes qualify for 
this proposed exemption would be determined on a case-by-case basis by 
the cognizant Federal agency official.
    The Board's existing requirements for contract price and cost 
adjustment would continue to be applied when there is no significant 
physical change in the contractor's ongoing operations and/or 
production activities but a change is made to the contractor's 
established cost accounting practices. In such cases, while a 
contractor's actual operations and overall total cost levels for those 
ongoing operations are not expected to change appreciably, the Board's 
rules and regulations would continue to require the adjustment of 
individual contracts for any significant greater or lesser allocation 
of cost to individual covered contracts that may occur due to the 
change in cost accounting practice.
    Because changes resulting in improved economies and efficiencies 
would be exempt from the contract price and cost adjustment, the Board 
has deleted from this NPRM proposal, the ANPRM provision proposed for 
desirable changes involving changes made to improve the economy and 
efficiency of operations.
    Public comments on this proposed exemption would be particularly 
helpful (see proposed 9903.302-2(c)(1)).
    (ii) Overhead or G&A pool combinations where the cost variability 
between the original pools and the resultant pool or pools is 
relatively similar so that resulting cost allocations to individual 
final cost objectives will not be significantly affected by the change. 
Pools would be considered similar if certain proposed criteria are met. 
When met, this exemption would obviate the need for contractor 
preparation and submission of the cost impact documents required under 
Subpart 9903.4.
    Comment: A commenter recommended the addition of an introductory 
provision to clarify that the illustrations in 9903.302-3 and 9903.302-
4 are not all inclusive.
    Response: Clarifying provisions have been added.

Contract Clauses

    Comment: A commenter recommended that the definition of a cost 
accounting practice at 9903.302-1 be incorporated by reference into 
paragraph (a)(2) of the clause.
    Response: To clarify that Part 9903 is incorporated in its 
entirety, including all of the definitions in Part 9903, paragraph (a) 
was revised to incorporate by reference the definitions and 
requirements of Part 9903. Paragraph (a)(4)(ii) was also revised to 
conform with the definition of the term ``increased cost'' contained in 
Subpart 9903.4.
    Comment: A commenter recommended that paragraph (a)(3) should 
require the contractor to maintain a system for identifying all CAS-
covered contracts and subcontracts by their periods of performance.
    Response: The proposed requirement at 9903.401-1(b) for identifying 
covered contracts and subcontracts is incorporated into proposed 
paragraphs (a), (a)(4) and (a)(5) of the applicable contract clauses.
    Comment: Revise paragraph (a)(4) to reference disclosed as well as 
established cost accounting practices and use the term ``cognizant 
Federal agency official'' in lieu of ``Contracting Officer.''
    Response: The suggestions were adopted.
    Comment: A commenter suggested that paragraph (c), access to 
records, be updated to include modern record storage mediums.
    Response: The suggestion was adopted.
    Comment: One commenter supported the proposed contract clause 
provisions

[[Page 49202]]

in paragraphs (a)(4) of the proposed contract clauses, requiring a 
Contractor to agree to price adjustments if CAS-covered subcontractors 
make required, voluntary or desirable changes to their cost accounting 
practices pursuant to the subcontracts' terms and conditions. One 
commenter felt there was no need to extend a contractor's liability for 
subcontractor changes. The commenter argued that prime contractors have 
no control over a subcontractor's cost accounting practices.
    Response: Under CAS-covered contracts, prime contractors are 
responsible for inserting CAS flow down provisions into their 
subcontracts and for administering the covered subcontracts. If a 
subcontractor claims proprietary data is involved, the prime contractor 
can obtain the necessary data in summary form through the cognizant 
Federal agency official. However, the proposed provision provides for 
the adjustment of the prime contract price and/or higher-tier 
subcontract price if affected due to a lower-tier subcontractor's 
compliant change in cost accounting practice and/or noncompliance. The 
referenced provision was retained.

Desirable Changes

    Comment: Several commenters recommended that the Board include as 
desirable changes, accounting changes required by law or regulation, as 
well as accounting changes required for conformity with changes in 
generally accepted accounting principles (GAAP) promulgated by the 
Financial Accounting Standards Board.
    Response: The Board disagrees with the commenters. The original 
CASB concluded that all contractor proposed changes in cost accounting 
``* * * for any reason * * *'' should be considered for contract 
adjustment and that if major changes in cost accounting practice were 
required in order for contractors to comply with an express provision 
of law, the Board would appropriately modify its Standards (Preamble J, 
Changes compelled by law or regulation (43 FR 9775, March 10, 1978)). 
Accounting procedures required to conform with laws, regulations or 
GAAP are generally not mandated for Federal contract cost accounting 
purposes. While a contractor must comply with such requirements for tax 
reporting purposes or financial statement reporting purposes to 
stockholders, such requirements are not per se a required cost 
accounting practices for Federal contracting purposes. Hence, any 
contractor desired change to an established cost accounting practice 
used to estimate, accumulate and report the costs of performing CAS-
covered contracts and subcontracts remains subject to the Board's 
Standards, rules and regulations, including the CAS contract clause 
adjustment provisions, governing changes in cost accounting practices. 
Accordingly, each contractor change in cost accounting practice made 
for any reason must be considered on a case-by-case basis in order to 
determine whether the change is or is not desirable.
    Comment: One commenter suggested that the proposed provision 
requiring the cognizant Federal agency official to determine that a 
change in cost accounting practice made to remain in compliance with a 
Standard to be a ``desirable'' change be deleted and treated instead as 
a ``required'' change.
    Response: The contract clause provision referred to as a 
``required'' change only pertains to a change in cost accounting 
practice that is made in order to comply with a new Standard, 
modification or interpretation thereto when it first becomes applicable 
to an existing covered contract through the award of a subsequent CAS-
covered contract or subcontract. It does not apply to changes in cost 
accounting practices made subsequently by a contractor due to changed 
circumstances in order to remain in compliance with an existing 
Standard already applicable to an existing contract. By treating such 
subsequent changes as a ``desirable'' change, the contracting parties 
can negotiate equitable adjustments for covered contracts and/or 
subcontracts materially affected by subsequent changes that the 
cognizant Federal agency official has determined, on a case-by-case 
basis, were necessary in order for the contractor to remain in 
compliance with an applicable Standard. To distinguish subsequent 
changes from first time ``required'' changes, the proposed word 
``required'' has been changed to ``necessary'' in the proposed 
provision.
    Comment: Some contractors advocated that a change in cost 
accounting practice recommended by the cognizant Federal agency 
official and implemented by the contractor be considered a desirable 
change. A Federal agency recommended deletion of the proposed provision 
because in their view this provision would rarely be used and it would 
avoid contractor interpretations of discussions held with Federal 
officials as representing recommended changes.
    Response: The word ``should'' has been changed to ``shall'' and a 
requirement for a written recommendation has been added.

Cognizant Federal Agency Responsibilities

    Comment: A Federal agency recommended editorial changes to 
paragraph (a) and deletion of proposed paragraphs (b), (c) and (d) at 
9903.201-7. The primary concerns were that the proposed amendments were 
already addressed by the Federal Acquisition Regulation (FAR), at FAR 
30.6 and 42.3., and that the proposed responsibilities for obtaining 
funding may go beyond the control of the cognizant Federal agency 
official.
    Response: The Board recognizes that the responsibility for 
administering CAS resides with the various Federal agencies, including 
the civilian agencies that are subject to CASB's rules and regulations. 
The Board, in reviewing the CAS cost impact process at a number of 
contractor locations, concluded that this process was generally not 
being accomplished in a timely or efficient manner. One contributing 
factor was that neither the Board's rules nor applicable agency 
regulations clearly set forth the complete process to be followed or 
actions to be taken. The Board is taking action today by proposing a 
precise yet flexible approach for the submission of cost impact data 
due to changes in cost accounting practices and noncompliances and for 
determining the resultant contract price or cost adjustments required 
under the Board's rules and regulations. The Board believes such 
specificity will facilitate the CAS administrative process, reduce 
administrative costs and improve timeliness. This proposal represents a 
first step toward the improvement of the process. Without more explicit 
implementing agency policies and procedures, however, the Board remains 
concerned that the timeliness of the contract price and cost adjustment 
process may not improve significantly and that the administrative costs 
associated with the cost impact process will not be curtailed.
    Funding availability and the process for obtaining funds needed to 
effect CAS contract price adjustments is an example of where agency 
regulations for administering CAS should be made explicit. A recurring 
contractor concern with the Board's cost impact adjustment process was 
that contractors believe that the funds required to effect the 
necessary CAS contract price adjustments are generally not made 
available to the administering official. Contractors also believe that 
the lack of funding often was the determining factor in why a compliant 
change in cost accounting practice was not considered

[[Page 49203]]

to be a ``desirable'' change subject to equitable adjustment under the 
Board's rules.
    The Board is fully aware that contract obligations can not be made 
in violation of applicable appropriations law and that funding 
availability is governed by each agency's administrative control of 
funds requirements. The proposed agency responsibilities are designed 
to permit each agency, in accordance with its funding systems, to 
establish appropriate internal procedures that are to be followed by 
programmatic, financial and procurement officials when additional 
funding is required to effect CAS contract price adjustments. While 
contract funds can be deobligated immediately, for equity's sake, under 
the Board's proposal, contract price increases and decreases due to a 
change in cost accounting or a noncompliance would be processed 
concurrently. The cognizant Federal agency official would not effect 
deobligations until the funding needed to increase contract prices 
under other contracts affected by the same change are made available 
for obligation by the affected agencies.
    The Board believes the proposed amendments address the areas that 
need to be clarified by implementing agency regulations and that the 
proposed concurrent processing requirement does not go beyond the 
control of the cognizant Federal agency official. Accordingly, the 
proposed provisions have been retained. The ANPRM language in 9903.201-
7 (a) and (d)(2)(iii) was revised based on the commenter's editorial 
suggestions and expressed concerns on funding.

Cost Impact Process

    Comment: A number of commenters expressed the view that proposed 
rules for the cost impact process were too rigid and did not allow 
sufficient flexibility. Others feared that existing local agreements on 
cost impact methodology could not continue once the proposed rule 
becomes a final rule.
    Response: The intent of the ANPRM was to place emphasis on 
materiality and to allow alternative methods with regard to resolving a 
cost impact due to changes in accounting practices. The Board believes 
that the frequent use of the concept of materiality throughout the 
proposed 9903.4; the allowance for use of ``other suitable techniques'' 
in 9903.405-5(c)(3) and 9903.405-5(d)(5); the flexibility in 
establishing appropriate materiality thresholds; and the allowance for 
alternative formats for the General Dollar Magnitude (GDM) and Cost 
Impact Settlement Proposal; provide sufficient latitude to the 
contracting parties to resolve a cost impact and does not constitute a 
``rigid'' process.
    Comment: Several commenters suggested that the GDM and Cost Impact 
Settlement Proposal formats included in the ANPRM be deleted since they 
may be construed to be required ``forms'' or the only acceptable 
formats by some cognizant Federal agency officials.
    Response: The illustrated formats are not to be considered required 
``forms'' or the only acceptable formats. They are included as an 
example of one acceptable presentation of a GDM and Cost Impact 
Settlement proposal. Inclusion of an acceptable format aids those 
cognizant Federal agency officials, as well as contractors, that have 
little experience with the cost impact process, particularly in the 
civilian agencies. To further emphasize that other formats may be used, 
the Board has added a clarifying sentence at 9903.405-4(a)(4) and 
substituted the word ``acceptable'' for ``suggested'' prior to the 
display of the illustrated formats.
    Comment: One commenter suggested deletion of various provisions 
included in the ANPRM based on the view that they represented opinion 
or detailed instructions and do not belong in the Board's rule or 
regulation.
    Response: The Board agrees in part and has deleted some, but not 
all, of the provisions suggested by the commenter.
    Comment: A number of contractor respondent's requested that 
specific timing requirements be included in 9903.4 for the actions to 
be taken by the cognizant Federal agency official. They saw an inequity 
in specifying timing requirements for contractors, but not for 
Government officials.
    Response: The Board expects that the various Federal agencies will 
establish appropriate regulations to implement the procedures and 
suggested time frames included in proposed Subpart 9903.4, and believes 
that such agency regulations are the appropriate place to detail 
specific administrative timing requirements for cognizant Federal 
agency officials. The Board encourages the Federal agencies to place 
appropriate emphasis on timeliness in completing the cost accounting 
change cost impact process in order to avoid the inefficiency problems 
caused by delays in the process which have been experienced in the 
past.
    Comment: Other industry respondents requested a provision which 
would provide for an irrevocable presumption of adequacy and compliance 
of an accounting practice change in the event that the cognizant 
Federal agency fails to make a formal determination within the 
suggested 60 day period included at 9903.405(c)(i) in the ANPRM.
    Response: The Board disagrees. A contractor's cost accounting 
practices must comply with applicable Cost Accounting Standards. 
Failure by Federal officials to act in a timely manner does not create 
a waiver from the Board's rules and regulations. As previously 
mentioned, the Board encourages timely action by all responsible 
parties, including Federal agencies. For this reason, the Board has 
retained, in the NPRM being promulgated today, suggested time frames 
for when actions are to be taken by the cognizant Federal agency 
official.
    Comment: One commenter objected to the requirement precluding use 
of planned changes in cost accounting practices in price proposal 
estimates, claiming that contractor's can use changed practices for 
estimating immediately.
    Response: The Board, in researching this issue, learned that a lack 
of consistency exists when contractors begin using a changed cost 
accounting practice to estimate costs in price proposals. Some used 
immediate implementation, while others waited until the cognizant 
Federal agency official made a determination of adequacy and 
compliance. The Board believes that a consistent and uniform approach 
is desirable and that waiting for an adequacy and compliance 
determination is the preferable method. Obtaining an adequacy and 
compliance determination prior to implementation will avoid the 
potential implementation of a noncompliant cost accounting practice 
when estimating costs in price proposals. The Board notes that the 
proposed period of delay in implementation of the new practice in only 
a maximum of 60 days. To make this requirement equitable and to prevent 
potential financial harm to contractors, the Board is also proposing to 
establish a new exemption from the voluntary change increased cost 
preclusion provisions for contracts negotiated between the notification 
date and effective date of a planned change in cost accounting 
practice. This new exemption appears at 9903.405-2(f) and 9903.405-
5(d)(7).
    Comment: Several commenters opined that requiring advance 
notification of a change in accounting practices made to comply with a 
new or revised Standard that would become applicable to existing 
covered contracts only through the subsequent award of a covered 
contract, i.e., a required change, was unreasonable, if not impossible. 
They suggested that notification be made sometime after the award of 
the contract which made the new or revised Standard applicable to a 
CAS-covered

[[Page 49204]]

contractor, rather than 60 days prior to the effective date of the new 
or revised Standard.
    Response: The Board agrees that notification prior to the effective 
date of the Standard may not always be required or practical, but 
disagrees that notification should be delayed until after award of the 
contract which made the new or revised Standard applicable. The 
effective date of a new or revised Standard is the Standard's specified 
effective date after which a CAS-covered contractor must comply with 
the new or revised Standard when estimating costs for a contemplated 
contract, that if awarded, will make the Standard applicable to the 
contractor. Therefore, if a contractor's current practice does not 
comply with the new or revised Standard, the contractor must use a 
compliant practice in the first such price proposal submitted after the 
Standard's effective date. A decision to make this required change 
obviously must be done some time before the submission of the proposal. 
Clearly, if a contractor has used a compliant practice for estimating 
purposes which is different than an established practice due to a 
required change, it is not unreasonable to expect that the contractor 
will disclose this to the cognizant Federal agency official. Therefore, 
the Board proposes to require that advance notification of such 
required changes in cost accounting practice shall occur no later than 
60 days prior to the submission of the price proposal in which the 
contractor must first use the required change to estimate costs for a 
potential CAS-covered contract, or other date to which both parties 
mutually agree.
    Comment: Several commenters took exception to the requirement to 
use estimates-to-complete in lieu of original cost estimates for 
computing the cost impact due to a compliant change in cost accounting 
practices on individual contracts. One respondent commented that 
estimates-to-complete should only be used when a significant part of 
the contract effort has been performed.
    Response: The Board believes that use of estimates-to-complete in 
lieu of original estimates better measures the true impact of a change 
in cost accounting practice because it applies the new practice only to 
the contract effort for which the new practice will be used for cost 
accumulation and reporting purposes. Distortions between planned 
contract performance and actual contract performance can lead to 
distorted cost impact computations if original estimates are used. The 
use of estimates-to-complete is also consistent with the prescribed 
methodology for pricing change orders which add and/or delete contract 
work. The Board acknowledges that in cases where little contract effort 
has been performed, there should be virtually no difference between 
using an estimate-to-complete as compared to the original estimate 
methodology.
    Comment: One commenter stated that the computation and completion 
of a GDM was a difficult and costly exercise.
    Response: Current Federal regulations already require the 
submission of GDM estimates by contract type and by agency, and have so 
for a long time. The Board's proposed GDM approach requires summary 
data only by contract type. The Board anticipates the existing 
requirement for summary data by agency would eventually be deleted from 
the procurement regulations because of the emphasis the Board is 
placing on the individual contract data included in the cost impact 
settlement proposal. Any agency having a CAS-covered contract that is 
significantly affected by an accounting change will receive adequate 
coverage and protection via the submission of a cost impact settlement 
proposal based on materiality thresholds. Although computing an 
accurate and reliable GDM may be difficult in some circumstances based 
on the complexity and number of accounting practice changes, the 
information is essential to the cognizant Federal agency official in 
determining the appropriate adjustments required to protect the 
financial interests of the Government when a change in cost accounting 
practice occurs.
    Comment: A number of commenters suggested combining the GDM and 
Cost Impact Settlement Proposal into one consolidated submission.
    Response: The GDM and the contractor cost impact settlement 
proposal submissions serve different purposes. The GDM is intended to 
provide summary data by contract type of the overall impact to the 
Government as a result of an accounting change. The cost impact 
settlement proposal is intended to provide a basis for resolving the 
cost impact proposal without requiring a detailed cost impact proposal. 
To streamline contractor submissions, the two may be combined provided 
that the GDM is separately presented on the first page of the combined 
submission.
    Comment: One commenter objected to the requirement to submit 
additional contract data during the cost impact settlement proposal 
stage, suggesting that, if no settlement can be reached based on the 
data initially submitted, a detailed cost impact settlement proposal 
should be required.
    Response: The Board believes that the interests of both the 
Government and CAS-covered contractors are served best if the data 
submission requirements are kept to a minimum. The Board visualizes 
instances where a contractor could supplement contract data included in 
the initial cost impact settlement proposal with a few additional 
contracts in order to provide sufficient information to resolve a cost 
impact. The proposed supplemental approach would be less costly and 
should result in a more timely resolution of a cost impact than if a 
contractor had to put together a separate and distinct detailed cost 
impact proposal having different and significantly more data 
requirements. The Board believes that once this process is put into 
actual practice, the superiority of the supplemental data approach over 
a detailed cost impact proposal will be borne out.
    Comment: A number of commenters suggested switching the definitions 
of offsets and netting.
    Response: Although never previously defined in a formal rule or 
regulation, the term ``offsets'' has acquired a connotation that most 
individuals familiar with the cost impact process have adopted over the 
years, i.e., the process of combining cost increases with cost 
decreases to arrive at a net smaller cost impact number than the 
individual contract cost impact amounts. The term offset has also taken 
on the concept of a technique used to reduce the number of individual 
contract price or cost adjustments that need to be made as a result of 
a change in cost accounting practice, or a failure to comply with cost 
accounting standards or established practices. The Board does not wish 
to disturb these accepted connotations and concepts. On the other hand, 
the process of determining to what extent increased costs may occur as 
a result of a voluntary change in cost accounting practices, although 
always required, has never been specifically identified. The Board 
believes that for clarity's sake, the process should be defined, and 
has dubbed this process ``netting''.
    Comment: Several commenters expressed the view that offsets should 
be permitted between different types of contracts.
    Response: The proper application of offsets has long been a source 
of confusion and controversy. For this reason, the Board has chosen to 
make it explicit that offsets shall only be made within the same type 
of contract. The primary rule of offsets is that use of the

[[Page 49205]]

technique should not result in costs paid by the Government that are 
materially different from that which would result if all affected 
contract prices had actually been adjusted. This rule cannot be met if 
offsets are applied to different types of contracts, particularly 
between flexibly priced and firm fixed-price contracts. The Board 
believes that use of the offset technique will be minimized by the 
individual contract materiality threshold concept included in the 
proposed 9903.405.
    Comment: One commenter asked if offsets will be limited to the 
``all other contract'' category under the proposed rule.
    Response: For single changes in cost accounting practices within an 
individual business unit or segment, offsets will in most, but not 
necessarily all, cases be limited to the ``all other contract'' 
category. The provision at 9903.405-5(b)(3) does allow for the offset 
technique to be applied to individual contracts, provided that it does 
not materially reduce the amount of the price adjustment to contracts 
exceeding the individual contract materiality threshold, or reduce the 
cost impact to these contracts to an amount below the threshold. For 
multiple changes within the same business unit, offsets are applied to 
the same contract to the extent that one or more changes may have an 
upward impact while other changes have a downward impact on the same 
contract, as provided by 9903.405-5(b)(4). Offsets are also applied 
between different business units or segments for changes that affect 
multiple segments to mitigate action that needs to be taken to preclude 
increased costs, as provided by 9903.405-5(b)(6).
    Comment: One commenter suggested that the Board add an illustrative 
chart at 9903.405-5(d) to clarify what adjustments should or should not 
be made to the various types of contracts in order to preclude payment 
of increased costs when a voluntary change is made.
    Response: The Board agrees that such a chart would provide useful 
clarifying information and has inserted a chart at 9903.405-5(d)(3).
    Comment: One commenter suggested that the concept of ``potential 
increased cost paid'' be added to the definition of ``increased cost 
paid''.
    Response: The Board finds no useful purpose to such a definition. 
The Board has defined increased costs as they relate to changes in 
accounting practices, cost estimating noncompliances and cost 
accumulation noncompliances. These definitions, when taken together, 
constitute potential increased costs paid. Increased costs paid occurs 
when the increased costs to CAS-covered contracts, as defined, is 
actually paid by the United States. Procedures described in 9905.405-
5(d), 9903.406-3 and 9903.406-4 set forth action that can be taken to 
preclude or reduce the payment of increased costs, as well as 
appropriate action to recover the increased costs once they have been 
paid.
    Comment: One commenter argued that the Board had exceeded its 
authority as a result of the definition of increased cost on firm 
fixed-price contracts and the method prescribed to recover such 
increased costs, and further suggests that such recovery is tantamount 
to an unauthorized penalty.
    Response: The Board strongly disagrees with these arguments. When a 
downward price adjustment is made to a fixed-price contract to reflect 
a lesser allocation of costs resulting from a change in cost accounting 
practices, no penalty is placed on the contractor. The adjustment does 
no more than reduce the contract price so that it is consistent with 
those accounting practices actually used during contract performance. 
Without this adjustment, the contractor would receive an unjustified 
enlargement of profit due merely to a shift of costs caused, not by the 
elimination of costs, but by a change in cost accounting practices. 
Clearly, payment of this unwarranted windfall represents increased 
costs to the Government. The contract price adjustment provisions for 
changes in cost accounting practices included in the CAS contract 
clause are meant to preclude the payment of these increased costs, as 
well as to adjust contract values so that they are consistent with the 
contract costs accumulated during contract performance.
    Comment: One commenter asked that the Board develop and prescribe 
specific materiality threshold amounts for contract price adjustment 
purposes.
    Response: Consistent with the Board's decision not to specify 
precise amounts in the materiality provisions at 9903.305, the Board 
believes the establishment of specific materiality threshold amounts 
for adjustments of contract prices due to changes in cost accounting 
practice is best left to the cognizant Federal agency official based on 
the individual circumstances involved and discussions with the 
contractor.
    Comment: A number of commenters expressed concern about the 
difficulty in obtaining the funding to effect the contract price 
adjustments negotiated for changes in cost accounting practices.
    Response: Although the funding issue is a legitimate concern, it is 
one which all of the contracting parties that are affected by changes 
in cost accounting practices must work with the cognizant Federal 
agency official to overcome.
    Comment: Several contractor commenters expressed the view that a 
noncompliance that does not result in a material increase in costs to 
the Government should not be considered a noncompliance, and asked that 
the provision on Technical Noncompliance at 9903.406-5 be deleted.
    Response: The Board does not agree with the commenters' position. 
Once a cognizant Federal agency official determines that a practice is 
noncompliant, there is no reason why some subsequent determination has 
to be made again in the future. Any significant increased costs paid as 
a result of the noncompliant condition in the event that the impact of 
the noncompliance subsequently becomes material, should be immediately 
recoverable by the Government with applicable interest. This serves to 
discourage the continued use of a noncompliant practice, regardless of 
materiality and best protects the interests of the Government when a 
noncompliant practice exists.

Restructuring Activities

    Comment: The ANPRM will discourage restructuring activities.
    Response: Some commenters erroneously interpreted the Board's 
proposal to mean that the net savings attributable to restructuring 
activities will be included in the measurement of the cost impact of 
any cost accounting practice changes resulting from the restructuring 
activities. The cost impact process deals only with the greater or 
lesser allocation of total ongoing costs to individual contracts 
resulting from a change in cost accounting practice. Savings due to 
reductions in the costs of ongoing functions or changes in the level of 
costs are not subject to adjustment under CAS and are not to be 
included in cost impact estimates.

Educational Institutions

    Comment: A university suggested that the Board comment on how the 
cost impact process should be handled during periods when predetermined 
rates are in effect. When would GDM and Cost Impact Settlement 
Proposals be required? The Board should consider the effect of the 
proposed regulation on educational institutions if extended to grant 
and cooperative agreements awards under OMB Circular A-21.
    Response: In a predetermined rate environment, the basic underlying

[[Page 49206]]

assumption is that the educational institution's cost accounting 
practices, e.g., the classification of a cost as either a direct cost 
or an indirect cost, will be followed consistently during the multi-
year periods covered by such rates. The predetermined indirect cost 
rates are predicated upon cost data for one base year which may be 
adjusted to reflect future year cost levels for the periods to be 
covered. The base year data is accumulated and forecasted in accordance 
with the institution's established cost accounting practices.
    Once established, the predetermined indirect cost rates are applied 
to appropriate estimated base costs to determine the estimated indirect 
costs included in cost proposals for potential awards. After award, as 
sponsored agreements are actually performed, the predetermined rates 
are also applied to the actual base costs that are accumulated in 
accordance with the institutions's established cost accounting 
practices.
    To be consistent, the cost accounting practices used to determine 
indirect pool costs and allocation base costs forecasted for the 
covered years must be followed consistently when proposal costs are 
estimated and when actual costs are accumulated and reported during the 
covered periods. Should there be any changes in cost accounting 
practices (e.g., if an indirect cost were to be reclassified as a 
direct cost), while a sponsored agreement is actually performed, the 
set of assumptions or conditions regarding the composition of the pools 
and allocation bases used to establish the predetermined rates and the 
estimated cost proposal would be changed to a different set of 
conditions. In such cases, the continued application of the same 
predetermined indirect cost rate in such circumstances could result in 
the inconsistent allocation of costs and inequitable claims for the 
reimbursement of actual costs. A contract price or cost adjustment may 
be required for such changes under the Board's rules.
    To minimize or preclude over- or under-payments resulting from 
``compliant'' changes in cost accounting practices, educational 
institutions are required to notify their cognizant Federal agency 
officials of any planned changes in cost accounting practice. If 
necessary, appropriate revisions to reflect the cost impact of a change 
in cost accounting practice on a predetermined rate should be effected 
promptly. This could minimize or preclude the need for subsequent cost 
or price adjustments attributable to a compliant accounting change.
    The Board agrees with the commenter that the cost impact process 
should be uniformly applied in an efficient and economical manner for 
all Federal awards affected by a compliant cost accounting practice 
change or a noncompliance. Therefore, certain unique provisions, 
including specified agency waiver authority, applicable solely to 
educational institutions that are subject to OMB Circular A-21, have 
been included in the NPRM being promulgated today.
    Comment: One university suggested that the contract clause for 
educational institutions at 9903.201-4(e) also be updated.
    Response: The referenced clause became effective on January 9, 
1995, and the Board does not believe sufficient time has elapsed to 
warrant its revision at this time. Further comments on the desirability 
of conforming the clause with the language being proposed today for the 
``Full'' and ``Modified'' clauses are requested. If there is support 
for such revision, the Board will consider updating the clause in the 
final rule.

F. Additional Public Comments

    Interested persons are invited to participate by submitting data, 
views or arguments with respect to this NPRM. All comments must be in 
writing and submitted to the address indicated in the ADDRESSES section 
of this NPRM. Computer diskette copies of your comments in WordPerfect 
6.1 or other format that is compatible with WordPerfect will be 
appreciated.
    The Board is considering the establishment of certain new 
requirements that it believes would clarify and facilitate the overall 
process governing changes in cost accounting practices. Therefore, the 
Board invites interested parties to specifically comment on the 
following NPRM provisions being proposed today:
    Changes in cost accounting practices:

--Proposed 9903.302-2(c) would exempt certain changes in cost 
accounting practices from contract price or cost adjustment and the 
cost impact process.

    Contract price and cost adjustment process: 

--Proposed 9903.201-6(b) establishes new criteria for determining when 
a voluntary change in cost accounting practice may be treated as a 
desirable change.
--Proposed 9903.405-2(b)(1) requires CAS-covered contractors to notify 
the Government of and fully disclose changes in cost accounting 
practices that are required to comply with a new or modified Standard 
or interpretation thereof 60 days prior to the submission of a price 
proposal in which the contractor first uses the required change to 
estimate costs for a potential CAS-covered contract or subcontract.
--Proposed 9903.405-2(b)(2) establishes new notification requirements 
for voluntary and desirable changes.
--Proposed 9903.405-2(f) provides a new equitable adjustment provision 
for contracts negotiated within 60 days after a contractor notifies the 
Government of a voluntary change that would otherwise be subject to a 
CAS-covered contract's no increased cost provision.
--Proposed 9903.405-4(b) provides for the use of a cost impact 
settlement proposal that would permit early resolution of the estimated 
cost impact in lieu of the use of a detailed cost impact proposal.

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 set forth in 
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 clause set forth below, Cost Accounting 
Standards--Full Coverage, 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.
* * * * *

COST ACCOUNTING STANDARDS--FULL COVERAGE

(AUGUST 1996)

    (a) The provisions of Part 9903 of 48 CFR, Chapter 99, including 
the definitions and requirements contained therein, are

[[Page 49207]]

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 practices disclosed for this contract 
shall be the same 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 
materially 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 materially 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 materially 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 materially affected by a change in cost accounting practice 
made by the contractor or a subcontractor that the cognizant Federal 
agency official finds to be 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 of the Internal Revenue Code of 1986 
(26 U.S.C. 6621) for such period, from the time the payment by the 
United States was made to the time the adjustment is effected. 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 books, records, documents, papers, or records, 
regardless of form (e.g., machine readable media such as disk, tape, 
etc.) or type (e.g., data bases, applications software, data base 
management software, utilities, etc.) relating to compliance with 
the requirements of this clause.
    (d) Flowdown to Subcontracts. Unless the subcontract is exempt 
under 9903.201, 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, including any applicable 
modifications or interpretations thereto, in effect on the 
subcontractor'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, except that if the subcontract is awarded to a 
business unit 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.

(End of clause)

* * * * *
    (c) Cost Accounting Standards--Modified Coverage. (1) The 
contracting officer shall insert the clause set forth below, 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 clause below requires the contractor to comply with CAS 
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 1996)

    (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 practices disclosed for this 
contract shall be the same 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 
materially 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

[[Page 49208]]

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 materially 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 materially 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 materially 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 of the Internal Revenue Code of 1986 
(26 U.S.C. 6621) for such period, from the time the payment by the 
United States was made to the time the adjustment is effected. 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 books, records, documents, papers, or records, 
regardless of form (e.g., machine readable media such as disk, tape, 
etc.) or type (e.g., data bases, applications software, data base 
management software, utilities, etc.) relating to compliance with 
the requirements of this clause.
    (d) Flowdown to Subcontracts. Unless the subcontract is exempt 
under 9903.201, 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, including any applicable 
modifications or interpretations thereto, in effect on the 
subcontractor'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, except that if the subcontract is awarded to a 
business unit 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.

(End of clause)

    3. Section 9903.201-6 is proposed to be revised to read as follows:


9903.201-6   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 change is desirable, as defined 
at 9903.403, i.e., desirable and not detrimental to the interests of 
the Government.
    (b) The determination as to whether or not a change in cost 
accounting practice is desirable should be made on a case-by-case basis 
in accordance with, but not limited to, the following criteria:
    (1) A change in cost accounting practice shall be deemed to be 
desirable and not detrimental if the cognizant Federal agency official 
determines that, for a Cost Accounting Standard which the contractor 
has complied with, the change is necessary in order for the contractor 
to remain in compliance with that Standard.
    (2) The cognizant Federal agency official shall determine that a 
change in cost accounting practice is desirable and not detrimental if 
the change from one compliant practice to another compliant practice 
was recommended in writing by the cognizant Federal agency official and 
the Contractor agrees to make the change.
    (3) The cognizant Federal agency official's finding should not be 
made solely because of the financial impact of the proposed change on a 
contractor's or subcontractor's current CAS-covered contracts. A change 
may be determined to be desirable and not detrimental to the 
Government's interest even though costs of existing contracts may 
increase, provided there is a reasonable expectation that benefits will 
accrue to the Government in future awards.
    4. Section 9903.201-7 is proposed to be revised to read as follows:


9903.201-7   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 the responsibilities specified in paragraph (d) of this 
section. Agencies should discourage agency officials from individually 
administering CAS on a contract-by-contract basis. 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

[[Page 49209]]

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) Responsibilities. 
    (1) The cognizant Federal agency official shall:
    (i) Make all required determinations for all CAS-covered contracts 
and subcontracts.
    (ii) Coordinate with affected agencies when developing the 
Government's negotiation position regarding settlement of the overall 
cost impact and 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) Request affected agencies to prepare implementing contract 
modifications and to obtain implementing subcontract modifications from 
their 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.
    (vi) 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:
    (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.
Subpart 9903.3--CAS Rules and Regulations
    5. Section 9903.301 is amended by adding two definitions 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, 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 that 
are generally included in specific indirect cost pools and 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.
* * * * *
    6. Section 9903.302-1 is amended by revising paragraph (c) to read 
as follows:
9903.302  Definitions, explanations, and illustrations of the terms, 
``cost accounting practice'' and ``change to a cost accounting 
practice.''
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 
systematically 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 determinations made on:
    (i) How a cost is to be accumulated in the contractor's cost 
accounting system,
    (ii) Whether a cost is to be directly or indirectly allocated to 
final cost objectives,
    (iii) The selection and composition of cost pools, and
    (iv) The selection and composition of the appropriate allocation 
bases.
    (2) The selection of cost pools involves the determination to 
establish one or more homogeneous cost pools for the accumulation of 
specific costs to be allocated to other intermediate and/or to specific 
final cost objectives at specified locations. Normally, separate pools 
are established for specific functional activities, e.g., for a 
specified assembly operation within a particular segment. The 
composition of cost pools involves the determinations to identify and 
accumulate, by specific 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 activity (e.g., labor hours, square footage) or cost 
data (e.g., labor dollars, total cost input) will be used as the basis 
for the allocation of the total costs accumulated in each pool to 
intermediate and/or final cost objectives at specified locations. 
Normally, the allocation base activity selected for each pool is the 
activity that best represents the causal or beneficial relationship 
between the pooled costs and the base activity. The composition of an 
allocation base involves the determination to collect and accumulate 
the selected base activity data for a particular function, or group of 
functions, associated with each established pool. The composition of a 
business unit allocation base includes the specific cost and/or 
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.
* * * * *
    7. Section 9903.302-2 is 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.

[[Page 49210]]

    (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 from an existing indirect cost pool to a different pool or 
pools.
    (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 company-wide 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 segment to another 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.
    (4) The transfer of an existing ongoing function from a segment's 
existing overhead or G&A indirect cost pool to a different pool is not 
a change in cost accounting practice provided:
    (i) The ongoing costs are directly allocated back to the original 
pool for reallocation to final cost objectives, and
    (ii) The segment continues to identify and accumulate the directly 
allocated cost of the function within the same pool in the same manner 
as was done before the change.
    (c) Cost accounting practice changes exempt from contract price and 
cost adjustment. The following types of changes in cost accounting 
practice shall not be subject to contract price or cost adjustment. 
However, the cost accounting practices resulting from such changes 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.
    (1) Changes in cost accumulation practices that result due to a 
transfer of functions or merger of cost pools which are undertaken for 
improved management efficiencies and effectiveness and which involve 
the physical realignment or reduction of facilities or personnel.
    (2) Changes in the selection and/or composition of an overhead or 
general and administrative expense pool resulting from the 
consolidation of existing pools or the expansion of an existing pool 
into two or more pools that are not exempt under paragraph (c)(1) of 
this section but meet all of the following conditions:
    (i) The elements of cost and the functions included in the original 
and resultant merged or split-out pools remain the same. After the 
change, the costs of the ongoing functions are identified and 
accumulated in the resultant merged pool or split-out pools in the same 
manner and at the same level of detail.
    (ii) The selected activity used as the allocation base remains the 
same for the affected pools. After the change, the merged allocation 
base activity or split-out allocation base activity is identified and 
accumulated in the new merged allocation base or split-out allocation 
bases.
    (iii) The merged or split-out pools involve the allocation of 
similar pooled overhead or G&A costs to similar final cost objectives 
where the underlying levels of pooled costs and allocation base 
activity involve similar proportional relationships. Pools shall be 
considered similar if, after the change, the resultant pools are 
homogeneous (see 9904.418-50(b)) and the rates (or rate) used to 
allocate pooled indirect costs to final cost objectives fall within a 
corridor of plus or minus one percent of the rate (or rates) that would 
have resulted if the combination or expansion had not occurred. The 
comparison shall be based on the same level of ongoing pooled costs and 
allocation base activity that is expected to occur after the change is 
made. For example, if under the original cost accounting practices 
followed for a single pool the overhead recovery rate would be 200%, 
then the resultant split-out rates must fall within the corridor of 
198% to 202%. In the case of a combination of pools and their 
respective allocation bases, the corridors around the two original 
rates that would result if there were no combination must converge or 
overlap to be considered similar, e.g., if the continued use of two 
pools would result in rates of 101% and 99%, their respective corridors 
of 100% to 102% and 88% to 100% would overlap.
* * * * *
    8. Section 9903.302-3 is 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)(11) 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 through 
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.        
                                         (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 activity.                

[[Page 49211]]

                                                                        
(4) A Segment combines two similar       (4)(i) Before change: The      
 ongoing functions.                       Segment established separate  
(i) For internal management and           assembly overhead pools to    
 financial reporting purposes, the        accumulate the indirect costs 
 ongoing direct and indirect assembly     applicable to Plant A's and   
 operations at Plants A and B are         Plant B's respective assembly 
 merged into a new combined plant-wide    functions. Pooled costs were  
 pool.                                    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    
                                          total assembly direct labor   
                                          dollars allocation base       
                                          applicable to the two plant   
                                          locations.                    
                                         (iii) A cost accounting        
                                          practice change occurred      
                                          because the selection and     
                                          composition of the pool has   
                                          changed and the composition of
                                          the allocation base has       
                                          changed.                      
                                         (iv) Because the pools were    
                                          combined, the specific        
                                          indirect costs associated with
                                          Plant A and Plant B are now   
                                          accumulated in one pool and   
                                          are allocated to all          
                                          individual final cost         
                                          objectives performed at both  
                                          Plants A and B.               
(5) Assume the same circumstances as in  (5)(i) The merging of the two  
 (4) above except that Plant A is         indirect cost pools into one  
 closed.                                  indirect cost pool and the    
(i) The contractor's total overall        merging of the two allocation 
 costs of operations are reduced.         bases resulted in a cost      
                                          accounting practice change for
                                          the same reasons cited in (4) 
                                          above.                        
(ii) The change involves reductions and/ (ii) The change resulted in    
 or transfers of employees and the sale   economies and efficiencies due
 of various physical assets by both       to physical changes and       
 Segments.                                reductions in personnel. The  
                                          CAS-covered contracts that    
                                          were affected by the change in
                                          practice are not subject to   
                                          contract price and cost       
                                          allowance adjustment or the   
                                          cost impact process under the 
                                          exemption provided by 9903.302-
                                          2(c)(1).                      
(6) Assume the same circumstances as in  (6)(i) The merging of the two  
 (4) above except that the two ongoing    indirect cost pools into one  
 assembly functions continue to operate   indirect cost pool and the    
 in the same manner before and after      merging of the two allocation 
 the change and that the two plants       bases resulted in a cost      
 otherwise remain unchanged.              accounting practice change for
                                          the same reasons cited in (4) 
                                          above.                        
                                         (ii) If the merged indirect    
                                          cost pools were determined to 
                                          be similar under the exemption
                                          criteria provided at 9903.302-
                                          2(c)(2), then the CAS-covered 
                                          contracts that were affected  
                                          by the change in practice     
                                          would not be subject to       
                                          contract price and cost       
                                          allowance adjustment or the   
                                          cost impact process.          
(7) Assume the same circumstances as in  (7)(i) Before change: Segments 
 (4) above except that Plants A and B     A and B each established an   
 are separate Segments A and B that are   assembly overhead pool to     
 combined as Segment C for management     accumulate the indirect costs 
 reporting purposes.                      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 (4) above, a cost    
                                          accounting practice change has
                                          occurred. Because the number  
                                          of pools established by the   
                                          contractor has changed, the   
                                          specific costs associated with
                                          Segments A and B are now      
                                          allocated to all of the       
                                          individual final cost         
                                          objectives performed by both  
                                          Segments A and B.             
                                         (iv) If either one of the      
                                          exemptions contained in       
                                          9903.302-2(c) applies, then   
                                          the CAS-covered contracts that
                                          were affected by the change in
                                          practice would not be subject 
                                          to contract price and cost    
                                          allowance adjustment or the   
                                          cost impact process.          
(8) The contractor changes how the       (8)(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 manufacturing and    
                                          assembly costs are split-out  
                                          and accumulated separately in 
                                          a manufacturing pool and      
                                          assembly pool. The pooled     
                                          costs 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.                   

[[Page 49212]]

                                                                        
                                         (iii) The decision to          
                                          accumulate the ongoing costs  
                                          of the manufacturing and      
                                          assembly functions separately,
                                          in two pools instead of one,  
                                          represents a change in the    
                                          selection and composition of  
                                          the pool. The decision to     
                                          allocate the accumulated pool 
                                          costs to final cost objectives
                                          by use of separate allocation 
                                          bases for the manufacturing   
                                          and assembly functions instead
                                          of one plant-wide allocation  
                                          base represents a change in   
                                          the composition of the base.  
(9) The contractor transfers the         (9)(i) Before change: The cost 
 incoming materials inspection            of performing the incoming    
 function.                                inspection function was       
(i) Incoming materials are inspected in   accumulated in an intermediate
 the same manner before and after the     cost objective that was       
 change.                                  included in the Segment's     
                                          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.               
                                         (iii) The decision to include  
                                          the accumulated cost of the   
                                          ongoing inspection function in
                                          a different cost pool         
                                          represents a change in the    
                                          composition of the two pools. 
                                          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 activity for the incoming
                                          inspection function.          
(10) A contractor establishes a new      (10) As of the effective date  
 product line by acquiring another        of acquisition, the contractor
 company. Both entities are performing    requires the new segment to   
 CAS-covered contracts.                   group, accumulate and         
(i) The acquired company will be          distribute the continuing     
 treated as a new segment. The            costs of the acquired ongoing 
 contractor's new segment will complete   functions differently, e.g.,  
 the CAS-covered contracts that were      the acquired company's single 
 novated from the prior company to the    overhead pool is split into   
 contractor. It will not perform any      two new pools. The cost of the
 work associated with the contractor's    ongoing functions will be     
 existing lines of business.              grouped and accumulated in    
                                          different indirect expense    
                                          pools and allocated to        
                                          different final cost          
                                          objectives by use of two      
                                          allocation bases split-out    
                                          from the previously used      
                                          single base.                  
                                         (i) The changes made by the    
                                          acquiring contractor represent
                                          changes in the selection and  
                                          composition of the pools and  
                                          the composition of the bases  
                                          for the acquired CAS          
                                          contracts. Unless one of the  
                                          exemptions at 9903.302-2(c)   
                                          applies, 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.        
(11) A contractor expands the existing   (11)(i) As of the effective    
 product line of Segment A by acquiring   date of acquisition, Segment A
 another company. Both entities are       merges the continuing costs of
 performing CAS-covered contracts.        the acquired company's ongoing
(i) The acquired company will be          functions into Segment A's    
 absorbed by Segment A.                   indirect cost pools and       
(ii) Segment A will complete the          allocation bases, in          
 acquired CAS-covered contracts that      accordance with Segment A's   
 were novated from the prior company to   established cost accounting   
 the contractor.                          practices. Segment A's pool   
                                          and base now include the      
                                          ongoing functions of both     
                                          Segment A and the acquired    
                                          company.                      
                                         (ii) The costs of the          
                                          contractor's existing         
                                          contracts will be accumulated 
                                          and reported differently than 
                                          when the contract costs were  
                                          estimated. The newly          
                                          established allocation bases  
                                          and indirect cost pools       
                                          include both the existing and 
                                          acquired ongoing functions.   
                                         (iii) The pool and base        
                                          combinations made by the      
                                          acquiring contractor represent
                                          changes in the selection and  
                                          composition of the pools and  
                                          bases for the existing Segment
                                          and acquired company. Unless  
                                          one of the exemptions at      
                                          9903.302-2(c) applies, the    
                                          cost accounting practice      
                                          changes are subject to the    
                                          contract price and cost       
                                          adjustment provisions of the  
                                          existing and acquired CAS-    
                                          covered contracts.            
                                         (iv) The exceptions 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 existing or
                                          acquired CAS-covered          
                                          contracts.                    
------------------------------------------------------------------------

    9. Section 9903.302-4 is amended by adding an introductory 
paragraph, and illustrations (h) through (k) 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 
changes 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.

[[Page 49213]]



------------------------------------------------------------------------
              Description                      Accounting treatment     
------------------------------------------------------------------------
                                                                        
*                  *                  *                  *              
                  *                  *                  *               
(h)(1) The contractor consolidates the   (h)(1) (i) Before the change,  
 accounting functions performed           Segments A and B each directly
 directly by Segment A and Segment B.     identified and accumulated the
A new service center is established       cost of their accounting      
 within Segment B to perform the          functions in intermediate cost
 accounting function for several          objectives that were included 
 segments.                                in their respective G&A       
                                          expense pools.                
                                         (ii) After the change, the     
                                          costs of performing the       
                                          accounting function for       
                                          Segment A and the other       
                                          segments are accumulated      
                                          directly by Segment B in a    
                                          newly established accounting  
                                          service center cost pool.     
                                          Segment B allocates the       
                                          accumulated service center    
                                          costs to the benefiting       
                                          Segments based on actual usage
                                          factors. Segments A and B     
                                          continue to identify and      
                                          accumulate the accounting     
                                          service cost charges received 
                                          from Segment B in their       
                                          respective Segment G&A expense
                                          pools.                        
                                         (iii) Since Segments A and B   
                                          continued to specifically     
                                          identify and accumulate the   
                                          contractor's costs of         
                                          performing Segment A's and B's
                                          accounting functions in their 
                                          respective G&A expense pools, 
                                          before and after the change,  
                                          no change in the contractor's 
                                          established cost accounting   
                                          practices has occurred.       
(h)(2) Assume the same circumstances as  (h)(2) (i) Before the change,  
 in (h) above, except that after the      Segment A directly identified 
 change the function is performed by a    and accumulated the cost of   
 home office.                             its accounting functions in an
                                          intermediate cost objective   
                                          that was included in its G&A  
                                          expense pool.                 
                                         (ii) After the change, the     
                                          costs of performing the       
                                          accounting function for       
                                          Segment A and the other       
                                          segments are accumulated      
                                          directly by the home office   
                                          and the accumulated costs are 
                                          allocated to the benefiting   
                                          Segments based on actual usage
                                          factors. Segment A continues  
                                          to identify and accumulate the
                                          accounting service cost       
                                          charges received from the home
                                          office in the Segment's G&A   
                                          expense pool.                 
                                         (iii) Since Segment A continued
                                          to specifically identify and  
                                          accumulate the contractor's   
                                          costs of performing Segment   
                                          A's accounting functions in   
                                          the G&A expense pool, before  
                                          and after the change, no      
                                          change in the contractor's    
                                          established cost accounting   
                                          practices has occurred.       
                                         (iv) A change in cost          
                                          accounting practice would     
                                          occur if Segment A no longer  
                                          accumulated the costs of its  
                                          ongoing accounting functions  
                                          in the same intermediate cost 
                                          objective, in the G&A pool,   
                                          e.g., if Segment A were unable
                                          to do so because the          
                                          contractor accumulated the    
                                          costs of the accounting       
                                          functions with other costs at 
                                          the home office and allocated 
                                          the combined costs to Segments
                                          on a common usage base or as  
                                          residual expense.             
(i) The contractor transfers an          (i)(1) Before the transfer, the
 inspection department employee from      employee's salary was         
 Plant A to Plant B.                      identified and accumulated as 
                                          inspection labor in Plant A's 
                                          overhead pool.                
                                         (2) After the transfer, the    
                                          employee's salary is similarly
                                          identified and accumulated in 
                                          Plant B's overhead pool. The  
                                          salaries of all other         
                                          employees performing the      
                                          inspection function at Plants 
                                          A and B continue to be        
                                          identified and accumulated in 
                                          their respective pools.       
                                         (3) Since the cost of the      
                                          inspection functions at Plants
                                          A and B continue to be        
                                          identified and accumulated    
                                          within the same pools, before 
                                          and after the change, no      
                                          change in cost accounting     
                                          practice has occurred.        
(j) A contractor with a corporate home   (j)(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 the same manner.  
 contractor's existing CAS-covered        The new segment is added to   
 contracts.                               the home office allocation    
                                          base or bases used to allocate
                                          home office costs to all      
                                          segments.                     
                                         (2) The addition of the new    
                                          segment to the 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 pool   
                                          and applicable allocation     
                                          bases were not otherwise      
                                          changed, the described home   
                                          office change is not a cost   
                                          accounting practice change    
                                          requiring contract price or   
                                          cost adjustments.             
(k) Assume the same circumstances as in  (k)(1) For the reasons stated  
 (j) above, except that:                  in (j) above, the described   
(1) The contractor acquired a new         home office change is not a   
 segment that is performing CAS-covered   cost accounting practice      
 contracts from another company.          change.                       
(2) The acquired segment will continue   (2) At the segment level, the  
 to estimate, accumulate and report       first time incurrence of the  
 costs in accordance with the original    acquiring contractor's home   
 company's compliant and previously       office cost allocation is an  
 disclosed cost accounting practices      initial adoption of a cost    
 for that segment. A new Disclosure       accounting practice (see      
 Statement is filed to that effect.       exception at 9903.302(b)(1)). 
 Also disclosed is the contractor's       Since the contractor adopted  
 home office cost allocation to the       the acquired segment's        
 segment.                                 previously established cost   
                                          accounting practices, no      
                                          change in established cost    
                                          accounting practices occurred 
                                          for the acquired CAS-covered  
                                          contracts.                    
------------------------------------------------------------------------


[[Page 49214]]

    10. Section 9903.302-5 is added to read as follows:


9903.302-5   Mergers and Acquisitions.

    (a) Each CAS-covered contract requires that the performing 
contractor consistently follow its established and disclosed cost 
accounting practices over the contract's entire period of performance.
    (b) When a contractor or a segment performing a CAS-covered 
contract is acquired by a different contractor through a merger or 
acquisition, the acquired contractor 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 
contractor or segment. 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.
    (c) This subsection applies equally to CAS-covered subcontracts 
acquired by a contractor or subcontractor.


9903.306   [Removed and Reserved]

    11. Section 9903.306 is amended by removing and reserving the 
section.
    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
9903.403  Definitions.
9903.404  Materiality determination for making adjustment.
9903.405  Change in Cost Accounting Practice.
9903.405-1  General.
9903.405-2  Notification of Changes in Cost Accounting Practices.
9903.405-3  Determination of Adequacy and Compliance and Request for 
General Dollar Magnitude (GDM).
9903.405-4  Contractor Cost Impact Submissions.
9903.406  Noncompliances.
9903.406-1  General Types of Noncompliances.
9903.406-2  Determination of Noncompliance.
9903.406-3  Cost Estimating Noncompliance.
9903.406-4  Cost Accumulation Noncompliance.
9903.406-5  Technical noncompliances.
9903.407  Illustrations.
9903.407-1  Change in Cost Accounting Practice--Illustrations.
9903.407-2  Compliance 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) Subpart 9903.4 rules and regulations are to be applied 
uniformly to all CAS-covered contracts and subcontracts affected by a 
compliant change in cost accounting practices 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 noncompliance actions and 
changes 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 (a) for 
processing noncompliance actions and changes in cost accounting 
practices, 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) Subpart 9903.4 rules and regulations apply 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 
contract price or cost adjustments for material cost impacts 
attributable to compliant changes in cost accounting practices and/or 
to noncompliant practices. Subpart 9903.4 establishes procedures for 
determining the required adjustments. Other Federally sponsored 
agreements that do not contain a CAS contract clause are subject to 
similar requirements under OMB Circular A-21, Cost Principles for 
Educational Institutions, which incorporated the Board's Disclosure 
Statement (Form CASB DS-2) and the CAS in part 9905. OMB Circular A-21 
also requires adjustments for sponsored agreements affected by material 
cost impacts due to changes in compliant cost accounting practices or 
due to the application of a noncompliant practice used to estimate, 
accumulate or report the costs of sponsored agreements.
    (b) The CASB and OMB requirements were designed 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 cost impact data and when determining the 
adjustments that may be required for individual CAS-covered contracts 
and other Federally sponsored agreements affected by the same change or 
noncompliance. The procedures applied to all Federally sponsored 
agreements, including CAS-covered contacts and subcontracts, should be 
consistent with subpart 9903.4 requirements and objectives.
    (c) Waiver authority for compliant changes. When an educational 
institution changes a compliant cost accounting practice 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 section 9903.405 requirements for affected CAS-
covered contracts and subcontracts if deemed necessary in order to 
establish appropriate alternative procedures or methods for obtaining 
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 
notification requirements in 9903.405-2 or the adequacy and compliance 
determinations required by 9903.405-3.


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 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, pursuant to such changes. Section 9903.405 also 
establishes procedures for adjustments of contract amounts that are 
materially

[[Page 49215]]

affected by 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 correct the 
noncompliant practices 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.
    Applicability date means (a) 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; and (b) 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 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.
    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.
    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; and
    (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, on contracts subject to adjustment.
    Increased costs due to a change in compliant cost accounting 
practices means:
    (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 
practices; and
    (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 had the contractor not changed its cost 
accounting practice(s).
    Increased costs due to a cost accumulation noncompliance means 
increased costs resulting 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 a flexibly-priced CAS-covered contract than would have 
been allocated to the contract 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 
increased costs 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 contract 
(or subcontracts), 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 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.
    Netting process means the technique used to determine if action 
needs to be taken to preclude the payment of increased costs for 
voluntary accounting changes not deemed desirable, by comparing the net 
higher allocation of costs by contract type to the net lower allocation 
of costs to other contract types for contracts subject to adjustment.
    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 
CAS-covered contractor is required to make in order to comply with 
applicable standards, modifications or interpretations thereto, that 
subsequently become applicable to an existing contract due to the 
receipt of another CAS-covered contract or subcontract.
    Technical noncompliance means a noncompliant cost accounting 
practice that does not produce material increased costs paid by the 
Government.
    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.


9903.404  Materiality determination for making adjustment.

    Contract price adjustments or actions to preclude or recover the 
payment of increased costs resulting from 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

[[Page 49216]]

use the criteria specified in 9903.305. A cognizant Federal agency 
official's determination of materiality will require judgment based on 
individual circumstances and discussions between the contracting 
parties. Such judgments, discussions and decisions should take place as 
soon as practicable after receipt of contractor notification of a 
change, or final determination of noncompliance, so as to lead to a 
timely resolution of the cost impact action. The cognizant Federal 
agency official may forego submission of a general dollar magnitude 
estimate or a cost impact proposal, or to adjust contracts, if the 
cognizant Federal agency official determines that the amount involved 
is immaterial based on other available data.


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 
9903.201-6 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 
accounting changes, as set forth in the remaining paragraphs of 
9903.405. Any changes in cost accounting practices that are implemented 
without the required notification as set forth in 9903.405-2 will 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. 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 determined and disclosed as soon as 
practicable, but no later than 60 days before the price proposal in 
which the contractor first uses the required change to estimate costs 
for a potential CAS-covered contract, or other date to which both 
parties mutually agree.
    (2) Voluntary and desirable changes 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 the 
earlier of the applicability date or 60 days before the effective date. 
The effective date on which the contractor shall begin using the new 
practice for cost estimating and negotiating purposes is the earlier 
of:
    (i) 60 days after notification of the change in accounting 
practice; or
    (ii) The date of determination by the cognizant Federal agency 
official that the revised accounting practice is adequate and compliant 
(or other date to which both parties mutually agree).
    (c) Contractors are encouraged to make early notification of 
changes in cost accounting practices in order to increase the time 
between the effective date and applicability date. This will decrease 
the number of contracts existing on the applicability date that were 
awarded based on the old cost accounting practice. Early use of the new 
practice in estimating proposal costs should lessen the number of 
contracts and subcontracts subject to adjustment as a result of the 
change, the total dollar impact of the accounting change for existing 
contracts, and the likelihood that a detailed cost impact proposal will 
be required.
    (d) For voluntary and desirable changes, the notification date 
generally should occur more than 60 days prior to the applicability 
date. If a contractor desires to make the applicability date of the 
change retroactive to the beginning of the current fiscal year in 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. 
Regardless of whether notification occurs before or after the 
applicability date, the contractor should not implement any retroactive 
changes until at least 60 days after giving notification to the 
cognizant Federal agency official.
    (e) For desirable changes, the contractor, when requesting that a 
voluntary change be deemed desirable, shall provide rationale 
demonstrating that the accounting change is desirable and not 
detrimental to the Government's interests (see 9903.201-6). The 
cognizant Federal agency official should make a decision with regard to 
this finding promptly after the change is determined to be adequate and 
compliant.
    (f) The contractor shall not implement a new cost accounting 
practice to estimate or accumulate costs prior to the cognizant Federal 
agency's official's determination of adequacy and compliance or 60 days 
after the notification date, whichever comes first. For voluntary 
changes, any contracts awarded between the notification and effective 
dates of the new practice that were based on the old practice will be 
subject to an equitable adjustment based on the effect of the 
application of the new accounting practice.
    (g) Data submission requirements: The description of any change in 
cost accounting practice will include the relevant Disclosure Statement 
pages affected by the change, 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) Exempt from contract price and cost adjustment pursuant to 
9903.302-2(c) (1) or (2),
    (2) 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,
    (3) Desirable and not detrimental to the interests of the 
Government, and/or
    (4) One that warrants retroactive implementation.


9903.405-3  Determination of Adequacy and Compliance and Request for 
General Dollar Magnitude (GDM).

    (a) Upon receipt of the contractor's notification, the cognizant 
Federal agency official, with the assistance of the auditor, shall 
review the planned cost accounting practice change

[[Page 49217]]

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. The 
notification date will then be revised to the date of receipt of a 
revised description of a planned change that is subsequently deemed 
adequate and compliant. 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. This generally should 
occur within 60 days of the contractor's notification of the change in 
accounting practice.
    (b) After a determination of adequacy and compliance has been made, 
the cognizant Federal agency official will request a GDM estimate of 
the cost impact of the change and a cost impact settlement proposal, as 
described in 9904.405-4 (a) and (b), unless a determination is made 
that the practice change is exempt under 9903.302-2(c) or the impact of 
the change on CAS-covered contracts and subcontracts is obviously 
immaterial based on information provided by the contractor in the 
notification of the change. The request should specify a date for 
submission of the GDM and cost impact settlement proposal, generally 30 
to 60 days after the cognizant Federal agency official's request, 
depending on the complexity of the changes. The cognizant Federal 
agency official will use the GDM and cost impact settlement proposal to 
determine if a detailed cost impact proposal is required, and if 
individual contract price and cost adjustments are necessary to achieve 
equity.


9903.405-4  Contractor Cost Impact Submissions.

    (a) General Dollar Magnitude (GDM).
    (1) The purpose of the GDM estimate is to provide information to 
the cognizant Federal agency official on the 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. The GDM is used together with the cost impact settlement 
proposal 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 9903.405-4(c).
    (2) The GDM 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.
    (3) In computing the GDM, the contractor shall use a consistent 
data baseline for the before and after change amounts. In most cases, 
the after change cost baseline should be used because this is the same 
cost baseline that will be used to determine the revised forward 
pricing rates and current contract estimates-to-complete based on the 
new accounting practice.
    (4) Any format which reasonably shows the aggregate impact by 
contract type is acceptable. One acceptable GDM format is illustrated 
below.

   Summary.--General Dollar Magnitude Estimate of Total Cost Impact on All Covered Contracts Awarded Prior to   
                                               Applicability Date                                               
                            [Required changes, voluntary changes, desirable changes]                            
----------------------------------------------------------------------------------------------------------------
                                                     Estimate to complete (1)                                   
                                                 --------------------------------   Difference       Proposed   
                                                   Old practice    New practice     cost impact     adjustment  
                                                     (2)  (A)        (3)  (B)          (A-B)       amounts  (4) 
----------------------------------------------------------------------------------------------------------------
Contract types:                                                                                                 
    CPFF                                                                                                        
    CPIF                                                                                                        
    FPI                                                                                                         
    FFP                                                                                                         
    T&M                                                                                                         
----------------------------------------------------------------------------------------------------------------
        Totals                                                                                                  
----------------------------------------------------------------------------------------------------------------
Instructions:                                                                                                   
1. The estimates to complete must be based on the same contract scope of effort, to be performed from the       
 applicability date of the change until contract completion.                                                    
2. Enter total estimated cost to complete all of the CAS-covered contract backlog based on existing cost        
 accounting practice. This estimate should be based on the CAS-covered contracts' allocable share of the total  
 direct and indirect costs forecasted for all cost accounting periods during which the backlog of CAS-covered   
 contracts estimated under the old practice will be performed.                                                  
3. Enter total estimated cost to complete the CAS-covered contract backlog based on new cost accounting         
 practice. This estimate should also be based on the backlog contracts' allocable share of the total direct and 
 indirect costs forecasted for all cost accounting periods during which the backlog of CAS-covered contracts    
 estimated under the old practice will be performed. However, that forecasted data must first be recast to      
 reflect application of the new cost accounting practice, e.g., determine the effect on indirect cost pools and 
 allocation bases, recalculate rate(s) and apply the new rate(s) to the recast base costs, as appropriate.      
4. Enter total amounts from cost impact settlement proposal.                                                    
----------------------------------------------------------------------------------------------------------------

    (5) The illustrated GDM format is an example of one GDM 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. The GDM shall 
be adequately supported, and generally should be based on the latest 
forecasted direct and indirect cost data used for forward

[[Page 49218]]

pricing purposes unless other data is considered preferable and agreed 
to by both the contractor and the cognizant Federal agency official. If 
a GDM 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 9903.405-4(c).
    (b) Cost Impact Settlement Proposal.
    (1) The purpose of the cost impact settlement proposal is to 
provide a sufficient number of individual contract and/or subcontract 
cost impact estimates to: support the accuracy of the GDM; assist the 
cognizant Federal agency official in determining whether any individual 
contract or subcontract price adjustments will be required; and allow 
for the settlement of the cost impact of a change in cost accounting 
practice without requiring a detailed cost impact proposal. The cost 
impact settlement proposal will be furnished simultaneously with the 
GDM.
    (2) One acceptable format for the submission of a cost impact 
settlement proposal is illustrated below.

                                         Cost Impact Settlement Proposal                                        
                       [Summary of specific contract price or cost allowance adjustments]                       
----------------------------------------------------------------------------------------------------------------
                                                     Estimate to complete (1)                                   
                                                 --------------------------------   Difference       Proposed   
                                                   Old practice    New practice     cost impact     adjustment  
                                                        (a)             (b)            (a-b)       amounts  (2) 
----------------------------------------------------------------------------------------------------------------
Contracts:                                                                                                      
(3)                                                                                                             
    CPFF                                                                                                        
    1.                                                                                                          
    2.                                                                                                          
``All other''                                                                                                   
                                                 ---------------------------------------------------------------
        Total                                                                                                (4)
----------------------------------------------------------------------------------------------------------------
CPIF                                                                                                            
    3.                                                                                                          
    4.                                                                                                          
    ``All other''                                                                                               
                                                 ---------------------------------------------------------------
        Total                                                                                                (4)
    FFP                                                                                                         
    5.                                                                                                          
    6.                                                                                                          
    ``All other''                                                                                               
                                                 ---------------------------------------------------------------
        Total                                                                                                (4)
----------------------------------------------------------------------------------------------------------------
Instructions:                                                                                                   
1. List each contract for which an individual cost impact statement has been prepared and enter the indicated   
 data.                                                                                                          
2. If a voluntary change that is not determined ``desirable'' and there are increased costs, in the aggregate,  
 attach an explanation detailing the proposed action(s) that will be taken to preclude the payment of any net   
 increased costs.                                                                                               
3. Enter contracts needed to resolve ``material'' amounts identified in GDM.                                    
4. Enter proposed settlement totals on the GDM, for each contract category.                                     
----------------------------------------------------------------------------------------------------------------

    (3) The illustrated cost impact settlement proposal format is an 
example and does not preclude the use of any other format or method 
that achieves the purpose of supporting the accuracy of the GDM and 
determining whether the impact on any individual contracts are 
significant enough to require price adjustments. The individual 
contracts selected by the contractor for inclusion in the cost impact 
settlement proposal shall be those contracts with the largest dollar 
impact. The cognizant Federal agency official should attempt to use the 
GDM and cost impact settlement proposal to resolve the cost impact 
process to the maximum extent possible. If additional individual 
contract data is needed to resolve the cost impact, the cognizant 
Federal agency official should specify the criteria for the additional 
data, e.g. contracts with a dollar impact exceeding a specific dollar 
amount. The contractor will then resubmit the cost impact settlement 
proposal based on the specified criteria. The revised proposal should 
be submitted within 30 days of the request for additional data.
    (4) If the impact is immaterial in both the aggregate by contract 
type as shown in the GDM, and for the individual contracts included in 
the cost impact settlement proposal, the cost impact process may be 
concluded without any adjustments. If the cognizant Federal agency 
official determines that the cost impact either in the aggregate by 
contract type or on individual contracts is material, the procedures in 
9903.405-5, Negotiation and Resolution of the Cost Impact, should be 
followed. The requirement for adjustments should be based on separate 
materiality thresholds for: individual contracts; the ``all other 
contracts'' amounts; and the aggregate by contract type. The 
materiality thresholds, as used here, are the amounts below which no 
adjustments are required. The ``all other contract'' amount is the 
difference between the aggregate amount by contract type and the net 
sum total of the impact of the submitted individual contracts by 
contract type. If the cognizant Federal agency official cannot resolve 
the cost impact based on the data submitted in the GDM and the cost 
impact settlement proposal, the cognizant Federal agency official 
should request a detailed cost impact proposal in accordance with 
9903.405-4(c). 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 contract. Such 
determination should be made promptly after the submission of the cost 
impact

[[Page 49219]]

settlement proposal, including any revisions thereto.
    (c) Detailed Cost Impact Proposal.
    (1) A detailed cost impact proposal is required when the GDM cannot 
be adequately supported or the cost impact settlement proposal does not 
contain sufficient data to resolve a cost impact due to a change in 
cost accounting practices. It will be used by the cognizant Federal 
agency official in lieu of the cost impact 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 any, should be adjusted for the impact of the 
change.
    (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 a formal written request by the cognizant Federal agency 
official for the data. The request should also specify that the 
proposal include a summary and be grouped by contract type.
    (3) The detailed cost impact proposal shall be submitted within a 
specified time period, generally 60 days after receipt of the cognizant 
Federal agency official's request, depending on the complexity of the 
changes(s) and the number of contracts involved.
    (4) 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 cost impact settlement proposal or a detailed cost impact 
proposal and should be concluded within a reasonable period of time 
after final submission of the proposal by the contractor.
    (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 aggregate 
impact shown on the GDM.
    (b) Offset Process The offset process of combining cost increases 
with cost decreases may be used to reduce the number of individual 
contract price or cost adjustments required as a result of a change in 
cost accounting practice. In applying this process, the following rules 
of offset apply:
    (1) Use of the offset process shall not result in 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 shown on the GDM.
    (2) The offset process shall only be applied to contracts that are 
of the same contract type, e.g., CPFF, CPIF, FPI or FFP.
    (3) The offset process shall 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. It also shall not be used to 
reduce the adjustment for these contracts to an amount below the 
established threshold. The offset process may be 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:
    (i) within the same contract to determine if the aggregate impact 
on individual contracts exceed the materiality threshold;
    (ii) on an overall basis to determine the aggregate ``all other 
contract'' amounts by contract type for all changes; and
    (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 settlement 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 cost impact 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.
    (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 adjustments of all 
contract prices shall not result in net increased costs paid 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 necessary 
to:
    (i) maintain consistency between contract funding and costs to be 
allocated to the contract using the new practice;
    (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,

[[Page 49220]]

or selects some other method for settlement as allowed under 9903.405-
5(a)(2), the negotiated net adjustment for each contract type should 
approximate the aggregate impact shown on the GDM.
    (4) To aid in the determination as to whether contract price or 
cost adjustments are required, the cognizant Federal agency official 
should establish materiality thresholds based on the circumstances of 
each change. Thresholds for individual contract price adjustments may 
be based on cost impact dollar values, percentage of 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, or any other appropriate 
materiality basis. Individual contract thresholds should be set high 
enough so that only contracts with significant cost impacts will be 
adjusted. If a contractor's cost impact settlement proposal includes 
all contracts that have cost impacts that are reasonably close to the 
established individual contract materiality threshold, it should be 
used as a basis to resolve the cost impact.
    (5) For accounting changes involving shifts of costs between 
contracts, generally no adjustments will be required if no individual 
contract's cost impact exceeds the individual contract cost impact 
threshold established, since the aggregate amount will, in most cases, 
be smaller than the highest impact on any one individual contract. 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 other than for individual contracts exceeding 
the established individual contract cost impact threshold, unless 
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 Procurement 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.
    (d) Action to Preclude Increased Cost Paid for Voluntary Changes.
    (1) In the absence of a finding pursuant to 9903.201-6 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 voluntary 
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 accounting changes, take action to ensure that increased 
costs are not paid as a result of a change.
    (2) The netting process (see 9903.403) is used to determine if a 
potential increased cost condition exists as a result of a voluntary 
change. To decide if action is required to preclude the payment of such 
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 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.
    (3) The cognizant Federal agency official may preclude increased 
costs on 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. Increased costs may also be 
precluded by disallowing 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 actions required when 
netting contracts in a voluntary change--no increased cost situation.

----------------------------------------------------------------------------------------------------------------
                          Cost shift by contract type                                                           
-------------------------------------------------------------------------------  Actions to be taken to preclude
            Flexibly priced                        Firm fixed-price                      increased costs        
----------------------------------------------------------------------------------------------------------------
Higher................................  Higher................................  No upward price adjustments.    
                                                                                 Disallow the higher level of   
                                                                                 costs on flexibly-priced.      
Lower.................................  Higher................................  Limit FFP upward price          
                                                                                 adjustments to amount of       
                                                                                 flexibly-priced downward price 
                                                                                 adjustments.                   
Lower.................................  Lower.................................  Adjust FFP and flexibly-priced  
                                                                                 contract prices down by the    
                                                                                 amount of the net downward     
                                                                                 price adjustment.              
Higher................................  Lower.................................  Limit upward adjustments on     
                                                                                 flexibly-priced to amount of   
                                                                                 downward adjustments on FFP.   
                                                                                 Disallow any excess increased  
                                                                                 costs on flexibly-priced.      
----------------------------------------------------------------------------------------------------------------

    (4) 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.
    (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 change are subject 
to equitable adjustments.
    (7) For voluntary changes, any contract prices negotiated between 
the notification and effective dates of the change where the estimated 
contract costs were based on the previous cost accounting practice 
shall not be subject to the increased cost prohibition. Further, 
failure to reflect the new practice in contract prices negotiated 
during this period will not result in any

[[Page 49221]]

additional increased costs precluded by the Government on contracts 
subject to adjustment as a result of the change. If the cost impact of 
the new cost accounting practice change on contract prices negotiated 
between the notification date and effective date is a net downward 
adjustment, those contracts will be included with all other contracts 
in the backlog subject to adjustment for the purpose of determining 
whether increased costs in the aggregate exist due to the voluntary 
change. If the cost impact on contract prices negotiated between the 
notification date and the effective date is a net upward adjustment, 
they will be subject to equitable adjustments under this exception 
provision and, therefore, shall be excluded from the contract backlog 
that is subject to the increased cost preclusion procedures described 
above. This exemption is illustrated at 9903.407-1(h).
    (e) If the parties fail to agree on the cost or price adjustments, 
the cognizant Federal agency official may make unilateral adjustments, 
subject to appeal as provided in the Disputes clause of the affected 
contracts.


9903.406  Noncompliances.


9903.406-1  General Types of Noncompliances.

    (a) A contractor's cost accounting practices may be in 
noncompliance with Cost Accounting Standards, modifications or 
interpretations thereto, as a result of using a noncompliant cost 
accounting practice to estimate and negotiate costs on CAS-covered 
contracts, 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 and 
9903.406-4 below. Noncompliant cost accounting practices that do not 
result in material increased cost to the Government should be 
considered a technical noncompliance and handled in accordance with 
9903.406-5.


9903.406-2  Determination of Noncompliance.

    (a) When the auditor finds a potential noncompliance, the auditor 
should, after sufficient discussion with the contractor to ensure all 
relevant facts are known, immediately issue an audit report to the 
cognizant Federal agency official describing the accounting practice 
and the basis for the opinion of noncompliance. Within 15 days of the 
receipt of the audit report of potential noncompliance, the cognizant 
Federal agency official should make an initial finding of compliance or 
noncompliance and advise the auditor and contractor.
    (b) If the cognizant Federal agency official makes a determination 
of compliance, no further action is necessary other than to notify the 
contractor and the auditor of the determination.
    (c) 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 and allow the 
contractor 60 days to agree, or disagree and submit reasons why the 
existing practices are considered to be compliant.
    (d) If the contractor agrees with the initial finding of 
noncompliance, the contractor will correct the noncompliance, and 
submit a noncompliance cost impact proposal, generally within 60 days 
after agreement or other date to which both parties mutually agree, 
showing the impact of the noncompliance on the affected CAS-covered 
contracts in accordance with 9903.406-3 if it is a cost estimating 
noncompliance, and/or 9903.406-4 if it is a cost accumulation 
noncompliance.
    (e) If the contractor disagrees with the initial noncompliance 
finding, the contractor shall provide the cognizant Federal agency 
official 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. If the 
cognizant Federal agency official believes that a noncompliance 
situation continues to exist, he/she should explain to the contractor 
the rationale for refuting the contractor's position. If the contractor 
agrees with the noncompliance, the procedures described in 9903.406-
2(d) will be followed.
    (f) Once the cognizant Federal agency official reaches a final 
position that a noncompliance exists, he/she 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 
clause of the contract. A final determination of noncompliance should 
also include a request for corrective action and a noncompliance cost 
impact proposal showing the impact of the noncompliance on CAS-covered 
contracts and subcontracts. The cost impact proposal should generally 
be submitted within 60 days after issuance of the final determination 
in accordance with 9903.406-3 if it is a cost estimating noncompliance, 
and/or 9903.406-4 if it is a cost accumulation noncompliance, as 
applicable.
    (g) 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.


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.
    (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 proposal, generally within 60 days from the 
date of the request, for all contracts negotiated based on the 
noncompliant practice. The cost impact proposal will show the 
negotiated contract values, by contract type, and the estimated 
contract values that would have been negotiated had the compliant 
practice

[[Page 49222]]

been used. The cognizant Federal agency official may establish contract 
value thresholds so that any contracts with an immaterial cost impact 
may be omitted from the cost impact proposal. The cost impact proposal 
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.
    (d) The cognizant Federal agency official should use the 
materiality guidelines established in 9903.305 and 9903.404 to 
determine whether any individual contract price adjustments, or 
adjustments for the net overstatement of contract values 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.
    (e) If any aggregate increased costs were paid as a result of the 
overstatement of contract prices due to the noncompliant practice, the 
cognizant Federal agency official should take action to recover any 
material increased costs paid. The cognizant Federal agency official 
should also recover interest on these increased cost payments at the 
annual rate established under section 6621 of the Internal Revenue Code 
of 1986 (26 U.S.C. 6621) for such period, from the time payment by the 
United States was made to the time of recovery of the increased costs.
    (f) Negotiation and resolution of the cost impact should be 
accomplished in accordance with 9903.405-5(a).
    (g) If the same noncompliant cost accounting practice was used to 
estimate and accumulate contract costs, the cognizant Federal agency 
official with the auditor's assistance, will evaluate the revised cost 
accounting practices for compliance with applicable Cost Accounting 
Standards, modifications or interpretations thereto. Corrective action 
and resolution of the noncompliant practice involves two distinct 
actions, 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.


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.
    (b) If the noncompliance results from a failure to comply with an 
applicable Cost Accounting Standard, modification or interpretation 
thereto, or failure to follow a disclosed or established practice 
consistently for cost accumulation purposes, the procedures established 
in this subsection should be used to resolve the impact due to the cost 
accumulation noncompliance. If the noncompliance results from a failure 
to comply with an applicable Cost Accounting Standard, modification or 
interpretation thereto, and 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 this 
9903.406-4.
    (c) 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 proposal, generally within 60 days from the 
date of the request. The proposal shall identify the cost 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, the cost impact 
proposal 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 9903.406-4(e).
    (d) The level of detail to be submitted with a cost impact proposal 
for a cost accumulation noncompliance will vary with the circumstances. 
Normally, the cost impact proposal 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. A GDM 
format similar to the one shown at 9903.405-4(a)(4) may be used to 
present the aggregate impact of the cost accumulation noncompliance for 
CAS-covered contracts performed during the noncompliant period. The 
cost impact proposal for a cost accumulation noncompliance is primarily 
developed and evaluated to determine if, and to what extent, increased 
costs were paid on covered contracts during the period of 
noncompliance. The minimum level of detail that can adequately support 
this determination should be used for the cost impact proposal. The 
level of detail required 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 proposal.
    (e) 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 of the Internal Revenue Code 
of 1986 (26 U.S.C. 6621) for such period, from the time the payments by 
the United States was made to the time of recovery of the increased 
costs. If the cost were incurred and paid evenly over the fiscal years 
during which the noncompliance occurred, the midpoint of the period in 
which the noncompliance began may be considered the baseline for the 
computation of interest. An alternate equitable method should be used 
if the costs were not incurred and paid evenly over the fiscal years 
during which the noncompliance occurred.
    (f) Negotiation and resolution of the cost impact should be 
accomplished in accordance with 9903.405-5(a).


9903.406-5  Technical noncompliances.

    (a) If no material increased costs result, in the aggregate, as a 
result of a noncompliance, the cognizant Federal agency official shall 
notify the contractor in writing that:
    (1) The practice is noncompliant via a final determination of 
noncompliance;
    (2) The contractor is not excused from the obligation to comply 
with the applicable Standard or rules and regulations involved; and,
    (3) Corrective action should be taken.
    (b) If the noncompliant practice is not corrected, the cognizant 
Federal agency official will inform the contractor that a technical 
noncompliance exists and that 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.

[[Page 49223]]

    (c) The contractor shall notify the cognizant Federal agency 
official within 60 days of when the technical noncompliance becomes 
material.


9903.407  Illustrations.


9903.407-1  Change in Cost Accounting Practice--Illustrations.

    The following illustrations deal with compliant changes in cost 
accounting practices. They are not meant to cover all possible 
situations, but rather to provide some guidelines in applying the 
procedures specified in 9903.405. The illustrations are meant to be 
considered only as examples. In actual cases, the individual 
circumstances need to be reviewed and considered to ensure equity for 
both parties.
    (a) Notification.
    (1) The contractor provides notification of a change in cost 
accounting practices in April and informs the Government that the 
change will have a retroactive applicability date of the beginning of 
the current year. In accordance with 9903.405-2(d), the contractor 
states that the reason for the beginning of the current year 
applicability date is to facilitate indirect cost allocations by use of 
one set of indirect cost rates for all work performed in the current 
year. The cognizant Federal agency official agrees to the proposed 
applicability date for covered contract costing purposes. After 
determination of adequacy and compliance, the cognizant Federal agency 
official requests a general dollar magnitude estimate for all contracts 
negotiated based on the previous accounting practice, including those 
negotiated after the applicability date of the change, plus a cost 
impact settlement proposal consisting of several contracts of each 
contract type which have the largest impact due to the cost accounting 
practice change.
    (2) The contractor provides notification of a voluntary change in 
cost accounting practices in June with a planned retroactive 
applicability date at 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. The 
contractor is informed that 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.
    (3) The cognizant Federal agency official informs the contractor 
that a planned change in cost accounting practice is both adequate and 
compliant 35 days after date of notification. In accordance with 
9903.405-2(f), the contractor immediately begins using the new cost 
accounting practice for cost estimating and cost negotiation purposes.
    (b) General Dollar Magnitude.
    (1) In accordance with 9903.405-3(b), the cognizant Federal agency 
official requests a general dollar magnitude (GDM) by contract type, 
plus a cost impact settlement proposal 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 by using a contract 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, i.e., CPFF, cost-plus-incentive-fee, fixed-price 
incentive and firm fixed-price. No contracts other than some of the 
individual contracts submitted with the cost impact settlement proposal 
extend out beyond the three year period. The cognizant Federal agency 
official, with the assistance of the auditor and using the cost impact 
settlement proposal data, determines that the GDM 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(b)(1), 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 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(c)(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.
    (c) Cost Impact Settlement Proposal.
    (1) The contractor submits a cost impact 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, and 
reasonably supports the GDM submitted with the cost impact settlement 
proposal. In accordance with 9903.405-4(b)(3), 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 supplement the cost impact settlement proposal with 
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 using the requested supplemental 
data.
    (2) The same situation described in (c)(1) occurs except that the 
aggregate impact by contract type in the GDM can not be reconciled with 
the aggregate net impact of the individual contracts by contract type 
submitted with the cost impact settlement proposal. In accordance with 
9903.405-4(b)(4), 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) After reviewing the GDM and cost impact settlement proposal for 
a change in a cost allocation practice, the cognizant federal agency 
official decides in accordance with 9903.405-4(b)(4) that, due to 
materiality, no additional data is needed and no contract price or cost 
adjustments are warranted.
    (d) Detailed Cost Impact Proposal.
    (1) In accordance with 9903.405-4(b)(4), 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]
    (e) Offset Process.
    (1) In analyzing the contractor's cost impact proposal, the 
cognizant Federal agency official determines that one firm

[[Page 49224]]

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 high dollar firm fixed-
price contracts for upward adjustment, in addition to the $1,000,000 
dollar downward adjustment to the contract exceeding the threshold.
    (2) 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 cost impact proposal 
for the three business units at the home office level. As a result of 
considering the aggregate impact at the three business units by 
applying the netting process 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 impact exceeding established thresholds were adjusted upwards or 
downwards, as appropriate, for the amount of the cost impact.
    (3) After determining the individual contracts subject to 
adjustment where the cost impact exceeded the established threshold for 
a change in 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 final cost to the Government of a lesser 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. 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(c)(3), an alternative technique, in lieu of 
adjusting contract prices, which achieves the same result of lesser 
cost paid of $2,200,000 may also be used for the aggregate ``all other 
contract'' cost impact adjustment.
    (f) 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 cost impact settlement 
proposal, only nine contracts exceed this threshold. The aggregate 
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 (f)(1) 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(c)(3), 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 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.
    (g) 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 with no increased costs 
allowed. 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)(3), 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 (g)(1) occurs except that 
contract B is a CPFF contract. In accordance with

[[Page 49225]]

9903.405-5(d)(3), 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. The 
cognizant Federal agency official determines that the higher level of 
costs on the CPFF contract is coming from a shift of costs from both 
Contract A and other contractor non-government work. 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 increased 
costs in accordance with 9903.405-5(d)(3).
    (3) After analyzing the contractor's cost impact proposal, the 
cognizant Federal agency official determines that five contracts exceed 
the threshold established for contract price adjustment purposes. The 
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 impacts. 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.
    (h) Contracts negotiated between notification date and effective 
date (see 9903.405-5(d)(7)).
    (1)(i) The contractor has the following covered contracts in 
existence during the period from the notification date to the 
applicability date of a voluntary accounting change subject to no 
increased costs:
[GRAPHIC] [TIFF OMITTED] TP18SE96.000

    (ii) Only contracts K1, K2 and K4 are subject to adjustment based 
on the accounting change, i.e., they were negotiated based on the old 
practice and will have costs accumulated beyond the applicability date 
based on the new practice. K3 was negotiated based on the old practice, 
but will be completed prior to the applicability date. K5 was 
negotiated after the effective date and, therefore, based on the new 
practice. Since K4 was negotiated between the notification date and 
effective date of the change, it is subject to an equitable adjustment 
and not subject to preclusion of increased costs paid. Further, the 
failure to base the negotiated amount of K4 on the new practice can not 
result in any additional costs precluded by the Government. K4 is a 
firm fixed-price contract. The impact of the accounting change on K4 is 
a higher allocation of costs in the amount of $2 million. K4 receives 
an upward equitable adjustment in this amount. K1 is a firm fixed-price 
contract with a cost impact of a lower allocation of costs in the 
amount of $1 million. K2 is a CPFF contract with a higher allocation of 
costs in the amount of $2 million. K1 is adjusted downward by $1 
million. K2 is adjusted upward by $1,000,000. Although the total impact 
of the change is an overall higher allocation of $3 million, the 
Government needs to take action to preclude costs for only the $1 
million on the CPFF contract which is over and above the $1 million 
impact on the firm fixed-price contract, since contract K4 is not 
subject to the no increased cost provision.
    (2)(i) The contractor has the following covered contracts in 
existence during the period from the notification date to the 
applicability date of a voluntary accounting change subject to no 
increased costs:

[[Page 49226]]

[GRAPHIC] [TIFF OMITTED] TP18SE96.001


    (ii) Only contracts K1, K2 and K4 are subject to adjustment based 
on the accounting change, i.e., they were negotiated based on the old 
practice and will have costs accumulated beyond the applicability date 
based on the new practice. K3 was negotiated based on the old practice, 
but will be completed prior to the applicability date. K5 was 
negotiated after the effective date and, therefore, based on the new 
practice. Since K4 was negotiated between the notification date and 
effective date of the change, it is subject to an equitable adjustment 
and not subject to preclusion of increased costs paid. Further, the 
failure to base the negotiated amount of K4 on the new practice can not 
result in any additional costs precluded by the Government. K4 is a 
firm fixed-price contract. The impact of the accounting change on K4 is 
a lesser allocation of costs in the amount of $2 million. K4 receives a 
downward equitable adjustment in this amount. K1 is a firm fixed-price 
contract with a cost impact of a lesser allocation of costs in the 
amount of $1 million. K2 is a CPFF contract with a higher allocation of 
costs in the amount of $2 million. K1 is adjusted downward by $1 
million. K2 is adjusted upward by $2,000,000. There is no need for the 
Government to take action to preclude increased costs after making 
contract price adjustments because the downward adjustments on K1 and 
K4 exceed the higher allocation of costs on K2, resulting in net 
decreased costs paid of $1 million as a result of the change.
    (3)(i) The contractor has the following covered contracts in 
existence during the period from the notification date to the 
applicability date of a voluntary accounting change subject to no 
increased costs:
[GRAPHIC] [TIFF OMITTED] TP18SE96.002

    (ii) Only contracts K1, K2 and K4 are subject to adjustment based 
on the accounting change, i.e., they were negotiated based on the old 
practice and will have costs accumulated beyond the applicability date 
based on the new practice. K3 was negotiated based on the old practice, 
but will be completed prior to the applicability date. K5 was 
negotiated after the effective date and, therefore, based on the new 
practice. Since K4 was negotiated between the notification date and 
effective date of the change, it is subject to an equitable adjustment 
and not subject to preclusion of increased costs paid. Further, the 
failure to base the negotiated amount of K4 on the new practice can not 
result in any additional costs precluded by the Government. K4 is a 
CPFF contract. The impact of the accounting change on K4 is a higher 
allocation of costs in the amount of $3 million. K4 receives an upward 
equitable adjustment in this amount. K1 is a CPFF contract with a cost 
impact of a lesser allocation of costs in the amount of $1 million. K2 
is a firm fixed-price contract with a higher allocation of costs in the 
amount of $2 million. K1 is adjusted downward by $1 million. K2 is 
adjusted upward by $1 million. There is no need for the Government to 
take action to preclude increased costs after making contract price 
adjustments because the upward adjustment on K2 has been limited to the 
downward adjustment of K1 (since K2 is a firm fixed-price contract the 
additional $1 million will not be paid by the United States) and K4 is 
not subject to preclusion of increased costs.
    (4)(i) The contractor has the following covered contracts in 
existence during the period from the notification date to the 
applicability date of a voluntary accounting change subject to no 
increased costs:

[[Page 49227]]

[GRAPHIC] [TIFF OMITTED] TP18SE96.003


    (ii) Only contracts K1, K2 and K4 are subject to adjustment based 
on the accounting change, i.e., they were negotiated based on the old 
practice and will have costs accumulated beyond the applicability date 
based on the new practice. K3 was negotiated based on the old practice, 
but will be completed prior to the applicability date. K5 was 
negotiated after the effective date and, therefore, based on the new 
practice. Since K4 was negotiated between the notification date and 
effective date of the change, it is subject to an equitable adjustment 
and not subject to preclusion of increased costs paid. Further, the 
failure to base the negotiated amount of K4 on the new practice can not 
result in any additional costs precluded by the Government. K4 is a 
CPFF contract. The impact of the accounting change on K4 is a higher 
allocation of costs in the amount of $2 million. K4 receives an upward 
equitable adjustment in this amount. K1 is a firm fixed-price contract 
with a cost impact of a higher allocation of costs in the amount of $2 
million. K2 is a CPFF contract with a higher allocation of costs in the 
amount of $3 million. No upward adjustment is made to K1 or K2 because 
they are subject to the no increased cost provision. Further, the 
Government must take action to preclude the increased costs of $3 
million from being paid on the CPFF contract. The cognizant Federal 
agency official does not have to take action to preclude the payment of 
the higher allocation of costs on K4 since this contract is not subject 
to the no increased cost provision.
    (5)(i) The contractor has the following covered contracts in 
existence during the period from the notification date to the 
applicability date of a voluntary accounting change subject to no 
increased costs:
[GRAPHIC] [TIFF OMITTED] TP18SE96.004

    (ii) Only contracts K1, K2 and K4 are subject to adjustment based 
on the accounting change, i.e., they were negotiated based on the old 
practice and will have costs accumulated beyond the applicability date 
based on the new practice. K3 was negotiated based on the old practice, 
but will be completed prior to the applicability date. K5 was 
negotiated after the effective date and, therefore, based on the new 
practice. Since K4 was negotiated between the notification date and 
effective date of the change, it is subject to an equitable adjustment 
and not subject to preclusion of increased costs paid. Further, the 
failure to base the negotiated amount of K4 on the new practice can not 
result in any additional costs precluded by the Government. K4 is a 
CPFF contract. The impact of the accounting change on K4 is a lesser 
allocation of costs in the amount of $2 million. K4 receives an 
downward equitable adjustment in this amount. K1 is a firm fixed-price 
contract with a cost impact of a lesser allocation of costs in the 
amount of $2 million. K2 is a firm fixed-price contract with a higher 
allocation of costs in the amount of $3 million. K1 is adjusted 
downward by $2 million. K2 is adjusted upward by $3 million. There is 
no need for the Government to take action to preclude increased costs 
after making contract price adjustments because the downward 
adjustments on K1 and K4 exceed the higher allocation of costs on K2, 
resulting in net decreased costs paid of $1 million as a result of the 
change.
    (i) GDM/Cost Impact Settlement Proposal Based on Contractor Model 
and Profile
    (1) The contractor has developed a model and profile which is used 
for the general dollar magnitude estimate and cost impact settlement 
proposal. The model and profile data are updated

[[Page 49228]]

whenever circumstances change and dictate revision to the data.
    (2) For a voluntary accounting change, the contractor 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 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 model and 
profile shows the following breakdown by contract type:

------------------------------------------------------------------------
                                                       In percent       
                                              --------------------------
                                                Year 1   Year 2   Year 3
------------------------------------------------------------------------
Direct Labor Base:                                                      
  CPFF.......................................       30       25       20
  CPIF/FPI...................................       20       21       22
  FFP........................................       50       54       58
Total Cost Input Base:                                                  
  CPFF.......................................       25       22       21
  CPIF/FPI...................................       15       16       17
  FFP........................................       60       62       62
------------------------------------------------------------------------

    (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 function 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. He/she has also determined that $500,000 will be 
the adjustment threshold for the ``all other contracts'' amounts by 
contract type. To support the general dollar magnitude estimate, the 
contractor includes in the cost impact settlement proposal three (3) 
contracts having the largest estimate-to-complete, by contract type. 
Based on the profile and model the contractor computes the following 
general dollar magnitude impact by contract type:

------------------------------------------------------------------------
                                                               Aggregate
                                     Year 1   Year 2   Year 3   Impact* 
------------------------------------------------------------------------
CPFF..............................     $242      $77     $(4)      $315 
CPIF/FPI..........................      225      110       43       378 
FFP...............................    (310)    (189)     (18)    (517)  
------------------------------------------------------------------------
* Dollars in thousands.                                                 
(  ) Denotes lesser allocation of costs.                                

    (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 cost impact 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. Since this is a no increased cost 
change, 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 (see 9903.405-5(b)(5)). He then limits the 
upward adjustment to the CPFF contract to $100,000. Additional action 
must then be taken to preclude the additional $100,000 of costs on the 
CPFF contract. After discussion with the contractor, the cognizant 
Federal agency official agrees with the contractor's proposal to delete 
the $100,000 from the cumulative claimed costs on the contract either 
when the contract reaches the estimated contract cost ceiling or prior 
to the submission of the final voucher, whichever comes first.


9903.407-2   Noncompliance illustrations.

    The following illustrations deal with recovery of increased costs 
due to noncompliant practices. They are not meant to cover all possible 
situations, but rather to provide some guidelines in applying the 
procedures in 9903.406. The illustrations are meant to be considered 
only as examples. In actual cases, the individual circumstances need to 
be reviewed and considered to ensure equity for both parties.
    (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 values under which the contractor used the 
noncompliant practice to estimate the 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 proposal 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 less than $10,000,000 would be 
immaterial, and limits the cost impact proposal to contracts of 
$10,000,000 or more in value. The cost impact proposal shows that the 
contract values are overstated (in the aggregate) by a significant

[[Page 49229]]

amount due to use of the noncompliant practice. The contracts are 
adjusted downward 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 cost 
impact proposal 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 Government, in accordance with 9903.406-3(c)(2), 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. He/she 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. At the direction of the cognizant Federal agency official, 
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 cost 
impact proposal 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 proposal 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 some, but not all, of its CAS-
covered contracts. Since the noncompliance involves accounting for 
direct costs as indirect costs, 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(d), 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 proposal that specifies the level of detail 
required. After analyzing the cost impact proposal, 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, Technical 
Noncompliance.
    (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. He/she 
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 Government, in 
accordance with 9903.406-4(b), requests two separate cost impact 
proposals to cover increased costs. The cost impact proposal for the 
overstated contract prices will be in accordance with the cost impact 
proposal described in 9903.406-3, and the cost impact proposal for the 
overbilled accumulated costs will be as described in 9903.406-4.

[FR Doc. 96-23409 Filed 9-17-96; 8:45 am]
BILLING CODE 3110-01-P