[Federal Register Volume 62, Number 134 (Monday, July 14, 1997)]
[Proposed Rules]
[Pages 37654-37692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17773]



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Part III





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 Rule

  Federal Register / Vol. 62, No. 134 / Monday, July 14, 1997 / 
Proposed Rules  

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9903


Cost Accounting Standards Board; Changes in Cost Accounting 
Practices

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Supplemental notice of proposed rulemaking.

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SUMMARY: The Cost Accounting Standards Board (CASB) invites a 
supplemental round of comments on proposed amendments to the regulatory 
provisions contained in chapter 99 of title 48. The proposed amendments 
being promulgated today, when issued as a final rule, would revise the 
current definitions, exceptions and illustrations governing changes in 
cost accounting practices 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 of either a compliant change 
in cost accounting practice or a noncompliant practice on covered 
contract and subcontract prices and/or costs. For covered contracts and 
subcontracts awarded to an educational institution, the proposed 
subpart includes a waiver provision that would permit the establishment 
of a uniform set of requirements for the notification and resolution of 
compliant changes to established cost accounting practices and/or the 
correction of noncompliant practices that affect covered contracts, 
covered subcontracts and other Federally sponsored agreements.
    Due to the complexity of the proposed coverage, the Board has 
decided to request an additional round of public comments prior to the 
promulgation of a final rule. In preparing this notice, the Board 
considered the public comments received in response to the original 
Notice of Proposed Rulemaking (NPRM) that was promulgated on September 
18, 1996 (61 FR 49196). Potential commenters need not resubmit their 
previously submitted concerns and suggestions. Specifically, the Board 
desires comments on the revisions being proposed for the first time to 
the extent such comments do not duplicate previously submitted 
comments. The Board is also requesting additional comments to determine 
to what extent, if any, there may be support for the establishment of 
new provisions that would exempt certain cost accounting practice 
changes from the Board's contract price and cost adjustment 
requirements (For details, see Section F., Additional Public Comments).

DATES: Comments must be submitted in writing, by letter, and should be 
received by September 12, 1997.

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(2). To facilitate the CASB's review 
of your submitted comments, please include with your written comments a 
three point five inch (3.5'') computer diskette copy of your comments 
and denote the format used. A format that is compatible with 
WordPerfect 6.1 or 5.1 is preferred. The submission of public comments 
via the internet by ``e-mail'' will not satisfy the specified 
requirement that public comments must be submitted in writing, by 
letter, as receipt of a readable data file is not assured.

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

SUPPLEMENTARY INFORMATION:

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 
(SDP)).
    (2) Issue an Advance Notice of Proposed Rulemaking (ANPRM).
    (3) Issue a Notice of Proposed Rulemaking (NPRM).
    (4) Promulgate a final rule.
    This promulgation supplements previously completed step 3 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. The CASB requested public 
comments from interested parties on this topic in a SDP published in 
the Federal Register on April 9, 1993 (58 FR 18428) and in an ANPRM 
published on April 25, 1995 (60 FR 20252). On September 18, 1996, the 
CASB, in an NPRM published in the Federal Register (61 FR 49196), 
proposed to amend the Board's current coverage governing changes in 
cost accounting practices. That original NPRM, hereafter referred to as 
the ``prior NPRM,'' included proposed amendments to conform the 
language contained in the contract clauses for ``Full'' and 
``Modified'' coverage, specify certain Federal agency responsibilities, 
and expand the criteria for desirable change determinations. A new 
subpart was also proposed to delineate the actions to be taken by the 
contracting parties when a contractor makes a compliant change to a 
cost accounting practice or follows a noncompliant practice.

Public Comments

    Of the thirty-five sets of public comments received in response to 
the prior NPRM, nineteen were provided in a timely manner. The public 
comments were received from contractors, professional associations, 
Federal agencies, accounting organizations, educational institutions, 
and other individuals. A number of commenters supported the proposed 
amendments contained in the prior NPRM. Some did not. The more 
significant comments and concerns expressed by commenters are 
summarized below.
    The contractor community concluded that the Board's existing 
definitions of the terms ``cost accounting practice'' and ``change to a 
cost accounting practice'' need not be amended because, in their view, 
CAS 418 (at 48 CFR 9904.418) provides the Government with adequate 
protection when disparate cost pools are combined or split-out. As 
discussed below, under Section E, Public Comments, contractors 
advocated that the Board's existing rules and regulations be retained 
and applied based on their interpretations of what the existing rules 
and regulations require. Their interpretations were, however, selective 
and did not cover the entire spectrum of possibilities under the 
Board's existing rules and regulations.

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    Contractors believe that the proposed definitional revisions (if 
adopted) will increase the number of cost accounting practice changes 
that would have to be administered as contrasted with the practices 
currently followed in implementing the Board's existing rules. 
Consequently, they opined that the overall administrative burden 
imposed by the Board's rules will increase.
    Some commenters believe that the Truth in Negotiations Act, the 
Board's Standards, and novation agreements provide adequate protection 
for organizational changes and resulting shifts in costs allocated to 
CAS-covered contracts.
    On the other hand, Federal commenters indicated that they were in 
general agreement with, and supported, the Board's proposed amendments. 
One agency commented that the revised language will assist contracting 
parties in addressing both changes in cost accounting practices and the 
cost impact process.
    Both the contractor community and the Government agency 
representatives generally supported the Board's proposal to establish a 
new subpart to streamline the notification and cost impact process 
associated with compliant cost accounting practice changes and 
noncompliances.
    After consideration of the public comments received, the Board 
concluded that contractors and Federal officials continue to interpret 
the Board's rules and regulations governing a change in cost accounting 
practice differently. The Board disagrees with the view put forth by 
several commenters that the Board's existing rules are adequate and 
therefore there is no need for the Board to do anything as it can rely 
on the ``protection'' provided by the existing provisions at 9904.418-
50(b). To resolve the described issues and concerns, the Board herein 
proposes to amend chapter 99 as follows:

--Definitions: Revise the definitions, explanations and illustrations 
governing cost accounting practice changes, for purposes of making it 
explicit that a change in the methods and techniques used to accumulate 
cost in indirect cost pools for allocation to final cost objectives 
constitutes a change in cost accounting practice. The revisions will 
make explicit that 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 constitutes a change in cost 
accounting practice.
--Exceptions: Retain, with certain modifications, the existing 
exceptions for circumstances that are not considered to be a change in 
cost accounting practice.
--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. It would also establish the 
process for the submission of cost impact data for compliant changes 
and noncompliances, and the contract price and cost adjustment process 
for resolving the resulting cost impacts on individual CAS-covered 
contracts and subcontracts.

    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, constructive technical comments 
and editorial suggestions provided by the commenters. Many of the 
expressed concerns and editorial suggestions aided the CASB's 
deliberations and have been incorporated into the proposed amendments 
being issued today.

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 supplemental 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 should be significantly reduced.
    Although the added rules and regulations being 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 proposed 
amendments, when promulgated as a final rule, are 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 benefits and administrative cost savings should also 
evolve from the finalization of the Board's proposed expansion of the 
criteria and coverage applicable to ``desirable changes,'' particularly 
with respect to practice changes resulting from actions taken to 
improve the efficiency and effectiveness of a contractor's operations. 
The proposed coverage should encourage, not discourage, such 
organizational changes in the future. 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 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

    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 shall determine 
that a contractor proposed change in cost accounting practice is 
desirable and not detrimental. Subsection 9903.201-7 is revised to 
specify certain cognizant Federal agency responsibilities for 
administering CAS-covered contracts and subcontracts.
    In subpart 9903.3, CAS Rules and Regulations, section 9903.301 is 
amended to incorporate definitions for the terms ``Function'' and 
``Intermediate cost objective.'' In subsection 9903.302-1, Cost 
Accounting Practice, the definition is amended to incorporate language 
changes and to add clarifying guidance. Subsection 9903.302-2, Change 
to a cost accounting practice, is revised to make explicit the types of 
changes that are to be regarded as a change in cost accounting 
practice. The illustration of a change in cost accounting practice at 
9903.302-3(c)(3) is replaced by a new illustration. In 9903.302-3(c) 
and in 9903.302-4, several illustrations have been included to provide 
additional guidance regarding the revised definitions of the

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terms ``cost accounting practice'' and ``change in cost accounting 
practice.''
    A new subpart 9903.4 is added to establish the notification and 
cost impact resolution process to be followed by a contractor and the 
cognizant Federal negotiator when a CAS-covered contractor or 
subcontractor changes a compliant cost accounting practice, fails to 
comply with an applicable Standard or fails to consistently follow its 
established cost accounting practices.

Summary Description of Proposed CAS Coverage

    In subpart 9903.2, the proposed amendments, when promulgated as a 
final rule, will:
    Conform the contract clause language for ``Full'' and ``Modified'' 
coverage. The contract clause provisions are also revised to clarify 
the actions required when a contractor or a subcontractor is required 
to change a cost accounting practice or elects to replace an 
established practice with another compliant cost accounting practice. 
Also specified are the corrective actions required when a contractor's 
estimated cost proposal was based on a noncompliant practice and/or 
actual contract cost accumulations were based on a noncompliant 
practice.
    Provide criteria for determining when a contractor proposed change 
in cost accounting practice shall be determined to be a desirable 
change that is not detrimental to the Government.
    Require Federal agencies, in accordance with agency procedures, to:

--Establish internal policies and procedures for administering CAS-
covered contracts when the agency is and is not the cognizant Federal 
agency for contractors performing agency contracts.
--Designate the agency office or official responsible for administering 
the agency's CAS-covered contracts and subcontracts.
--Delegate contracting authority to designated agency officials, as 
required, for the negotiation of cost impact settlements and associated 
contract price or cost accumulation adjustments.
--Concurrently settle, on a Government-wide basis, the cost impacts on 
all CAS-covered contracts and subcontracts affected by a contractor's 
or subcontractor's change in cost accounting practice or noncompliant 
practice.

    In subpart 9903.3, proposed for inclusion in 9903.301, are two 
definitions to clarify the terms ``Function'' and ``Intermediate cost 
objective.'' The proposed amendments to 9903.302-1(c), allocation of 
cost to cost objectives, make explicit the methods and techniques that 
are considered a cost accounting practice, including the methods and 
techniques used to accumulate the cost of specific activities. 
Additional subparagraphs are proposed to clarify what is meant by the 
selection and composition of cost pools and their allocation bases.
    The proposed amendments to 9903.302-2 expand the existing coverage 
by specifying that, as used in part 9903 and the applicable contract 
clauses, changes in cost accounting practices include pool 
combinations, pool split-outs and transfers of existing ongoing 
functions. The existing cost accounting practice exceptions cited in 
9903.302-2 (a) and (b) are restated and modified in new subparagraphs.
    Within 9903.302-3, a new introductory paragraph is proposed to be 
added regarding the use of the illustrations that follow. Introductory 
paragraphs (a), (b) and (c) are proposed to be 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 
practices that are consistent with the revised definitions. The new 
illustration at 9903.302-3(c)(3) illustrates that the use of a 
different base for the allocation of indirect costs to final cost 
objectives is a change in cost accounting practice. Additional 
illustrations are added to 9903.302-3(c) and 9903.302-4 to depict 
various changes which do and do not result in changes in cost 
accounting practices when a contractor combines, eliminates or splits-
out pools, transfers functions or when business combinations due to 
mergers and acquisitions occur.
    A new subpart 9903.4, Contractor Cost Accounting Practice Changes 
and Noncompliances, is proposed. It details the methodology for 
determining required contract price or cost accumulation adjustments 
due to changes in a contractor's cost accounting practices and 
specifies the actions to be taken by 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 additional section is also included to illustrate the 
application of the proposed coverage. The proposed coverage is briefly 
described below.
    Section 9903.405, Changes in Cost Accounting Practices, includes 
subsections on the following areas: contractor notification of changes 
in cost accounting practices; Government determinations, approvals and 
initiating the cost impact process; contractor cost impact submissions; 
and negotiation and resolution of the cost impact action.
    Section 9903.405 provides a streamlined process which does not 
require submissions of cost impact estimates or contract price 
adjustments for every CAS-covered contract affected by a change in 
accounting practice. It provides flexibility to the cognizant Federal 
agency official in determining the level of detail required for a cost 
impact submission and materiality thresholds for required contract 
price and cost adjustments. To this end, it creates a three-step 
sequential process which includes (1) An initial evaluation to 
determine if the cost impact of the accounting change is obviously 
immaterial, (2) the use of a general dollar magnitude (GDM) settlement 
proposal, and if ultimately determined necessary, (3) the submission of 
a detailed cost impact proposal for contracts exceeding Government 
determined materiality thresholds. The procedure encourages settlement 
of material cost impacts based on the contractor's GDM settlement 
proposal to the maximum extent possible, without having to resort to a 
detailed cost impact proposal. It also provides for contract price 
adjustment on individual contracts only when the cost impact amount is 
material.
    Section 9903.405 includes 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 
provide that offsets of increased costs against decreased costs shall 
only be made within the same contract type.
    Section 9903.405 also explains when and what action needs to be 
taken to preclude increased costs paid by the Government as a result of 
a voluntary change in cost accounting practice. It clarifies how 
increased costs to the Government are measured on firm fixed-price 
contracts as a result of a change in accounting practice. It also makes 
clear that action must be taken to preclude increased costs from being 
paid when

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the estimated aggregate higher allocation of costs on flexibly-priced 
contracts subject to adjustment exceeds the estimated aggregate lower 
allocation of costs on firm fixed-price contracts subject to adjustment 
as a result of a voluntary change in accounting practice.
    Section 9903.406, Noncompliances, provides detailed rules and 
regulations for handling noncompliant actions. It outlines the 
procedures to be followed when the parties agree or disagree on whether 
a noncompliant condition exists. An example of an acceptable GDM 
Settlement Proposal format that the contracting parties may use to 
resolve a noncompliance is included. The proposed section contains 
separate coverage on estimating practice noncompliances and cost 
accumulation practice noncompliances to clarify the different actions, 
particularly to recover increased costs and/or applicable interest on 
increased costs paid, that need to be taken under these different 
noncompliant conditions. It also provides procedures to be followed 
when a noncompliant condition does not result in material increased 
costs paid by the Government.

C. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this proposal, because this proposal imposes no paperwork burden on 
offerors, affected contractors and subcontractors, or members of the 
public which require the approval of OMB under 44 U.S.C. Sec. 3501, et 
seq.

D. Executive Order 12866 and the Regulatory Flexibility Act

    The economic impact of this proposal on contractors and 
subcontractors is expected to be minor. As a result, the Board has 
determined that this 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 was developed after consideration of the public comments 
received in response to the Board's NPRM that was published in the 
Federal Register on September 18, 1996, 61 FR 49196, 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

    Comment: Several contractor representatives advocated that the 
proposed amendments making explicit that pool combinations and split-
outs are changes in cost accounting practices were not necessary 
because:

--Only a change in the selection of an allocation base ``method'' used 
to allocate pooled costs to cost objectives is a change in cost 
accounting practice.
--As long as cost pools are homogeneous, in compliance with 9904.418, 
before and after a pool is combined or split-out, then no change in 
cost accounting practice has occurred.
--9904.418 provides adequate protection if material differences in the 
amount of costs allocated to cost objectives result due to pool 
combinations or split-outs.
--One commenter stated: ``* * * Pool combinations split-outs do not 
necessarily result in a change to cost accounting practice. When pools 
are combined or a single pool is split into two or more pools, we do 
not agree that a change in cost accounting practice has necessarily 
occurred. If the combined pools consist of the same functions and the 
allocation bases are the same (e.g. direct labor dollars, * * *) then 
the composition of the cost pools has not changed. Only the amounts are 
different. The same is true for pool split outs. * * *''
--Regarding shifts in cost allocations to contracts, another commenter 
expressed the belief that the Board's concerns are eliminated by 
9904.418-50(b)(2). ``* * * if the splitting out or merging of pools and 
bases results in material differences from that which existed prior to 
the split-out or merger, the pools cannot be changed without risking a 
418 noncompliance (which protects the Government) or without causing a 
change in cost accounting practice (e.g., use of an allocation base of 
labor dollars instead of labor hours), in which case the Government 
interests are again protected.''

    Response: For the reasons set forth below, the Board does not agree 
with the commenters' interpretations and conclusions.
CAS 418 Does Not Explicitly Provide the Protection Alluded to by the 
Commenters
    Before concluding that the cited 9904.418 provisions provide 
adequate protection, one must accept the commenters' unstated premise 
that the contracting parties agree on how to determine whether combined 
or spilt-out pools continue to have the same beneficial or causal 
relationship to cost objectives or if material differences in the 
amounts of cost allocated to individual cost objectives have resulted 
after a pool combination or split-out. Such a premise, however, is not 
self-evident. For example, some contractors have taken the position 
that as long as the original pools have similar activities (purchasing 
and purchasing, inspection and inspection, etc.), then the resulting 
pool combination is still compliant with CAS 9904.418 and that no 
change in cost accounting practice has occurred, irrespective of 
disparate pool demographics and resulting shifts of indirect costs 
allocated to cost objectives.
    The Board is not persuaded that most contractors, in individual 
cases, would agree with the commenters' inferences, i.e., that a 
comparison of the difference between the costs allocated to individual 
cost objectives utilizing the original pool configurations versus the 
new combined pool or split-out pools is clearly required under CAS 
9904.418 or, if a material difference occurs, that a noncompliant 
condition requiring corrective action exists.
    In order to be compliant with CAS 9904.418, both the original 
pool(s) and resulting pool combinations or split-outs, must be 
homogeneous. Essentially, the CAS 9904.418 criteria involves two 
concepts: One requires that activities included in a pool have the same 
or similar beneficial or causal relationship to cost objectives, and 
the other requires that ``pooled'' costs allocated to cost objectives 
not be materially different from the allocation that would result if 
the cost of activities included in that pool were allocated separately.
    However, the CAS 9904.418 criteria is not explicit regarding 
comparisons of costs allocated to cost objectives based on different 
groupings of similar activities, such as through the use of existing 
pools (or pool) versus a new combined pool or split-out pools. The 
cited 9904.418-50(b) language does not specify that the contracting 
parties must determine if materially different cost allocations result 
due to pool combinations or split-outs, nor are such comparisons 
precluded. The commenters did not indicate how cost

[[Page 37658]]

allocation comparisons between the original pool(s) and the resultant 
combined pool or split-out pools could be accomplished under CAS 
9904.418 in order to provide the Government with sufficient protection 
in cases where material differences in cost allocations to cost 
objectives result. Thus, the Board disagrees with the commenters' 
premise that CAS 9904.418 comparisons provide adequate protection in 
the event of material differences in cost allocations to cost 
objectives attributable to pool combinations or split-outs, 
particularly since some commenters and contractors have argued that 
combining pools with similar activities is compliant with CAS 9904.418, 
and not a practice change, irrespective of the impact it may have on 
cost allocations to cost objectives.
    Adoption of the commenters' concept that the Government can achieve 
equity in the event significant cost shifts occur after a pool 
combination or spilt-out by simply pursuing a CAS 9904.418 
noncompliance would most likely result in recurring controversies and 
potential disputes, particularly if a noncompliance determination were 
predicated on a material difference between cost allocations resulting 
under the old and new pool configurations.
Administrative Cost Implications of Noncompliances
    If the Government determined that a merged or split-out pool was 
not in compliance with CAS 9904.418, the noncompliant cost accounting 
practice would have to be corrected and the CAS contract price or cost 
adjustment remedies for estimating and/or cost accumulation 
noncompliances would apply. To correct the noncompliance, the 
contractor would have to replace the newly established cost accounting 
practice with a compliant practice, by probably changing back to the 
original practice. It is not self-evident how the commenters' suggested 
alternative ``noncompliance approach'' would result in lower 
administrative costs and motivate contractors to implement economy and 
efficiency changes unless one were to conclude that CAS 9904.418 
provides little, if any, protection for shifts in costs allocated to 
cost objectives due to pool mergers and or split-outs.
Cost Accounting Practice Definition Considerations
    Compliance with CAS 9904.418 before and after a pool combination or 
split out does not in itself mean that there was no change in the cost 
accounting practices used to accumulate pooled costs and allocation 
base activities. When indirect cost pools are combined or split out, 
the costs of the same ongoing activities (functions) are grouped and 
accumulated differently. The intermediate cost objectives used as the 
cost accumulation points in the contractor's cost accounting system may 
change, e.g., intermediate cost objectives for similar functions may be 
combined or split-out. There is a change in the number of pools used to 
accumulate the indirect costs of specific activities for the allocation 
of cost to final cost objectives. Although the pools are compliant with 
CAS 9904.418, before and after the change, the methods and techniques 
used to accumulate costs in intermediate cost objectives, the selection 
and composition of the pool(s) and the composition of the allocation 
base(s) have changed. It is precisely these changes in the pattern of 
accumulating the costs of indirect functions and activities and the 
accumulation of base activities that were addressed in the proposed 
revisions to the definition of a ``cost accounting practice''.
Potential CAS 9904.401 Noncompliances
    If the Government relied exclusively on CAS 9904.418, as suggested, 
contractors might erroneously assume that indirect costs can be 
estimated and accumulated differently. For example, a contractor might 
estimate indirect costs in contract cost proposals based on the use of 
two pools and, after award, accumulate actual costs based on the use of 
one combined pool. This would, however, violate the consistency and 
comparability objectives and requirements of 9904.401.
    The CAS 9904.401 provision at 9904.401-50(a)(2) provides that ``* * 
* the cost accounting practices used in estimating costs in pricing a 
proposal and in accumulating and reporting costs on the resulting 
contract shall be consistent with respect to * * * (2) The indirect 
cost pools to which each element or function of cost is charged or 
proposed to be charged * * *'' Therefore it could be argued that if 
pool combinations and split-outs are not treated as compliant changes 
in cost accounting practices, a contractor could never combine or 
split-out a pool because that would result in a CAS 9904.401 
noncompliance.
    That line of reasoning is, however, not what the current CAS 
contract clause provisions stipulate for compliant changes. The Board's 
rules clearly permit contractors to combine or split-out pools as a 
voluntary change from one compliant practice to another compliant 
practice. However, to remedy any material shifts in costs allocated to 
cost objectives resulting from such compliant changes, the contractor 
is specifically required to agree to contract price and cost 
adjustments under the CAS contract clauses.
In Brief
    Under the Board's existing rules, pool combinations and split-outs 
resulting in cost accounting practice changes are permitted as 
compliant changes to established cost accounting practices. However, 
the practice change is subject to the Board's notification and 
disclosure requirements, and the resulting cost impact of the practice 
change on CAS-covered contracts is subject to the applicable CAS 
contract price and cost adjustment provisions.
    The commenters' recommendations avoid resolution of the primary 
issue, i.e., what constitutes a change in cost accounting practice? It 
only moves the issues concerning pool combinations and split-outs from 
disagreements over whether a change in cost accounting practice has 
occurred to disagreements over whether there is a CAS 9904.401 or CAS 
9904.418 noncompliance. It does not resolve the underlying issue.
    The argument that pool combinations and split-outs should not be 
considered changes in cost accounting practice that are subject to the 
Board's rules for contract price and cost adjustment, as suggested by 
the commenters, appears inconsistent with the resulting actions 
necessitated by such actions. For example:

--New forecasted indirect cost rate agreements and/or billing rates 
need to be established.
--The contractor's Disclosure Statement, if required, must be updated 
to reflect the selection and composition of the new combined or split-
out pools and the composition of each new pool's allocation base.

    Under the Board's proposed approach in this NPRM, if the original 
pools were compliant with CAS 9904.418 and the new combined pool or 
split-out pools is/are CAS 9904.418 compliant, then the resulting 
changes in the methods and techniques used to accumulate the costs of 
indirect activities and allocation base data, the selection and 
composition of the pool(s) and the composition of the allocation 
base(s), can be treated as a compliant change in cost accounting 
practice. The outcome of the proposed approach is more predictable than 
the commenters' suggested approach which could result in 
noncompliances. The administrative costs and financial risks to 
contractors associated with compliant changes should be less than the

[[Page 37659]]

administrative costs and financial risks associated with contractor 
corrective actions that would be required if a practice change is 
implemented and it is subsequently determined to be noncompliant.
    Accordingly, the commenters' suggestions that the amendments 
proposed in the prior NPRM not be promulgated were not adopted.
    Comment: Several commenters stated that the proposed language 
concerning ``cost accumulation'' was confusing and that cost 
accumulation was not a cost accounting practice but the result of the 
application of a contractor's cost accounting practices.
    Response: The proposed coverage was intended to make it explicit 
that the term ``cost accounting practice'' includes the methods and 
techniques used to accumulate costs of specific activities in specific 
intermediate cost objectives and to accumulate the costs of specific 
activities, or groups of activities, in specific indirect cost pools 
for subsequent allocation to intermediate and/or final cost objectives. 
This concept, although questioned by several commenters, is consistent 
with 9904.401-50(a)(2) which specifically requires that:

    ``(a) * * * The standard allows grouping of homogeneous costs in 
order to cover those cases where it is not practicable to estimate 
contract costs by individual cost element or function. However, 
costs estimated for proposal purposes shall be presented in such a 
manner and in such detail that any significant cost can be compared 
with the actual cost accumulated and reported therefor. In any event 
the cost accounting practices used in estimating costs in pricing a 
proposal and in accumulating and reporting costs on the resulting 
contract shall be consistent with respect to `` * * * (2) The 
indirect cost pools to which each element or function of cost is 
charged or proposed to be charged * * * ''

    Since commenters opined that the proposed language may be 
interpreted differently, the Board has essentially retained the 
existing language at 9903.302-1(c) that cited `` * * * methods and 
techniques used to accumulate costs * * * '' in an attempt to mitigate 
the commenters' expressed concerns and to facilitate implementation of 
the amendments being proposed today. The Board wishes to emphasize, 
however, that the proposed coverage contained in this NPRM is not 
intended to alter the meaning of any Standard in parts 9904 or 9905 of 
the Board's regulations. Rather, the intent is to facilitate an 
understanding that the Board's definition of a cost accounting 
practice, in part 9903, includes the methods and techniques used to 
accumulate cost in specific intermediate cost objectives and the 
selection of the number of pools established to accumulate the costs of 
specific functions (or activities). Specifically, that the number of 
pools established to accumulate the costs of specific activities, or 
groups of activities, included therein, is a method or technique used 
to allocate indirect costs, i.e., a cost accounting practice. 
Accordingly, the phrase ``selection * * * of cost pools'' was added to 
the definition of a cost accounting practice (see 9903.302-
1(c)(1)(iii)). Where deemed appropriate, the illustrations proposed in 
the prior NPRM for inclusion in section 9903.302-3 were revised to 
further clarify these cost accounting practices.
    Comment: Several commenters opined that existing regulations 
provide the Government with adequate protection against significant 
cost shifts resulting from pool combinations and split-outs. One 
commenter stated: `` * * * The Truth in Negotiations Act requires full 
disclosure of contractor decisions and plans (regarding organizational 
changes) prior to contract award. The causal beneficial relationship 
and homogeneity requirements of the Standards require that major 
elements of indirect pools have the same or similar relationship to 
benefiting cost objectives. Novation agreements prevent improper cost 
increases to the Government * * * ''
    Response: The referenced laws and regulations serve different 
purposes.
    The Truth in Negotiations Act (TINA) only applies to the specific 
data that the contractor identifies and certifies as being accurate, 
complete and current as of a specified date. A signed certification is 
normally obtained prior to contract award when contract negotiations 
are completed or agreement on contract price occurs. After contract 
award, TINA provides no protection for decisions or plans made to 
change the cost accounting practices used to accumulate the costs of 
contract performance. Also, TINA provides no protection for contracts 
priced using noncompliant practices. The Board's rules and Standards 
do. Applicable CAS contract clauses require that the same cost 
accounting practices used to develop contract cost proposal estimates 
be applied consistently when accumulating the costs of contract 
performance, after contract award. Changes in compliant practices are 
permitted but affected contract prices and costs are subject to 
adjustment for the cost impact of the change in practice. TINA and CAS 
are completely independent concepts that have entirely different 
applications and purposes.
    As discussed in a prior comment, 9904.418, in and of itself, does 
not address all aspects relative to changes in cost accounting 
practices resulting from pool combinations or split-outs.
    Novation agreements do not address a contractor's cost increases or 
decreases due to changes in cost accounting practices. Novation 
agreements are used only when a contract is transferred or assigned 
from the original performing entity to a subsequent performing entity 
(``successor-in-interest''). Novation agreements limit the cost to the 
Government (amount paid by the Government) by precluding increased 
contract costs for the novated contracts. The novation agreement 
enables the Government to disallow any higher level of costs incurred 
by the successor in interest.
    Comment: One commenter suggested that the words ``at specified 
locations'' proposed for 9903.302-1(c) (2) and (3) be replaced with 
``for a particular segment, home office, or business unit'' because 
contractors may not accumulate costs by location.
    Response: The suggestion was adopted.
    Comment: Several commenters suggested that certain language in 
proposed 9903.302-1(c) (1), (2) and (3) be deleted or conformed with 
the language in the Board's rules and applicable Standards.
    Response: To the extent deemed appropriate, the Board has revised 
the proposed language for 9903.302-1(c) for improved conformity with 
the language contained in the Board's rules and applicable Standards.
    Comment: In reading the prior NPRM preamble comments at 61 FR 
49199, some commenters concluded that to move work from one segment to 
another is deemed a cost accounting practice change by the Board. One 
commenter stated the prior NPRM implies that a contractor cannot decide 
to move contract work to another segment without generating a cost 
accounting practice change.
    Response: If there is a change in the place of performance for some 
part of the contract work, the costs estimated to be performed in-house 
by the proposing segment will not be accumulated in the proposing 
segment's cost accounting records under the same elements of cost as 
proposed, e.g., as direct material, labor and allocable overhead cost. 
Instead the allocable contract costs will still be accumulated by the 
same performing segment, but as a different cost element, e.g., intra-
company transfer cost, in accordance with the segment's established 
cost accounting practices. Such intra-company

[[Page 37660]]

``purchases'' or ``orders'' that result in the accumulation of costs 
under different cost elements by the proposing segment do not 
constitute a change to that segment's established cost accounting 
practices.
    However, the prior NPRM also stated that if the responsibility for 
performing a contract is transferred in its entirety from one segment 
to another segment, that ``neither segment's cost accounting practices 
may have changed * * * Such changes in the place of contract 
performance are subject to applicable procurement regulations * * * '' 
In such cases, the costs of contract performance estimated in 
accordance with the original segment's cost accounting practices would 
not be incurred, accumulated and reported by the original proposing 
segment. Instead, a different segment, i.e., the acquiring segment, 
would accumulate the costs of contract performance in accordance with 
its established cost accounting practices. The contract transfer does 
not constitute a change to either segments' established cost accounting 
practices. Such contract transfers in place of performance are not 
specifically addressed under the Board's regulations which presume that 
contracts and subcontracts will be performed by the segment or segments 
designated in the contractor's proposal. Resolution of contract 
transfers resulting in changes in the place of contract performance 
remain subject to applicable procurement regulations.
    Comment: One commenter stated that the prior NPRM appears 
inconsistent. Specifically: `` * * * the NPRM states that a change in 
the composition of a cost pool or allocation base represents an 
accounting practice change. However, performing an additional contract 
within that cost pool and allocation base, or completing an existing 
contract does not represent an accounting practice change. Similarly, 
the transfer of an ongoing G&A function, such as Marketing, from a Home 
Office to a Business Segment, is treated in the NPRM as a change but 
transfers of employees are not * * * '' Another commenter stated that 
under the prior NPRM, composition of the pool would be defined as a 
volume change.
    Response: There is no inconsistency.
    The Board's underlying concept is that the indirect cost of 
performing a specific function (or activity) must be accumulated in the 
same intermediate cost objective and included in the same indirect cost 
pool when a contractor estimates and accumulates costs. An entire 
function cannot be transferred from one indirect cost pool to another 
indirect cost pool after award unless the contractor processes a 
compliant change in cost accounting practice. Otherwise, the transfer 
is not in compliance with the requirements of 9904.401 or 9905.501, as 
applicable.
    An individual employee can change duties to support different 
functions and be transferred from function to function or from pool to 
pool. Such employee transfers are not a change in cost accounting 
practice as long as the costs of the ongoing functions or activities 
continue to be accumulated in the same intermediate cost objectives and 
the intermediate cost objectives remain in the same indirect cost 
pools.
    Volume changes (e.g., adding contract work or completing work) are 
not a cost accounting practice change. There is no inconsistency 
because the addition of new work and completion of existing work is 
considered in the contractor's forecasts when direct and indirect cost 
levels are estimated to support the contractor's forecasted indirect 
cost rates that are used to estimate contract costs.
    Comment: A commenter concluded that the Government may deem 
equipment transfers to be a change in cost accounting practice.
    Response: Presumably, the commenter is referring to the physical 
transfer of equipment whose costs are depreciated and recovered as an 
indirect cost. A change in cost accounting practice would not result if 
the physical transfer of equipment occurs because the equipment will be 
used to support a different function or activity. The Board's 
assumption is that the original function and the different function did 
not move, i.e., the indirect costs of each function are included in the 
same indirect cost pool or pools before and after the transfer. Only 
the equipment and its depreciation charge moved because the equipment 
is now used to support the different function. Therefore, the described 
transfer of equipment is similar to the employee transfer discussed 
above and the ``employee transfer'' illustration that is proposed to be 
added as ``not a change in cost accounting practice'' (see 9903.302-
4(h) in this NPRM).

Change to a Cost Accounting Practice--Exceptions

    Comment: Regarding the proposed revisions for 9903.302-2(b)(1), one 
commenter recommended that the undefined term ``company-wide'' proposed 
in the prior NPRM be replaced with the term ``home office''.
    Response: The commenter's recommendation was adopted. In addition, 
the last sentence was revised to clarify that the exception does not 
apply to transfers of ongoing functions between segments as well as to 
transfers of ongoing functions between pools within a segment.
    Comment: Regarding the proposed addition of a new exception at 
9903.302-2(b)(4), commenters expressed concern that the rationale for 
the proposed exception was not clear, that the proposed language was 
not clear and/or that certain technical aspects required expansion. 
Another opined that the cost impact of the change would be zero and 
that there was no benefit from this exception. A Federal agency 
commented that the described exception is a cost accounting practice 
change that should be disclosed to the Government and treated as an 
``exemption'' from the cost impact and contract price and cost 
adjustment process.
    Response: The unintended confusion and concerns generated by this 
proposed exception have been interpreted by the Board to mean that the 
anticipated costs of implementation associated with this proposed 
exception could far exceed the potential benefits envisioned by the 
Board. Accordingly, the Board is not proceeding with the previously 
proposed exception in this supplemental NPRM. Consequently, when a 
contractor makes the types of changes that were proposed in the prior 
NPRM as exceptions to the Board's definition of a ``change to a cost 
accounting practice,'' such changes shall not be treated as exceptions 
to the Board's rules. Instead, the determination of whether a change in 
cost accounting practice has or has not occurred shall continue to be 
made in accordance with the Board's promulgated definitions of the 
terms ``cost accounting practice'' and ``change to a cost accounting 
practice.''

Exemptions From Contract Price And Cost Adjustment Proposed in the 
Prior NPRM That Are Withdrawn

9903.302-2(c)(1)--Physical Changes To Improve Management Efficiency and 
Effectiveness
    Comments: Contractors conceptually supported the proposed exemption 
for improved effectiveness and efficiencies but recommended significant 
language changes and questioned the level of detail needed to obtain 
the exemption. The concern was that the administrative cost of 
requesting the exemption would approximate the same levels of cost 
needed to prepare and support a cost impact proposal. Examples of 
recommendations were that:

--Detailed guidance be developed on what constitutes ``improved

[[Page 37661]]

management efficiency and effectiveness,'' to eliminate the potential 
requirement of a cost impact as measurable proof of such efficiency and 
effectiveness.
--The criteria should not be limited to just ``* * * changes in cost 
accumulation practices * * *'' It should apply to all applicable cases. 
The term ``physical realignment'' should be clarified.

    Other commenters did not support the proposed exemption.
    One respondent recommended ``* * * deletion of the (c)(1) exemption 
since it does not support consistency, the primary objective of the 
Cost Accounting Standards. It also does not support the objective of 
fairness since the contractor's interests are placed above the 
interests of the government with no legal recourse. Historically at 
this contractor location, the contract price and cost adjustment 
process has not hindered contractor accounting change decisions that 
result in more economical business operations . . . Further, the 
current exemption criterion is too broad, does not appear consistent 
with the prefatory response requiring significant physical and cost 
level changes, and promotes inconsistent treatment of organizational 
accounting changes. The tremendous resources expended to enhance the 
Cost Accounting Standards, especially in the cost impact area, will be 
neutralized by this one sentence exemption, if implemented. 
Contractor's will be allowed to submit nearly all future accounting 
changes under this exemption while the improved CAS cost impact 
regulations may rarely ever be used . . .''
    A Federal agency representative recommended deletion of the 
exemption proposed in the prior NPRM and reinstatement of the desirable 
change criteria that was proposed in the ANPRM. Another Federal agency 
official recommended that the proposed exemption be revised to ``* * * 
state that in order for a change in cost accumulation practice to be 
exempt from a contract price and cost adjustment, it must result from 
restructuring activities and the contractor must notify the cognizant 
Federal agency official of the change prior to beginning the 
restructuring activities or by some other mutually agreeable date.''
    Response: The contractor community indicated that the 
administrative costs associated with the submission of data and other 
efforts needed to support a request for the proposed exemption may 
exceed the administrative costs associated with the cost impact 
process. If the request for exemption were denied, the contractor would 
still be subject to potential contract price and cost adjustment and 
the CAS cost impact process. The contractor community advocated 
expansion of the proposed cost accumulation exemption criteria (which 
was designed to mitigate the cost impact process associated with pool 
combinations and split-outs) to include all cost accounting practice 
changes. Additionally, the contractor community advocated that the 
criteria for desirable changes also be expanded to include changes made 
to improve the economy and efficiency of the contractor's operations.
    The Federal agency's recommendation that only a change in cost 
accounting practice resulting from restructuring activities be 
exempted, implies that a contractor's exemption request would not be 
approved unless the restructuring activities are determined to result 
in savings in accordance with that agency's procedures. The Board does 
not believe that CASB rules and agency procurement regulations should 
be so inextricably interwined.
    In order to arrive at an equitable balance between the previously 
proposed ``exemption'' provision and the equitable adjustment 
provisions applicable to ``desirable changes,'' the Board, in this 
supplemental NPRM, proposes to replace the previously proposed 
exemption coverage with expanded ``desirable change'' coverage as 
described below, under the heading ``Desirable Changes.'' The Board 
believes such expanded ``desirable change criteria'' when finalized in 
the Board's regulations will result in greater use of that provision, 
and that it would not discourage contractor's from implementing economy 
and efficiency measures that result in cost accounting practice 
changes. The approach being proposed in this NPRM should also minimize 
the costs required to administer compliant changes made to a 
contractor's cost accounting practices.
    Additional comments relative to this matter are requested under 
Section F.
9903.302-2(c)(2)--Changes in the Selection and Composition of Overhead 
and General and Administrative Expense Pools when Specified Criteria 
are Met
    Comment: Several contractor and two Federal agency representatives 
recommended deletion of this previously proposed exemption. One 
commenter supported the Board's proposal. Another recommended that the 
proposed one percent corridor be expanded.
    Response: The proposed exemption was intended to allow contractors 
to combine or split-out pools that included the same or similar types 
of activities with common beneficial or causal characteristics; 
provided, the resulting indirect cost allocations to final cost 
objectives would closely approximate the indirect cost allocations that 
would have resulted had the pool combination or split-out not been 
made. In such circumstances, contractors would provide notification of 
the change in cost accounting practice, demonstrate that the resulting 
indirect cost rates are expected to fall within a prescribed corridor, 
but they would not be required to incur the administrative costs 
associated with the cost impact process. The proposal was not supported 
by either the contractor community or by Federal representatives. The 
Board has, therefore, withdrawn this proposed exemption from the 
supplemental NPRM being issued today.
    Additional comments relative to this matter are requested under 
Section F.

Illustrations--Changes in cost accounting practices

    Comment: Commenters suggested certain editorial changes to the 
illustration proposed at 9903.302-3(c)(4) in the prior NPRM. One 
commenter stated that the illustration did not represent a change in 
cost accounting practice since the accounting method or technique had 
not changed.
    Response: The proposed illustration is consistent with the Board's 
definitions of the terms ``cost accounting practice'' and ``change to a 
cost accounting practice.'' The illustration was revised to incorporate 
suggested editorial changes and to emphasize how the methods and 
techniques had changed with respect to cost accumulation, selection and 
composition of the pool, and composition of the allocation base.
    Comment: In regard to the illustrations proposed at 9903.302-3(c) 
(5) and (6) in the prior NPRM, one commenter disagreed that the 
illustrations depicted changes to cost accounting practices and 
recommended that they be deleted. Others inquired regarding the 
application of the Board's proposed exemptions to the illustrated 
practice change.
    Response: The purpose of the proposed illustrations was to provide 
examples of practice changes subject to the proposed exemptions from 
the contract price and cost adjustment. Since the proposed exemptions 
have

[[Page 37662]]

been withdrawn, the proposed illustrations have also been withdrawn.
    Comment: A commenter recommended deletion of the illustration 
proposed at 9903.302-3(c)(9) in the prior NPRM because ``* * * the 
method or technique has not changed * * *'' Another indicated that the 
illustration represented a change in cost accounting practice because 
there has been a ``* * * a change in the allocation base * * *'' but 
that the illustration was confusing in that the change was referred to 
as ``* * * a change in the selection of the allocation base activity * 
* * perhaps if the word ``activity'' is deleted, users will not have to 
interpret what was intended.''
    Response: The illustrated transfer of the entire inspection 
function from one pool to another pool is a change in cost accounting 
practice because several of the methods or techniques listed as 
examples in the definition of the term ``cost accounting practice'' 
have changed. The proposed illustration was revised to more precisely 
cite the methods or techniques that changed (see 9903.302-3(c)(7)).
    Comment: The illustration proposed at 9903.302-3(c)(10) in the 
prior NPRM introduces the concept of contract practices versus 
contractor practices. Extending the voluntary change concepts to 
contract practices that change because of a merger or acquisition is 
inappropriate. One commenter did not agree that the depicted pool 
split-out was a change in cost accounting practice.
    Response: The purpose of the proposed illustration is to make 
explicit that a cost accounting practice change made to an acquired 
segment's established cost accounting practices by an acquiring 
contractor after the effective date of a merger or acquisition is a 
change to that segment's established cost accounting practices with 
regard to the acquired CAS-covered contracts that will be completed by 
the acquired segment. The Board agrees with the commenter that the 
Board's rules governing changes to a cost accounting practice apply to 
the contractor's cost accounting practices established for the 
performing segment or business unit, and that separate practices are 
not to be established for individual contracts. However, the Board's 
rules are applied to individual contracts through the incorporation of 
an applicable CAS contract clause which requires the contractor to 
comply with applicable Standards and to consistently follow the 
contractor's established (or if required, disclosed) cost accounting 
practices when accumulating and reporting contract performance cost 
data. Thus, when the acquiring contractor elects to change the cost 
accounting practices previously used by the acquired segment to 
estimate and accumulate contract costs, a cost accounting practice 
change occurs for the acquired CAS-covered contracts affected by the 
practice change, and such covered contracts are subject to potential 
contract price and cost adjustment. The proposed illustration was 
modified to reflect that the contracting parties agreed that a change 
to a cost accounting practice had occurred (see 9903.302-3(c)(8)).
    Comment: The use of the words ``identified'' in the illustration 
proposed to be added as 9903.302-4(i) in the prior NPRM is not clear.
    Response: The illustration, promulgated in this proposed rule at 
9903.302-4(h), was revised to clarify that the transfer of an employee 
from one intermediate cost objective to a different intermediate cost 
objective does not result in a change to a cost accounting practice 
when the costs of the ongoing functions or activities continue to be 
accumulated consistently in the same intermediate cost objectives and 
that the intermediate cost objectives remain in the same indirect cost 
pools, before and after the employee is transferred. The words 
``identified'' were deleted where it appeared.
    Comment: With respect to the illustration proposed to be added as 
9903.302-4(j) in the prior NPRM, the increase in the base for the 
allocation of home office costs resulting from the creation of a new 
segment is not an ``initial adoption'' of a cost accounting practice.
    Response: The initial allocation of home office costs to a newly 
created segment constitutes the initial adoption of a cost accounting 
practice for that entity. If the same established practices used for 
existing segments are applied (e.g., volume increase in base) or if a 
special or different allocation method or technique is established to 
reflect the beneficial or causal relationship of the home office costs 
to the new segment, a cost accounting practice is established for the 
first time, and, if required, must be disclosed. However, such first 
time adoptions are treated as an exception from the definition of a 
change to a cost accounting practice in order not to trigger the CAS 
contract price and cost adjustment provisions. The proposed 
illustration, promulgated in this rule at 9903.302-4(i), was revised to 
make explicit that the described ``increase in the base for the 
allocation of home office costs'' is a first time adoption of a cost 
accounting practice, i.e., an exception to the definition of a change 
to a cost accounting practice.

Contract Clauses

    Comment: A commenter recommended deletion of the proposed words 
``or will result'' in paragraph (a)(5), entitled ``Noncompliance,'' of 
the proposed contract clause because the commenter believed that the 
meaning and resulting application of the phrase was unclear. The 
commenter inquired: Does it apply to increased costs under the 
contracts that have been awarded by the date of noncompliance or is a 
projection based on future awards required?
    Response: The intent of the phrase ``will result'' is to require 
consideration of the amounts remaining to be paid under existing CAS-
covered contracts affected by a noncompliant cost accounting practice 
that was used to estimate contract costs. For example, assume that a 
noncompliant practice was used to estimate contract costs for a fixed-
price contract which resulted in the negotiation of an overstated 
price. After award, at the time the noncompliance is being resolved, 
the affected fixed-price contract is partially complete with units of 
production remaining to be billed at the negotiated contract unit 
price. In such cases, increased costs paid occurred when the Government 
paid for the units that were completed and delivered. Increased costs 
paid by the Government would also result in the future as the 
contractor receives payment for the remaining contract items when they 
are completed and delivered. Resolution of estimating noncompliances, 
in the form of required contract price adjustments for affected cost-
type and/or fixed-price contracts, need not wait until the Government 
actually pays the increased costs included in the negotiated contract 
price. The proposed provision was retained.
    Comment: A commenter recommended that the ``access to records'' 
paragraph be revised by deleting the proposed coverage describing the 
type and form of records covered. The commenter expressed concern that 
the proposed language regarding providing copies of computer software 
may involve third party agreements.
    Response: The previously proposed references to ``software'' have 
been deleted from the revised contract clause language being proposed 
today.
    Comment: A Federal agency recommended that the contract clause at 
9903.201-4(d), applicable to negotiated contracts awarded to a United 
Kingdom contractor, and 9903.201-4(e) Cost

[[Page 37663]]

Accounting Standards--Educational Institutions, be modified for 
consistency with the amendments proposed for the contract clauses at 
9903.201-4(a), Full Coverage, and 9903.201-4(c), Modified Coverage.
    Response: Clause (d), for United Kingdom contractors, is quite 
different from the other referenced provisions. In addition, it is both 
brief and simple. In the absence of any identified implementation 
problems, that clause does not appear to be in need of modification. 
The clause for educational institutions was promulgated on November 8, 
1994. In response to one related ANPRM comment, the Board asked in the 
prior NPRM (61 FR 49206) for further comments on the desirability and 
support for making such revisions. Only this one comment was received. 
Accordingly, the Board believes that such revision is not currently 
warranted.

Desirable Changes

    Comment: Several contractors urged the Board to retain the ANPRM 
provisions that included economy and efficiency changes as examples of 
desirable changes. A professional association recommended: ``* * * make 
it clear that organizational changes intended to produce cost savings 
are desirable and should be administered using equitable adjustment 
procedures.''
    Response: The ANPRM criteria for desirable changes was deleted when 
the NPRM exemption for economy and efficiency changes was proposed. The 
Board concluded that performing contractors and Federal officials 
should not be able to choose which of the two types of coverage should 
be applied to changes in cost accounting practices that result from 
contractor actions taken to improve the economy and efficiency of 
operations. In practice, such provisions could result in endless 
debates and produce potential disputes between the contracting parties. 
Accordingly, the ANPRM desirable change criteria citing economies and 
efficiencies were not incorporated in the prior NPRM issued on 
September 18, 1996.
    As discussed under the heading ``Exemptions From Contract Price And 
Cost Adjustment Proposed in the Prior NPRM are Withdrawn,'' a number of 
commenters expressed concern that the proposed exemptions, while 
appreciated for their fairness, would increase rather than decrease 
contract administrative costs. Some also believed that the exemptions 
should be expanded and that more detailed procedural provisions were 
needed. After considering the comments received, the Board concluded 
that the proposed ANPRM economy and efficiency criteria provide for an 
equitable resolution process that can be reasonably implemented, in a 
fairly predictable manner, with a minimum of administrative effort. 
Further, the ANPRM approach was generally supported by contractors and 
a commenting Federal official. Accordingly, the Board proposes to adopt 
the commenters' recommendations to reinstate the ANPRM ``economy and 
efficiency'' criteria for ``desirable'' changes (and to also delete the 
previously proposed ``exemptions'') in this supplemental NPRM. 
Additionally, the previously proposed permissive use of the ANPRM 
economy and efficiency criteria was replaced by mandatory language that 
states a change in cost accounting practice ``shall'' be deemed a 
desirable change if a listed criterion is met.
    Specific comments relative to this proposed provision are requested 
under Section F.
    Comment: Clarify that the proposed criteria are not conjunctive by 
adding the phrase ``one or more of'' after ``not limited to.''
    Response: The proposed criteria are not conjunctive. The 
recommended phrase was added at 9903.201-6(b) to clarify that only one 
criterion needs to be met for a practice change to be deemed a 
desirable change.
    Comment: Several commenters from the contractor community again 
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 continues to disagree with the commenters. As 
stated in the prior NPRM, 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 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: Several commenters recommended deletion or revision of the 
proposed criteria at 9903.201-6(b)(1) which provides that if the 
Government determines that a change in cost accounting practice is 
``necessary'' in order for the contractor to remain in compliance with 
an applicable Standard, the practice change shall be deemed to be a 
``desirable'' change. The commenters believed such changes are 
``required'' changes that are subject to equitable adjustments under 
the CAS contract clause provisions for required changes. Furthermore, 
contractors should not be required to request a second determination 
that a change ``required to remain in compliance'' be deemed a 
desirable change.
    Response: As stated in the prior NPRM preamble comments (61 FR 
49202), the CAS contract clause provisions that refer to a ``required'' 
change only pertain 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 ``desirable'' changes, 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.
    When a determination is made that a practice change was 
``necessary,'' it is expected that the cognizant Federal

[[Page 37664]]

agency will treat that determination as the equivalent of a desirable 
change determination. No further paperwork is envisioned by the Board 
in such cases. If not determined ``necessary'' and the practice change 
is not otherwise considered to be a desirable change, the compliant 
practice change would be a voluntary change that is subject to the ``no 
increased cost to the Government'' provisions of affected CAS-covered 
contracts and subcontracts.
    To distinguish subsequent changes in cost accounting practices from 
first time ``required'' practice changes, the Board has retained the 
proposed criteria, including the proposed designation of ``necessary'' 
in the rule being proposed today. The proposed procedures at 9903.405-
2(d) for requesting that a voluntary change be considered a desirable 
change were modified to also require the submission of data 
demonstrating that a change was ``necessary'' to remain in compliance 
with an applicable Standard.
    Comment: Two Federal commenters objected to the criteria proposed 
at 9903.201-6(b)(2) in the prior NPRM. One stated that the provision is 
subject to misinterpretation, that contractors are responsible for 
initiating voluntary changes and that the Government only determines if 
a practice change is adequate and compliant. The other commenter also 
believes it is inappropriate for the Government to make recommendations 
to contractors to change an accounting practice.
    Response: In response to the ANPRM, 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, since they apparently had experienced such 
conditions. 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. In the prior 
NPRM, a requirement for a written Government recommendation was added 
to preclude contractor actions or misinterpretations of conversational 
exchanges with Government representatives.
    The Board has reconsidered this matter and agrees with the Federal 
commenters that the Government should not recommend specific cost 
accounting practices to be applied by contractors. Rather, authorized 
Government representatives should limit their oversight activities to 
determining whether a contractor's proposed or established cost 
accounting practices are in compliance with the Board's applicable 
Standards. Accordingly, the referenced provision has been deleted from 
this supplemental NPRM.

Cognizant Federal Agency Responsibilities

    Comment: Representatives from two Federal agencies expressed a 
number of concerns regarding proposed subsection 9903.201-7 and one 
recommended deletion of proposed paragraph (d) therein. The primary 
concerns were that the proposed amendments may conflict or duplicate 
existing and/or future provisions in Federal Acquisition Regulation 
(FAR) subparts 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 continues to recognize that responsibility for 
administering CAS-covered contracts rests with the various Federal 
agencies, including civilian agencies that are subject to CASB rules 
and regulations. The Board, in reviewing how the CAS cost impact 
process was conducted 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 by the contracting 
parties. This supplemental NPRM proposes a precise yet flexible 
approach for the submission of cost impact data due to compliant 
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.
    However, the Board also recognizes that certain implementing 
administrative policies and procedures need to be established in 
applicable agency regulations. Accordingly, the Board has modified the 
previously proposed provisions to provide agencies with more 
flexibility in developing applicable implementing policies and 
procedures. Proposed paragraph (d) has been significantly modified in 
this supplemental NPRM. It was retitled to reflect its applicability to 
just the processing of contractor changes in cost accounting practices. 
The proposed language was revised to state that actions are to be taken 
in accordance with applicable agency regulations. A new paragraph (3) 
was added to clarify that other methods may be used to resolve 
negotiated cost impact settlements if the cognizant Federal agency 
official determines that funds needed to effect contract price 
modifications will not be made available in a timely manner.
    The Board is of the opinion that modification of contract and 
subcontract prices, as prescribed in the regulations being proposed 
today, represents the preferred method to be used to resolve material 
cost impacts due to a change in cost accounting practice. Modification 
of contract prices enable the contracting parties to establish contract 
prices for covered contracts that correlate with the increased or 
decreased cost allocations to such contracts that result due to 
practice changes. This facilitates contract administration by 
permitting meaningful comparison of estimated and actual costs. The 
Board is also aware that often the necessary funding required to 
increase some contract prices may not be readily available. In the NPRM 
being issued today, revised coverage has been added to emphasize that 
the decision on how to best achieve an equitable solution, in the 
aggregate, remains a cognizant Federal agency official responsibility.

Cost Impact Process

    Comment: A Federal agency expressed concern about the extent of 
detailed administrative responsibilities and requirements included in 
the prior NPRM. An industry representative presented a similar view by 
stating that some of the proposed material was overly prescriptive.
    Response: In order to fully and clearly describe the cost impact 
process, inclusion of certain administrative responsibilities and 
requirements is unavoidable. However, the Board agrees that some of the 
prior NPRM material may have been overly instructional and prescriptive 
in nature. The Board has deleted such material.
    Comment: Industry commenters questioned the fairness of having 
``strict'' time requirements put on contractors for cost impact 
responsibilities, while the Government had ``suggested'' time periods 
for completion of their required actions. A Federal agency commenter, 
on the other hand, wanted more flexibility with regard to time 
requirements applied to the responsibilities of cognizant agency 
officials.
    Response: In order to fairly respond to both industry and 
Government groups, all specific time frame requirements,

[[Page 37665]]

with the exception of the advance notification requirements for changes 
in cost accounting practices, have been deleted from the NPRM being 
issued today. Previously proposed time requirements were replaced with 
language that states that actions should be taken ``on or before the 
date specified by the cognizant Federal agency official or other 
mutually agreeable date''. However, the Board concluded that the length 
of time taken to complete the change in cost accounting practice and 
noncompliance cost impact and resolution process has been a problem in 
the past, and believes the problem will continue if not adequately 
addressed by procurement officials. The Board therefore urges Federal 
agencies to establish reasonable and specific time guidelines in their 
implementing regulations for the completion of the various steps to be 
specified in subpart 9903.4 when this rulemaking process is completed.
    Comment: One industry commenter suggested that the term 
``voluntary'' be eliminated from the definition of a desirable change 
because not all desirable changes are voluntary. A Government commenter 
suggested that the rule refer to changes that are not required changes 
as either voluntary changes ``not deemed desirable'' or as voluntary 
changes deemed ``desirable'', as applicable.
    Response: The Board believes that through usage and practice the 
contracting parties familiar with the requirements of the CAS contract 
clause provisions governing compliant changes in cost accounting 
practices have assigned distinct meanings to the terms ``voluntary'' 
and ``desirable'' changes. The usage of and reference to these terms in 
most of the commenters' responses affirms the Board's belief. The Board 
therefore does not wish to disturb this commonly accepted and 
understood usage of these terms. The proposed definition of a voluntary 
change was revised for greater consistency with the common usage of the 
term by adding that it is a change ``that is not deemed desirable by 
the cognizant Federal agency official and for which the Government will 
pay no increased costs''. Similarly, the definition of a desirable 
change has been expanded to indicate that these are changes which 
become subject to ``equitable adjustments'' if covered contracts are 
affected by the change. Thereafter in the proposed subpart being issued 
today, practice changes are referred to as ``voluntary'' when no 
increased costs will be paid by the Government and as ``desirable'' 
when equitable adjustments will apply.
    Comment: Several industry commenters objected to the proposed 
notification requirement for required changes (at 9903.405-2(b)(1) in 
the prior NPRM). The commenters contended that the proposed 60 day 
advance notification requirement was not always practical or even 
possible when a Request For Proposal provides a shorter time period for 
proposal submissions.
    Response: Estimated costs proposed for a CAS-covered contract must 
be predicated on cost accounting practices that are compliant with the 
CAS that will apply to the potential contract, if awarded. The proposed 
advance notification requirement was intended to provide the Government 
with additional time to determine if the contractor's changed cost 
accounting practice to be used for contract cost estimating purposes 
was adequately disclosed and compliant with the potentially applicable 
CAS. However, the Board agrees with the commenters that the 60 day 
advance notification requirement may not always be practical. The 
proposed requirement was revised to require notification ``* * * as 
soon as it becomes known that a required change must be made, but no 
later than the date of submission of the price proposal in which the 
contractor must first use the changed practice to estimate costs for a 
potential CAS-covered contract.''
    Comment: Industry commenters, in general, objected to the proposed 
provisions (at 9903.405-2(b)(2) (i) and (ii) in the prior NPRM) which 
precluded contractors from using a proposed new accounting practice for 
estimating costs for the first time (the effective date) until the 
earlier of 60 days after notification or the date a determination of 
adequacy and compliance is made by the cognizant Federal agency 
official. A Government agency expressed concern about applying 
different treatment for contracts awarded between the notification date 
and effective date based on the ``preclusion of use'' provision, than 
for other contracts awarded prior to the notification date for 
voluntary changes. They recommended that the Board delete the ``special 
equitable adjustment'' treatment included in the prior NPRM for these 
contracts. A group of ``concerned U.S. Taxpayers'' raised several 
questions with regard to the ``special equitable adjustment'' 
provisions which indicated that the procedure included in the prior 
NPRM for these ``special'' contracts may be difficult to apply.
    Response: The Board, in researching this issue, learned that a lack 
of consistency exists as to the point in time when contractors actually 
begin to use 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's purpose in proposing the 
``special equitable adjustment treatment'' provision was to promote 
consistency in use of changed practices for estimating costs for price 
proposals.
    After considering the many negative comments received about this 
provision, the Board has decided to withdraw the proposed requirement 
which would have precluded contractors from immediately using proposed 
new practices for estimating purposes. The Board is also eliminating 
the related ``special equitable adjustment'' provisions proposed for 
contracts awarded between the notification and effective dates (at 
9903.405-2(f), 9903.405-5(d)(7) and 9903.407-1(h) in the prior NPRM). 
Due to this elimination, the effective date for voluntary changes being 
proposed in this supplemental NPRM is the date on which the contractor 
first begins using the new practice for estimating costs for potential 
CAS-covered contracts. In the event that the cognizant Federal agency 
official subsequently determines that the new practice is noncompliant 
with an applicable Cost Accounting Standard, the contractor's 
implementation of the noncompliant practice for estimating purposes 
would be handled in accordance with 9903.406-3.
    The Board has also revised the previously proposed requirements for 
the notification date for voluntary changes based on the elimination of 
the ``preclusion of use'' and ``special equitable adjustment'' 
provisions. As revised, the requirement for notification is ``60 days 
before the applicability date'' or the date of submission of the first 
contract price proposal which reflects the use of the voluntary change 
(see 9903.405-2(b)(2) in this NPRM). The previously proposed provision 
of concern to some commenters regarding the establishment of a 
``revised notification date'' (at 9903.405-3(a) in the prior NPRM) has 
also been eliminated since this related to the 60 day window period for 
the ``preclusion of use'' and ``special equitable adjustment'' 
provisions.
    Comment: Several Government commenters requested that the Board 
include a provision requiring the Federal agency official to notify the 
contractor of the desirable change determination so that a voluntary

[[Page 37666]]

change could be treated as a ``desirable'' change for cost impact and 
contact price adjustment purposes.
    Response: Since there is a proposed requirement for the contractor 
to submit a written request and provide written justification for 
desirable changes, the Board agrees that the cognizant Federal agency 
official's decision and response should also be in writing. The Board 
proposes to establish this requirement at 9905.405-3(b). When the 
contractor provides the required notification, a determination has not 
yet been made by the cognizant Federal agency official as to whether a 
voluntary change is or is not desirable. Accordingly, 9903.405-2(b)(2) 
was revised to clearly reflect that the notification requirement 
applies to a voluntary change. A similar requirement concerning the 
determination made on planned voluntary changes with retroactive 
applicability dates is also proposed at 9903.405-3(c).
    Comment: In the interest of streamlining, both industry and 
Government commenters recommended that the general dollar magnitude 
(GDM) submissions and Cost Impact Settlement Proposal submissions (at 
9903.405-4 (a) and (b) in the prior NPRM) be combined into one 
submission.
    Response: The Board agrees with this recommendation. A combined 
submission format is being proposed at 9903.405-4(a)(4). The Board has 
decided to refer to the submission as a ``GDM Settlement Proposal'' in 
order to give recognition to the submission's two purposes: (1) To 
provide a general dollar magnitude estimate of the aggregate cost 
impact amounts by contract type; and (2) to provide the contractor an 
opportunity to propose specific adjustments to settle the cost impact 
of a change in cost accounting practice. Previously proposed paragraph 
(c) covering the submission of a detailed cost impact proposal has been 
moved to 9903.405-4(b).
    Comment: One commenter suggested that a contractor's cost impact 
submissions be shown by two contract groups rather than by contract 
type. The suggested groups were ``firm fixed-price'' and ``other than 
firm fixed-price''.
    Response: The Board believes that the suggested ``other than firm 
fixed-price'' grouping to be inappropriate because it would combine 
contracts that should not be combined, e.g., incentive contracts with 
non-incentive contracts. In order to reduce the number of contract 
types that must be listed in the GDM Settlement Proposal, the Board 
believes that in most situations, the contract types may be limited to 
the following groups: firm fixed-price (FFP); time and material (T&M); 
incentive type (FPI/CPIF); and all other cost reimbursement contracts. 
These contract ``type'' groupings are illustrated in the GDM Settlement 
Proposal being proposed today at 9903.405-4(a)(4).
    Comment: One industry commenter recommended that a contractor 
initially only be required to submit a GDM estimate of the aggregate 
impact of changes in cost accounting practices so that a materiality 
determination can be made prior to requesting any individual contract 
data. A Government commenter supported the submission of some contract 
data, as proposed in the prior NPRM, by opining that ``a GDM alone does 
not furnish any information on the expected impact on specific large 
contracts, and the lack of data may cause delays and requirements for a 
detailed cost impact proposal''.
    Response: The submission of some individual contract data with the 
GDM aggregate estimate serves three purposes. First, it provides 
reasonable assurance with regard to the accuracy of the aggregate 
estimate by contract type submitted in the GDM. Secondly, it provides 
additional and needed support to determine if a cost impact due to 
changes in cost accounting practices is material both in the aggregate 
and for individual contracts. Finally, it provides a contractor an 
opportunity to propose specific adjustments to settle the cost impact 
without resort to a detailed cost impact proposal. The Board included 
in the prior NPRM, and has more prominently displayed in this NPRM, a 
provision that states that if the cognizant Federal agency official 
determines that the impact of a change is obviously immaterial, the 
process will be considered completed (see 9903.405-3(d)). Absent an 
``obviously immaterial'' condition, the Board continues to believe that 
individual contract data is needed to evaluate the accuracy of the GDM 
aggregate estimate and to determine the materiality of the impact both 
for the aggregate amounts and for individual contracts. The Board has 
therefore retained the proposed requirement for the submission of 
individual contract data along with the GDM aggregate estimate (as part 
of the GDM Settlement Proposal).
    Comment: A Government commenter recommended that the previously 
proposed provision at ``* * * 9903.405-3(b) be expanded to specifically 
require the contractor to submit a GDM. Disputes have arisen over who 
is required to submit a GDM, the contractor or the Government''.
    Response: In order to make clear that it is the contractor that is 
required to prepare and submit the GDM Settlement Proposal, the Board 
has included revised wording at 9903.405-3(e) in this NPRM.
    Comment: One commentator suggested that the baseline for computing 
the cost impact due to changes in cost accounting practices be the 
``before change'' cost data baseline as opposed to the ``after change'' 
cost data baseline as proposed at 9903.405-4(a)(3).
    Response: The most important factors in the computation of the cost 
impact of a change in cost accounting practice are: (1) to use a 
consistent cost data baseline; and (2) to isolate the cost impact of 
cost allocation differences on covered contracts that are due solely to 
the application of the original and changed cost accounting practices. 
If this is done properly, there should not be a significant difference 
in the cost impact amount, regardless of which baseline is used. The 
Board continues to believe that the ``after change'' cost data baseline 
is preferable for the reason stated at 9903.405-4(a)(3). The Board has 
not mandated its use, however, as evidenced by the proposed use of the 
word ``should'' and the phrase ``in most cases'' included in this 
subparagraph. To provide added flexibility for determining the data to 
be used for cost impact computation purposes, additional language was 
inserted to reflect the Board's preference for the use of the latest 
forecasted data used for forward pricing purposes, while still 
permitting the use of other data that ``is considered preferable and 
agreed to by both the contractor and cognizant Federal agency 
official.''
    Comment: One industry commenter suggested that the Board establish 
specific materiality thresholds for the aggregate, ``all other'' 
contract, and individual contract amounts for contract price adjustment 
purposes.
    Response: The Board's decision not to specify materiality amounts 
for cost impact thresholds is consistent with the position the Board 
has taken in the past with regard to this issue. The Board leaves such 
materiality determination decisions to the cognizant Federal agency 
officials who must evaluate the specific circumstances on a case-by-
case basis in making these determinations.
    Comment: Several industry commenters argued that the use of the 
``netting'' process described in the prior NPRM be expanded to required 
and desirable changes, and not be limited to ``no increased costs'' 
voluntary changes. One Government commenter recommended deleting the 
term ``netting'' because ``* * * it is confusing for the rule to 
discuss the two different terms, `offset' and `netting'. Since

[[Page 37667]]

`offsets' is the term currently used and most contractors and 
contracting officers are familiar with it, we see no reason to 
introduce a new term.''
    Response: The concept of ``netting'' only has relevance for a 
voluntary change for which there will be no increased costs to the 
Government. The proposed use of the term ``netting'' was to be 
associated with the process used to determine if the Government would 
potentially pay increased costs, in the aggregate, after giving 
consideration to appropriate adjustments of all affected contracts, due 
to the cost impact of a voluntary change in cost accounting practice. 
Since increased cost to the Government is not a concern for required or 
desirable changes which result in equitable adjustments upward or 
downward based on the cost impact, ``netting'' simply does not apply to 
such practice changes. The Board agrees with the Government commenter 
that the introduction of the term has caused some additional confusion 
concerning this process. The term ``netting'' has therefore been 
eliminated from this NPRM.
    The process for determining whether increased costs to the 
Government would result after all potential contract price adjustments 
are considered is still an essential action that must be accomplished 
for a voluntary change. The required process is specified at 9903.405-
5(d) in this NPRM.
    Comment: Regarding the ``preclusion of increased cost'' matrix 
previously proposed at 9903.405-5(d)(3) for voluntary changes, one 
industry commenter argued that it was not equitable that no upward 
adjustments be made when a higher amount of costs are to be allocated 
to both flexibly priced and firm fixed-price contracts, while downward 
adjustments to both flexibly priced and firm fixed-price contracts are 
made when a lower amount of costs were to be allocated to these 
contract types as a result of voluntary changes in cost accounting 
practices. Other commenters argued that downward adjustments to CAS-
covered fixed-price contracts should be limited to corresponding upward 
adjustments to CAS-covered flexibly priced contracts, or otherwise a 
``windfall'' accrues to the Government.
    Response: The proposed matrix is intended to show that for 
voluntary changes, the Government will not pay increased costs in the 
aggregate by precluding any net upward price adjustments. The Board's 
proposed rule is predicated on the basic concept that the Government 
should not pay more than the Government would have paid had the 
voluntary change not been made. That is the important distinction 
between a voluntary change and a desirable or required change.
    If the same scenarios that appear in the matrix were applied to 
required or desirable changes, there would be no limit on upward or 
downward adjustments, nor would there be a concern with regard to 
whether the cost allocation increases or decreases were coming from 
other CAS-covered work, other Government non-CAS-covered work, or 
commercial work. For required or desirable changes, CAS-covered 
contracts are subject to equitable adjustments under the changes clause 
of the contract. Therefore, in the scenario for required and desirable 
changes in which the costs to be allocated are higher for all contract 
types, the CAS-covered contracts are equitably adjusted upward to 
reflect the impact of the change (see 9903.405-5(d)(6)). The Government 
certainly could not claim an ``offset'' against the upward adjustment 
of the flexibly priced contracts by saying that a corresponding higher 
amount of costs to be allocated to firm fixed-price contracts 
represents ``decreased'' cost, thereby denying the contractor its 
equitable adjustments. The same is true of the opposite scenario of a 
lower amount of costs to be allocated to all contract types due to 
required and desirable changes. The contractor similarly has no 
``offset'' claim here, and the Government is entitled to its downward 
equitable adjustments under the contract clause provisions for required 
and desirable changes.
    The contract clause provision for changes in cost accounting 
practices which applies to ``any change'' is that ``the change must be 
applied prospectively'' and that ``if the contract price or cost of 
this contract is materially affected by such changes, such adjustment 
shall be made in accordance with subparagraph (a)(4) or (a)(5) of this 
clause'' (see (a)(2) of the contract clause at 9903.201-4(a)). 
Therefore, in accordance with this provision, contract prices are to be 
adjusted upward or downward to reflect any material cost impact due to 
compliant changes in cost accounting practices. The only exception 
results from the ``no increased cost'' provision for voluntary changes 
at (a)(4)(ii) of the contract clause. This precludes net upward 
contract price adjustments for voluntary changes. There is no similar 
preclusion of net downward contract price adjustments for voluntary 
changes.
    The Government should be left no worse off as a result of a 
voluntary change than it is for a required or desirable change with 
regard to contract price adjustments. Therefore, net downward contract 
price adjustments can and should be made if the cost impact reflects a 
lower amount of costs in the aggregate to be allocated to CAS-covered 
contracts as a result of changes in cost accounting practices. Such net 
downward adjustments do not create a ``windfall'' to the Government. 
Nor do these downward contract price adjustments result in recovery by 
the Government of costs greater than the lesser allocation of costs in 
the aggregate on the relevant contracts subject to price adjustment 
(this would only occur if the Government made downward contract price 
adjustments greater than the aggregate lower cost allocation amounts 
reflected by the cost impact). The contract price adjustments merely 
adjust the affected contract values to make them consistent with the 
costs expected to be accumulated under the changed cost accounting 
practices to be used to accumulate costs on those contracts for the 
remainder of their contract performance period.
    Due to the apparent continuing confusion regarding the use of the 
term ``increased costs'', the Board re-examined the proposed 
definitions contained in the prior NPRM. The Board concluded that it 
was not commonly understood that the definition of increased cost was 
dependent upon the type of contract involved and whether the contract 
price would or would not reflect the changes in cost allocations 
resulting from a change in cost accounting practice. The Board has 
therefore modified the proposed definitions to clarify that the term 
``increased cost'' refers to ``increased cost to the Government'' and 
that the definition is from the point of view of the condition that 
would result if no contract price or cost adjustments were made to 
achieve equity.
    Comment: Another commenter recommended substituting ``Increased 
Costs'' and ``Decreased Costs'' for ``Higher'' and ``Lower'' in the 
matrix to conform with the terms used throughout the NPRM with regard 
to cost impacts due to changes in cost accounting practices.
    Response: Since ``Increased Costs'' has a certain defined 
connotation in the CAS Board's rules and regulations, use of this term 
disturbs the various scenarios and related conclusions presented in the 
column entitled ``Actions To Be Taken To Preclude Increased Costs''. 
However, in order to make clear what is meant by ``Higher'' and 
``Lower'' in the matrix with regard to shifts of costs resulting from 
voluntary changes, descriptive footnotes have been added in the matrix 
(see

[[Page 37668]]

9903.405-5(d)(3)). The proposed language is consistent with the 
language used in the definitions of increased costs included in 
9903.403.
    Comment: One commenter suggested that the Board eliminate the term 
``disallow'' in the matrix since we are dealing with costs that are 
otherwise allowable except for the ``no increased cost'' provision for 
voluntary changes.
    Response: The Board proposes to replace the term with the phrase 
``preclude payment of'' to be consistent with the wording in the 
contract clause provision for voluntary changes.
    Comment: One commenter interpreted the prior NPRM as requiring 
that, for noncompliances, detailed cost impact proposals must be 
submitted, and stated that ``requiring a detailed cost impact proposal 
for all noncompliances is contrary to acquisition reform and 
streamlining Government regulations.''
    Response: The Board did not intend that a detailed cost impact 
proposal be submitted for all noncompliances. The Board's prior 
proposal has been revised to clarify this point. In this NPRM, the 
proposed language at 9903.406-2(e) specifies that a cost impact 
submission may be in a format similar to the GDM Settlement Proposal 
shown at 9903.405-4(a)(4), the detailed cost impact proposal specified 
at 9903.405-4(b) or other mutually agreeable format which will 
accomplish the objectives of 9903.406-3 (c) and (d) for a cost 
estimating noncompliance or 9903.406-4 (c) and (d) for a cost 
accumulation noncompliance. Also, an example of a GDM Settlement 
Proposal format for a noncompliance action has been added to 9903.406-
2(e). Elsewhere in proposed 9903.406, the previously proposed phrase 
``cost impact proposal'' was replaced with the phrase ``cost impact 
submission'' in order to avoid the perception that a detailed cost 
impact proposal was being required for all noncompliances.
    Comment: One commenter recommended using the phrase ``cost 
accounting noncompliance'' in lieu of ``cost accumulation 
noncompliance''.
    Response: The Board proposed the terms ``estimating'' and 
``accumulating'' to describe the two types of noncompliances that can 
occur. The two terms are consistent with the terminology used in 
9904.401 which requires consistency in the cost accounting practices 
used to estimate and accumulate costs. The Board believes that use of 
the phrase ``cost accounting noncompliance'' would lead to confusion 
since cost accounting practices are used to both estimate and 
accumulate costs.
    Comment: One commenter recommended that a provision be added that 
would allow a contractor to submit data demonstrating that the impact 
of a noncompliance is immaterial and therefore could be handled under 
9903.406-5 as a Technical Noncompliance.
    Response: The Board agrees with this recommendation and proposed 
language has been added at 9903.406-3(a) and 9903.406-4(a) to reflect 
this permitted action.
    Comment: One commenter suggested that the Board add an illustration 
to show that a situation similar to the one described in the prior NPRM 
illustration proposed at 9903.407-1(e)(1) could be resolved by 
adjusting one contract rather than three contracts.
    Response: The Board has added such an illustration at 9903.407-
1(d)(2) in this NPRM.
    Comment: One commenter advised that, in the proposed illustration 
at 9903.407-1(g)(2), the statement that increased cost on a CPFF 
contract was ``coming from a shift of costs from both Contract A and 
other non-government work'' implies that the need to preclude costs 
depends on how the costs are shifted and recommended its deletion.
    Response: The Board did not intend to imply that, when changes in 
cost accounting practices result in shifts of costs to or from CAS-
covered contracts, the resolution of the cost impact and resulting 
contract price adjustments would be affected or influenced by whether 
the cost shift was coming from or going to other CAS-covered work or 
non-CAS-covered work. In order to avoid any unintentional implications 
or inaccurate inferences, the cited reference to the source of the 
shift of costs onto the CPFF contract was deleted (see the revised 
illustration at 9903.407-1(f)(2) in this NPRM).
    Comment: A commenter did not understand why the proposed resolution 
of the estimating noncompliance illustrated in the prior NPRM, at 
9903.407-2(a)(2), did not result in net upward adjustments to the 
affected fixed-price contracts. Specifically, the commenter stated that 
``we are unable to determine either the logic or the regulatory basis 
for the Government to keep the windfall profit''.
    Response: The commenter's assertion appears to be that fixed-price 
contract prices should be adjusted upward to reflect the full amount by 
which the estimated costs contained in the contractor's cost proposals 
were understated due to the application of a noncompliant cost 
accounting practice. This contrasts with the proposed resolution shown 
in the referenced illustration which limited the upward adjustment on 
one fixed-price contract to the downward adjustment experienced on a 
different fixed-price contract, i.e., an approach that results in no 
increased cost, in the aggregate, to the Government when an estimating 
noncompliance is corrected. The proposed illustration was consistent 
with the regulatory provisions proposed in the prior NPRM at 9903.406-
3(c)(2). The Board's rationale was based on the opinion that 
contractors are expected to consistently apply their established cost 
accounting practices, in compliance with applicable Cost Accounting 
Standards when estimating costs for potential CAS-covered contracts, 
and, if the contract is awarded, when accumulating and reporting the 
costs of contract performance. The Board's continuing objective is to 
encourage contractors to utilize compliant cost accounting practices in 
a consistent manner when submitting cost proposals that are intended to 
reflect the estimated costs of contract performance expected to be 
accumulated in the contractor's cost accounting records if the contract 
were awarded.
    In questioning the Board's basis for the proposed solution, perhaps 
the commenter is advocating that the correction of a contractor's 
estimating noncompliance, as illustrated in the prior NPRM, should 
result in revised contract prices that are higher, in the aggregate, 
than the amounts agreed to by the contracting parties at the time of 
negotiation. If such a policy were established, a contractor that 
inadvertently or knowingly proposed a lower estimated cost by using a 
noncompliant cost accounting practice would have the potential ability 
to gain a competitive advantage or mislead the Government regarding the 
eventual cost to the Government while being assured that after contract 
award, by initiating action to correct the noncompliant practice, the 
contract price would be revised upward to fully cover the understated 
costs. The Board does not agree with the thrust of the commenter's 
inquiry.
    Accordingly, the illustration proposed in the prior NPRM was 
retained in this NPRM. In addition, 9903.406-3(d) was revised to 
clarify that estimating noncompliances cannot result in net upward 
contract price adjustments. A schedule was also added to illustrate 
whether contract price adjustments are to be required for flexibly-
priced and/or fixed-price contracts when an estimating noncompliance 
results in the negotiation of contract prices that are higher or lower 
than the prices that

[[Page 37669]]

would have resulted had a compliant practice been used.
    Comment: One commenter advised that it would be useful if the Board 
would prescribe which of the two ``underpayment interest rates'' 
prescribed at 26 U.S.C. 6621 specifically applies to the CAS contract 
price adjustment interest provision required by 41 U.S.C. 422(h)(4) and 
included in the various CAS contract clauses.
    Response: The Board agrees with the commenter that this issue has 
engendered some confusion among contractors and Government agencies. 
The Board's enabling statute, and the various CAS contract clauses, 
specify that the interest rate prescribed at 26 U.S.C. 6621 shall be 
used in making such calculations. At the time the Board's current 
enabling statute was enacted, this provision only contained one 
``underpayment interest rate''. Subsequntly, the statute was amended to 
include two different ``underpayment interest rates''. Upon careful 
consideration of this issue, the Board has concluded that the lesser of 
the two ``underpayment rates'' should be used in making the appropriate 
interest adjustment calculation. The Board has reached this conclusion 
after considering the specialized nature of the more recently enacted 
``underpayment rate for large corporations'' and what would appear to 
be its limited use in certain Internal Revenue Service tax enforcement 
actions. In addition the interest rate specified at 26 U.S.C. 
6621(a)(2) was the rate in effect at the time that the Board's current 
enabling statute was enacted. To effect the requested clarification, a 
revision has been made at 9903.306.

Educational Institutions

    Comment: Several commenters suggested that the Board exempt 
educational institutions from the requirements of proposed subpart 
9903.4, Contractor Cost Accounting Practice Changes and Noncompliances. 
They believed that OMB Circular A-21, Cost Principles for Educational 
Institutions, as amended April 26, 1996, which now incorporates the 
Board's applicable Standards and Disclosure Statement, provides 
sufficient coverage and guidance for the reporting of changes to 
established cost accounting practices and for making required price or 
cost adjustments if a practice change or a noncompliance results in a 
material cost impact on Federally sponsored agreements, including any 
CAS-covered contracts.
    Response: As proposed, subpart 9903.4 would have applied to all 
CAS-covered contractors, including educational institutions. However, a 
waiver provision authorizing cognizant agencies to waive, on a case-by-
case basis, any CAS unique 9903.405 requirements for determining the 
cost impact of compliant changes in cost accounting practices under 
CAS-covered contracts awarded to educational institutions was also 
provided at 9903.401-2 in the prior NPRM. The waiver provision was 
intended to provide maximum flexibility when the cognizant Federal 
agency official must concurrently determine contract price and cost 
adjustments for CAS-covered awards and make similar adjustments for non 
CAS-covered contracts and Federal grants in accordance with applicable 
OMB Circular A-21 requirements. Under the proposed waiver authority, 
the cognizant Federal agency official can waive specific CAS adjustment 
methodologies so that one set of calculations can be applied, in a 
consistent manner, to the total universe of Federally sponsored 
agreements affected by a compliant change in cost accounting practice. 
However, actions specified in subpart 9903.4 requiring notification to 
the Government when a practice change is made and to equitably resolve 
the cost impact resulting from the use of a noncompliant cost 
accounting practice used to estimate, accumulate or report costs were 
not subject to the proposed waiver.
    Although OMB Circular A-21 does not contain the specificity 
contained in subpart 9903.4 for determining the cost impact of a cost 
accounting practice change or a noncompliance on CAS-covered contracts, 
the Board is sympathetic with the commenters' expressed concerns. To 
promote the concept that the cognizant Federal agency official should 
administer all Federally sponsored agreements on a consistent basis 
with regard to cost accounting matters, the Board, in the NPRM being 
issued today, has expanded the proposed waiver authority to include all 
of the requirements of subpart 9903.4 except for the adequacy and 
compliance determinations required by 9903.405-3(a). As revised, the 
proposed provision requires the cognizant Federal agency official to 
administer the cost accounting aspects of CAS-covered contracts awarded 
to an educational institution in accordance with proposed subpart 
9903.4 procedural requirements but where alternate procedures are 
deemed appropriate and necessary in order to achieve a uniform and 
consistent approach for all Federally sponsored agreements being 
performed by an educational institution, the cognizant official is 
authorized to waive subpart 9903.4 requirements on a case-by-case 
basis. A provision requiring the cognizant Federal agency official to 
determine the specific procedures to be applied for providing 
notification of a cost accounting practice change and resolving the 
cost impact due to a change in cost accounting practice or a 
noncompliance is also being proposed (see 9903.401-2).

F. Additional Public Comments

    Interested persons are invited to participate by submitting data, 
views or arguments with respect to the proposed amendments contained in 
this NPRM. All comments must be in writing and submitted timely to the 
address indicated in the ADDRESSES section of this NPRM.
    The Board is considering the establishment of certain new 
provisions that it believes would facilitate the overall process 
governing compliant changes in cost accounting practices and 
noncompliances. Therefore, the Board invites interested parties to 
specifically comment on the following amendments being proposed today:

--Proposed 9903.201-6(c)(2), Desirable changes, which proposes to 
establish that when cost savings are expected to result from management 
actions that will be taken to improve the economy and efficiency of 
operations, changes in cost accounting practices associated with such 
operational changes shall be deemed to be desirable and not detrimental 
to the Government. Such determinations would permit the equitable 
adjustment of existing CAS-covered contracts materially affected by 
such changes in cost accounting practices.
--Proposed 9903.401-2, Educational Institutions, which proposes to 
establish that the cognizant Federal agency official is required to 
administer the cost accounting aspects of CAS-covered contracts and 
other Federally sponsored agreements in a uniform and consistent 
manner. Where determined necessary, the proposed provisions would 
permit the cognizant Federal agency official to waive applicable 
subpart 9903.4 requirements to attain that objective.
--Proposed 9903.406-2(e) which includes a newly proposed General Dollar 
Magnitude Settlement Proposal format for determining and resolving the 
estimated cost impact of a noncompliant cost accounting practice.
--Proposed 9903.406-3(d) which includes a newly proposed schedule

[[Page 37670]]

for determining the contract price adjustments to be required when an 
estimating noncompliance occurs.
Exemption provisions under consideration.
    In addition to requesting public comments on the proposed 
amendments being promulgated today, the Board requests interested 
parties to provide their views on the potential establishment of 
``exemption'' coverage in the Board's rules and regulations that would 
exempt compliant changes in cost accounting practices from contract 
price and cost adjustment when specified criteria are met.
    The Board, after considering the public comments received in 
response to the ``exemptions'' that were proposed in the prior NPRM, is 
proposing in this NPRM to establish expanded coverage for ``desirable 
change determinations'' inlieu of the previously proposed 
``exemptions'' as discussed in section E above under the topic heading 
``Exemptions From Contract Price And Cost Adjustment Proposed in the 
Prior NPRM are Withdrawn.'' However, the Board will consider this 
matter further if commenters responding to this NPRM indicate that 
there is a compelling need and strong support for the establishment of 
such exemptions, in addition to the proposed amendments being issued 
today in this NPRM.
    To assist interested parties wishing to comment on this matter, the 
Board is providing below the draft ``exemption'' coverage that was 
prepared by the CASB staff as ``Option B'' and ``Option C'' for the 
Board's consideration. Specifically of interest to the Board are the 
potential commenters' views regarding the draft exemption criteria and 
procedural requirements. Commenters may wish to indicate under what 
specific circumstances, if any, they believe a particular draft 
exemption should be applied or modified. For example: Should the Option 
B exemption be limited to major nonrecurring organizational changes 
that materially alter a contractor's operations? Should it only apply 
to restructuring activities approved in advance under agency 
regulations? The submission of specific alternative criteria and/or 
procedural requirements that commenters believe could result in the 
establishment of workable regulatory exemption coverage are also 
welcome.

Option B--Draft Exemption for Improved Management Efficiency and 
Effectiveness

    Commenters primarily opined that it was not clear how the exemption 
proposed in the prior NPRM at 9903.302-2(c)(1) would be administered or 
what evidence was needed to obtain the proposed exemption. To that end, 
the CASB staff drafted for the Board's consideration coverage along the 
following lines:
    1. In section 9903.302-2, add a new paragraph ``(c)'' to read as 
follows:
    (c) Voluntary Cost accounting practice changes exempt from contract 
price and cost adjustment. The types of voluntary changes in cost 
accounting practice described in (1) below 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 the allocation of cost to cost objectives involving 
the transfer of functions or merger of cost pools that are made due to 
management actions which are undertaken for improved management 
efficiencies and effectiveness and which involve the physical 
realignment or reduction of facilities or personnel.
    (2) To qualify for this exemption the contractor must, prior to 
making the change:
    (i) Request the exemption.
    (ii) Submit a comprehensive description of the planned change(s) 
intended to improve the segment's or business unit's economy and 
efficiency of operations and of the voluntary changes to the 
contractor's established cost accounting practices that will be made to 
implement the planned change(s).
    (iii) Provide a summary schedule of the aggregate increase or 
decrease in the total amount of costs expected to be allocated to all 
existing CAS-covered fixed-price contracts and flexibly-priced 
contracts (by contract types; such as fixed-price incentive, cost-
reimbursement, etc.) after the change(s) are made.
    (iv) Demonstrate that an equal or lesser amount of costs, in the 
aggregate, will be allocated to any existing CAS-covered contracts that 
are flexibly priced, by contract type, after the planned changes are 
implemented.
    (3) The required cost comparison calculation methodology is 
summarized below:

------------------------------------------------------------------------
                                                        Flexibly priced 
                                     Fixed-price         contracts, by  
                                      contracts          contract type  
------------------------------------------------------------------------
1. Total amount of costs that                                           
 would be allocated to existing                                         
 CAS-covered contracts, in                                              
 accordance with established                                            
 cost accounting practices, at                                          
 the estimated cost levels that                                         
 would continue if the                                                  
 contemplated economy and                                               
 efficiency changes were not                                            
 made.                                                                  
2. Total amount of costs that                                           
 would be allocated to existing                                         
 CAS-covered contracts, in                                              
 accordance with the new                                                
 changed cost accounting                                                
 practices, at the estimated                                            
 new cost levels that would                                             
 result if the planned economy                                          
 and efficiency management                                              
 changes were made.                                                     
3. Difference (1. minus 2.).                                            
------------------------------------------------------------------------

    (4) When the requirements of 9903.302-2(c)(2)(iv) are met, the 
cognizant Federal agency official shall notify the contractor that the 
voluntary change(s) to established cost accounting practices resulting 
from the planned management changes will be exempt from the contract 
price and cost adjustment provisions of affected CAS-covered contracts.
    (5) When the requirements of 9903.302-2(c)(2)(iv) are not met, the 
cognizant Federal agency official shall determine, in writing, if the 
voluntary change to the contractor's established cost accounting 
practices resulting from the planned management changes otherwise 
qualifies for the exemption, i.e., that the potential savings to be 
realized in cost proposals for anticipated future CAS-covered contracts 
and subcontracts when the planned economy and efficiency changes are 
implemented will substantially exceed any increased cost allocations to 
flexibly-priced contracts identified under (c)(3) above. If so 
determined, the cognizant Federal agency official shall notify the 
contractor that the voluntary change to the contractor's established 
cost accounting practices otherwise qualifies

[[Page 37671]]

for the requested exemption, i.e., the voluntary practice change will 
be exempt from the contract price and cost adjustment provisions 
contained in existing CAS-covered contracts affected by the changes.
    (6) When the cognizant Federal agency official determines the 
voluntary change to the contractor's cost accounting practices 
resulting from the planned management changes does not qualify for the 
requested exemption, the cognizant Federal agency official shall inform 
the contractor of the determination and initiate the cost impact 
process in accordance with 9903.405-3. The contractor may request a 
desirable change determination in accordance with 9903.201-6 and 
subpart 9903.4 prior to the submission of a requested cost impact 
submission.
    2. Modify paragraph 9903.201-6(c)(2) proposed in this NPRM by 
deleting the economy and efficiency criteria proposed at 9903.201-
6(c)(2)(i) or by replacing that proposed mandatory provision with a 
permissive provision that reads as follows:

Section 9903.201-6 Desirable changes.

* * * * *
    (``x'') The cognizant Federal agency official should determine that 
a change in cost accounting practice is beneficial and not detrimental 
if cost savings, in the aggregate, will occur under existing and/or 
future CAS-covered contracts and subcontracts, e.g., cost accounting 
practice changes attributable to:
    (i) An organizational change that combines, separates or 
centralizes operations, and the contractor or subcontractor 
demonstrates that more efficient and economical operations will result.
* * * * *

Option C--Draft Exemption for Changes in the Selection and Composition 
of Overhead and General and Administrative Expense Pools.

    The contractor community did not appear to object to an equitable 
process to determine and resolve material differences in the amount of 
costs allocated to CAS-covered contracts that may occur due to a pool 
combination or split-out. Rather, they expressed concerns regarding the 
rigid process that was proposed in the prior NPRM. Accordingly, the 
CASB staff prepared for the Board's consideration the following draft 
exemption provision that would provide the cognizant Federal agency 
official with a flexible process for determining if a requested 
exemption for a practice change attributable to a pool combination or 
split should be granted.
    1. In section 9903.302-2, add a new paragraph ``(d)'' to read as 
follows:
    (d) Voluntary cost accounting practice changes exempt from contract 
price and cost adjustment. The types of voluntary changes in cost 
accounting practice described in (1) below 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 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 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 accumulated in 
intermediate cost objectives that are now included in the resultant 
merged pool or split-out pools.
    (ii) The selected allocation base remains the same for the affected 
pools. After the change, only the composition of the allocation base 
will change since the merged or split-out allocation base(s) are now 
accumulated in a new configuration for each selected pool in the post-
change pool structure.
    (iii) The merged or split-out pools involve the allocation of 
similar pooled overhead or G&A costs to similar final cost objectives 
and the underlying levels of pooled costs and allocation base measures 
retain their proportional relationships with respect to the existing 
CAS-covered contracts. This test is met if the cognizant Federal agency 
official determines that, after the change, the resultant pools are 
homogeneous (see 9904.418-50(b)) and the amount of indirect costs 
allocated to individual CAS-covered contracts affected by the change is 
not materially different from the amounts that would have been 
allocated to such final cost objectives if the pool combination(s) or 
split-out(s) had not occurred.
    (2) To qualify for this exemption the contractor must, prior to 
making the change:
    (i) Request the exemption.
    (ii) Submit a comprehensive description of the planned pool 
combinations or split-outs, including details concerning the estimated 
amount of costs to be accumulated in the original and resultant pool or 
pools, the respective allocation base totals, and their respective 
indirect cost rates.
    (iii) Provide a summary schedule of the aggregate increase or 
decrease in the total amount of costs expected to be allocated to all 
existing CAS-covered fixed-price contracts and flexibly-priced 
contracts (by contract types; such as fixed-price incentive, cost-
reimbursement, etc.) after the change(s) are made.
    (3) In making the determination required under 9903.302-
2(d)(1)(iii) above, the cognizant Federal agency official may determine 
that a material difference in the amount of indirect costs allocated to 
CAS-covered contracts will not result if the rates (or rate) used to 
allocate pooled indirect costs to final cost objectives fall within a 
corridor that is plus or minus a stated percentage (to be determined by 
the cognizant Federal official on a case by case basis) of the rate (or 
rates) that would have resulted if the combination or expansion had not 
occurred. The comparison shall be based on the level of ongoing pooled 
costs and allocation base activity that is expected to occur after the 
change is made. For example, assuming a one percent corridor was 
determined to be an appropriate range and under the original cost 
accounting practices followed for a single pool the overhead recovery 
rate is expected to 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 forecasted 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 ``one percent'' corridors of 100% to 102% and 98% to 100% 
would overlap.
    (4) The cognizant Federal agency official shall determine, in 
writing, if the voluntary change to the contractor's established cost 
accounting practices resulting form the planned pool combination or 
split-out qualifies for the exemption. The cognizant Federal official 
shall inform the contractor of the determinations made. If the 
voluntary change is determined to be exempt, no further action is 
required. If not determined to be exempt, the cognizant Federal 
official will initiate the cost impact process in accordance with 
9903.405-3. The contractor may request a desirable change determination 
in accordance with 9903.201-6 and subpart 9903.4 prior to the 
submission of a requested cost impact submission.

[[Page 37672]]

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 following clause, 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.
    (2) * * *

COST ACCOUNTING STANDARDS--FULL COVERAGE

(June 1997)

    (a) The provisions of part 9903 of 48 CFR chapter 99, including 
the definitions and requirements contained therein, are incorporated 
herein by reference and the Contractor, in connection with this 
contract, shall--
    (1) Disclosure. Disclose in writing the Contractor's cost 
accounting practices by submission of a Disclosure Statement as 
required by 9903.202. The 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 
affected by such changes, adjustment shall be made in accordance 
with subparagraph (a)(4) or (a)(5) of this clause, as appropriate.
    (3) Compliance with Standards. Comply with all CAS contained in 
part 9904, including any modifications and interpretations thereto, 
in effect on the date of award of this contract or, if the 
Contractor has submitted cost or pricing data, on the date of final 
agreement on price as shown on the Contractor's signed Certificate 
Of Current Cost Or Pricing Data. The Contractor shall also comply 
with any CAS, including any modifications or interpretations 
thereto, which become applicable because of a subsequent award of a 
CAS-covered contract or subcontract to the Contractor. Such 
compliance shall be required prospectively from the date of 
applicability to such contract or subcontract.
    (4) Compliant changes in cost accounting practices. As required 
by subpart 9903.4, provide timely notification of changes in 
disclosed or established cost accounting practices, provide data 
concerning the cost impact of such changes and:
    (i) Required change. Agree to an equitable adjustment of the 
price of this contract as provided under this provision if the 
contract cost is affected by a change to a disclosed or established 
cost accounting practice which, pursuant to subparagraph (a)(3) of 
this clause, the Contractor or a subcontractor is required to make.
    (ii) Voluntary change. Agree to an adjustment in the price or 
cost of this contract as provided under this provision if contract 
cost is affected by a voluntary change made by the contractor or a 
subcontractor; provided that no agreement may be made under this 
provision that will result in the payment of any increased costs by 
the United States in the aggregate for all of the contractor's or a 
subcontractor's CAS-covered contracts and subcontracts affected by 
the change.
    (iii) Desirable change. Agree to an equitable adjustment of the 
price of this contract as provided in this provision if contract 
cost is affected by a change in cost accounting practice made by the 
contractor or a subcontractor that the cognizant Federal agency 
official finds to be a desirable change.
    (5) Noncompliance. As required by subpart 9903.4, initiate 
action to correct any noncompliance, provide data concerning the 
cost impact of the noncompliance and agree to an adjustment of the 
contract price or cost if the Contractor or a subcontractor fails to 
comply with an applicable Cost Accounting Standard, including any 
modifications or interpretations thereto, or to follow any cost 
accounting practice consistently and such failure results or will 
result in any increased costs paid by the United States. Also, agree 
to the recovery of any increased costs paid by the United States, 
together with interest thereon computed at the annual rate 
established under section 6621 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 documents, papers, or records, regardless of type and 
regardless of whether such items are in written form, in the form of 
computer data or in any other form, relating to compliance with the 
requirements of this clause.
    (d) Flowdown to subcontracts. The Contractor shall include in 
all negotiated subcontracts which the Contractor enters into, the 
substance of this clause, except paragraph (b), and shall require 
such inclusion in all other subcontracts, of any tier, including the 
obligation to comply with all CAS in effect on the subcontract's 
award date or if the subcontractor has submitted cost or pricing 
data, on the date of final agreement on price as shown on the 
subcontractor's signed Certificate of Current Cost or Pricing Data. 
If the subcontract is awarded to 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. 
This requirement shall apply only to negotiated subcontracts in 
excess of $500,000, except that the requirement shall not apply to 
negotiated subcontracts otherwise exempt from the requirement to 
include a CAS clause as specified in 9903.201-1.
(End of clause)
* * * * *
    (c) Cost Accounting Standards--Modified Coverage. (1) The 
contracting officer shall insert the following clause, Cost Accounting 
Standards--Modified Coverage, in negotiated contracts when the contract 
amount is over $500,000, but less than $25 million, and the offeror 
certifies it is eligible for and elects to use modified CAS coverage 
(see 9903.201-2), unless the clause prescribed in paragraphs (d) or (e) 
of this subsection is used.
    (2) The following clause requires the contractor to comply with 
9904.401, 9904.402, 9904.405 and 9904.406, to disclose (if it meets 
certain requirements) actual cost accounting

[[Page 37673]]

practices, and to follow disclosed and established cost accounting 
practices consistently.

COST ACCOUNTING STANDARDS--MODIFIED COVERAGE (JUNE 1997)

    (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 
affected by such changes, adjustment shall be made in accordance 
with subparagraph (a)(4) or (a)(5) of this clause, as appropriate.
    (3) Compliance with Standards. Comply with the requirements of 
9904.401, Consistency in Estimating, Accumulating and Reporting 
Costs; 9904.402, Consistency in Allocating Costs Incurred for the 
Same Purpose; 9904.405, Accounting For Unallowable Costs; and 
9904.406, Cost Accounting Period; including any modifications or 
interpretations thereto, in effect on the date of award of this 
contract, or, if the Contractor has submitted cost or pricing data, 
on the date of final agreement on price as shown on the Contractor's 
signed Certificate Of Current Cost Or Pricing Data. The Contractor 
shall also comply with any modifications or interpretations to such 
CAS which become applicable because of a subsequent award of a CAS-
covered contract or subcontract to the Contractor. Such compliance 
shall be required prospectively from the date of applicability to 
such contract or subcontract.
    (4) Compliant changes in cost accounting practices. As required 
by subpart 9903.4, provide timely notification of changes in 
disclosed or established cost accounting practices, provide data 
concerning the cost impact of such changes and:
    (i) Required change. Agree to an equitable adjustment of the 
price of this contract as provided under this provision if the 
contract cost is affected by a change to a disclosed or established 
cost accounting practice which, pursuant to subparagraph (a)(3) of 
this clause, the Contractor or a subcontractor is required to make.
    (ii) Voluntary change. Agree to an adjustment in the price or 
cost of this contract as provided under this provision if contract 
cost is affected by a voluntary change made by the contractor or a 
subcontractor; provided that no agreement may be made under this 
provision that will result in the payment of any increased costs by 
the United States in the aggregate for all of the contractor's or a 
subcontractor's CAS-covered contracts and subcontracts affected by 
the change.
    (iii) Desirable change. Agree to an equitable adjustment of the 
price of this contract as provided in this provision if contract 
cost is affected by a change in cost accounting practice made by the 
contractor or a subcontractor that the cognizant Federal agency 
official finds to be a desirable change.
    (5) Noncompliance. As required by subpart 9903.4, initiate 
action to correct any noncompliance, provide data concerning the 
cost impact of the noncompliance and agree to an adjustment of the 
contract price or cost if the Contractor or a subcontractor fails to 
comply with an applicable Cost Accounting Standard, including any 
modifications or interpretations thereto, or to follow any cost 
accounting practice consistently and such failure results or will 
result in any increased costs paid by the United States. Also, agree 
to the recovery of any increased costs paid by the United States, 
together with interest thereon computed at the annual rate 
established under section 6621 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 documents, papers, or records, regardless of type and 
regardless of whether such items are in written form, in the form of 
computer data or in any other form, relating to compliance with the 
requirements of this clause.
    (d) Flowdown to Subcontracts. The Contractor shall include in 
all negotiated subcontracts which the Contractor enters into, the 
substance of this clause, except paragraph (b), and shall require 
such inclusion in all other subcontracts, of any tier, including the 
obligation to comply with all CAS in effect on the subcontract's 
award date or if the subcontractor has submitted cost or pricing 
data, on the date of final agreement on price as shown on the 
subcontractor's signed Certificate of Current Cost or Pricing Data. 
If the subcontract is awarded to 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. 
This requirement shall apply only to negotiated subcontracts in 
excess of $500,000, except that the requirement shall not apply to 
negotiated subcontracts otherwise exempt from the requirement to 
include a CAS clause as specified in 9903.201-1.

(End of clause)

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


9903.201-6  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, one or more of the criteria 
specified in paragraph (c) of this subsection.
    (c) A change in cost accounting practice shall be deemed to be 
desirable and not detrimental if the cognizant Federal agency official 
determines that:
    (1) 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) Cost savings, in the aggregate, will occur under existing and/
or future CAS-covered contracts and subcontracts, e.g., cost accounting 
practice changes attributable to:
    (i) An organizational change that combines, separates or 
centralizes operations, and the contractor or subcontractor 
demonstrates that more efficient and economical operations will result.
    (ii) The development of a new and significantly improved cost 
accounting system that will be implemented at a specific date in the 
future. The purpose of the new cost accounting system is to improve the 
contractor's or subcontractor's financial management

[[Page 37674]]

capabilities and there is a reasonable expectation that more efficient 
and economical operations will result and benefits will accrue to the 
Government.
    (3) Circumstances, other than those listed in paragraphs (c) (1) 
and (2) of this section, included as justification in the contractor's 
written request for a desirable change determination clearly 
demonstrate that the change is otherwise desirable and not detrimental 
to the interests of the Government.
    (d) The cognizant Federal agency official's finding should not be 
made solely because of the 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 applicable agency regulations. Coordinated 
administrative actions will provide greater assurances that individual 
contractors follow their cost accounting practices consistently under 
all their CAS-covered contracts and that aggregate contract price and 
cost adjustments required under CAS-covered contracts for changes in 
cost accounting practices or CAS noncompliance issues are determined 
and resolved, equitably, in a uniform overall manner.
    (b) Federal agencies shall prescribe regulations and establish 
internal policies and procedures governing how agencies will administer 
the requirements of CAS-covered contracts, with particular emphasis on 
inter-agency coordination activities. Procedures to be followed when an 
agency is and is not the cognizant Federal agency should be clearly 
delineated. Agencies are urged to coordinate on the development of such 
regulations.
    (c) Internal agency policies and procedures shall provide for the 
designation of the agency office(s) or officials responsible for 
administering CAS under the agency's CAS-covered contracts and 
subcontracts at each contractor and subcontractor business unit and the 
delegation of necessary contracting authority to agency individuals 
authorized to negotiate cost impact settlements under CAS-covered 
contracts, e.g., Contracting Officers, Administrative Contracting 
Officers (ACO's) or other agency officials authorized to perform in 
that capacity.
    (d) Processing changes in cost accounting practices.
    (1) The cognizant Federal agency official shall, in accordance with 
applicable agency regulations:
    (i) Make all required determinations for all CAS-covered contracts 
and subcontracts affected by a change in cost accounting practice, 
including cost impact materiality determinations, in the aggregate.
    (ii) Coordinate with affected agencies on the potential 
modification of CAS-covered awards, prior to actual negotiations.
    (iii) Negotiate the cost impact settlement, in the aggregate, for 
all CAS-covered contracts and subcontracts materially affected by the 
change in cost accounting practice.
    (iv) Inform the affected agencies of the negotiation results, by 
distribution of the negotiation memorandum.
    (v) When contract and/or subcontract price adjustments are 
negotiated:
    (A) Request affected agencies to prepare implementing contract 
modifications and to obtain implementing subcontract modifications from 
the next higher-tier contractor, as appropriate. The modifications 
shall be predicated on the negotiated cost impact settlement reflected 
in the negotiation memorandum and are to be forwarded for signature by 
the contractor through the cognizant Federal agency official.
    (B) Concurrently, obtain contractor signatures for all contracts 
and subcontracts to be modified and distribute the executed 
modifications to the awarding agencies.
    (2) Awarding agencies shall, in accordance with applicable agency 
regulations:
    (i) Coordinate with and support the cognizant Federal agency 
official.
    (ii) Prepare and/or obtain contract modifications needed to 
implement negotiated cost impact settlements, as requested by the 
cognizant Federal agency official.
    (iii) When the cognizant Federal agency official has properly 
determined a cost impact settlement on behalf of the Government, make 
every effort to provide funds required for increased contract price 
modifications to affected Contracting Officers for obligation so that 
the cognizant Federal agency official can concurrently execute all the 
requested contract modification(s) needed to settle the cost impact 
action in a timely manner.
    (3) If the cognizant Federal agency official makes a written 
determination that funding needed to execute required modifications is 
not expected to be available, an equitable solution by use of any other 
suitable technique which resolves the negotiated cost impact settlement 
may be used (see 9903.405-5(c)(3)).

Subpart 9903.3--CAS Rules and Regulations

    5. Section 9903.301 is proposed to be amended by adding two 
definitions in alphabetical order to read as follows:


9903.301  Definitions.

    (a) * * *
* * * * *
    Function, as used in this part, means an activity or group of 
activities that is identifiable in scope and has a purpose or end to be 
accomplished. Examples of functions include activities such as 
accounting, marketing, research, product support, drafting, assembly, 
inspection, 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 proposed to be amended by revising 
paragraph (c) to read as follows:


9903.302-1  Cost accounting practice.

* * * * *
    (c) Allocation of cost to cost objectives, as used in this part, 
refers to the cost accounting methods or techniques used to assign an 
item of cost or a group of items of cost to intermediate and final cost 
objectives.

[[Page 37675]]

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 methods and techniques used to:
    (i) Accumulate cost in the contractor's cost accounting system,
    (ii) Determine whether a cost is to be directly or indirectly 
allocated to intermediate or final cost objectives,
    (iii) Determine the selection and composition of cost pools, and
    (iv) Determine the selection and composition of the appropriate 
allocation bases.
    (2) The selection of cost pools involves the determination to 
establish one or more cost pools for the accumulation of specific costs 
to be allocated to other intermediate and/or to final cost objectives 
for a particular segment, home office, or business unit. The 
composition of cost pools involves the determinations to accumulate, by 
elements of cost, the costs of the specific functions or groups of 
functions to be included within each established cost pool.
    (3) The selection of an allocation base involves the determination 
on what type of allocation measurement activity (e.g., labor hours, 
square footage, labor dollars, total cost input) will be used as the 
basis for the allocation of the total costs accumulated in each 
selected pool to intermediate and/or final cost objectives for a 
particular segment, home office, or business unit. The composition of 
an allocation base involves the determination to accumulate and measure 
the selected allocation base data associated with each selected pool 
that was established. The composition of an allocation base includes 
the specific functional groupings within the base. The composition of a 
home office allocation base includes the grouping of segments within 
the applicable base. Examples of allocation bases include direct 
engineering labor hours for a specific direct engineering function 
performed at a specified location, total cost input of a particular 
segment, total payroll costs for specific segments reporting to the 
same group or home office.
    7. Section 9903.302-2 is proposed to be revised to read as follows:


9903.302-2  Change to a cost accounting practice.

    (a) Change to a cost accounting practice, as used in this part, 
including the contract clauses prescribed at 9903.201-4, means any 
alteration in a cost accounting practice, as defined in 9903.302-1, 
whether or not such practices are covered by a Disclosure Statement, 
including the following changes in cost accumulation:
    (1) Pool combinations. The merging of existing indirect cost pools.
    (2) Pool split-outs. The expansion or breakdown of an existing 
indirect cost pool into two or more pools.
    (3) Functional transfers. The transfer of an existing ongoing 
function in its entirety from an existing 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 home office level, depending upon 
the nature of the cost or the function involved. At the segment level, 
different segments can establish different cost accounting practices 
for the same type of cost when the cost is incurred for the first time 
or a function is created by each segment. This exception does not apply 
to transfers of ongoing functions, e.g., from one pool or segment to 
another pool, segment or home office.
    (2) The partial or total elimination of a cost or the cost of a 
function is not a change in cost accounting practice.
    (3) The revision of a cost accounting practice for a cost which 
previously had been immaterial is not a change in cost accounting 
practice.
    (c) Mergers and Acquisitions. (1) Each CAS-covered contract 
requires that the performing contractor consistently follow its 
established or disclosed cost accounting practices over the contract's 
entire period of performance.
    (2) When a business unit or a segment performing a CAS-covered 
contract is acquired by a different contractor through a merger or 
acquisition, the acquired business unit or segment shall accumulate and 
report costs incurred from the effective date of acquisition or merger 
through completion of the acquired contract consistently in accordance 
with the cost accounting practices established by the acquired business 
unit or segment. Compliant or noncompliant 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.
    (3) This paragraph (c) applies equally to CAS-covered subcontracts 
acquired by a contractor or subcontractor.
    8. Section 9903.302-3 is proposed to be amended by adding a new 
introductory paragraph, revising the introductory text to paragraphs 
(a), (b) and (c), revising the illustration at (c)(3) and by adding new 
illustrations (c)(4) through (c)(9) to read as follows:


9903.302-3  Illustrations of changes which meet the definition of 
``change to a cost accounting practice.''

    The following illustrations are not intended to cover all possible 
changes in cost accounting practices nor are the illustrations to be 
used as limitations for determining if an accounting change has 
occurred. Further, each illustration is not intended to be all-
inclusive. Accordingly, the lack of a mentioned change in cost 
accounting practice does not mean that there is not a change in cost 
accounting practice. The decision as to whether a change in cost 
accounting practice has or has not occurred, requires a thorough 
analysis of the circumstances of each individual situation based on the 
definitions and exceptions specified in 9903.302-1 and 9903.302-2.
    (a) The cost accounting practice used for the measurement of cost 
has been changed.
* * * * *
    (b) The cost accounting practice used for the assignment of cost to 
cost accounting periods has been changed.
* * * * *
    (c) The cost accounting practice used for the allocation of cost to 
cost objectives has been changed.

[[Page 37676]]

      
      
      

----------------------------------------------------------------------------------------------------------------
                      Description                                          Accounting treatment                 
----------------------------------------------------------------------------------------------------------------
                                                                                                                
                  *                  *                  *                  *                  *                 
(3) The contractor changes to a different allocation     (3)(i) Before change: The contractor used a direct     
 base.                                                    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        
                                                          measurement activity.                                 
(4) A Segment combines two similar ongoing functions...  (4)(i) Before change: The Segment established separate 
(i) The ongoing direct and indirect assembly operations   assembly overhead pools to accumulate the indirect    
 at Plants A and B are merged.                            costs applicable to Plant A's and Plant B's respective
                                                          assembly functions. Pooled costs were allocated to    
                                                          individual final cost objectives based on Plant A's   
                                                          and Plant B's respective assembly direct labor dollars
                                                          allocation bases.                                     
                                                         (ii) After change: The indirect costs of the two       
                                                          ongoing assembly functions are combined and           
                                                          accumulated in one indirect assembly cost pool. Pooled
                                                          costs are allocated to individual final cost          
                                                          objectives based on a total assembly direct labor     
                                                          dollars allocation base applicable to the two plant   
                                                          locations.                                            
                                                         (iii) The methods and techniques used to accumulate    
                                                          cost changed because the indirect cost pools used to  
                                                          accumulate the cost of specific activities have       
                                                          changed from two pools to one pool. The selection of  
                                                          pools used to allocate the segment's indirect costs to
                                                          final cost objectives changed from two pools to one.  
                                                          The composition of the pools changed because the      
                                                          specific activities originally included in the two    
                                                          indirect cost pools are now included in one pool. The 
                                                          composition of the allocation base changed because the
                                                          selected allocation base measurement activity         
                                                          originally accumulated separately for each selected   
                                                          pool is now accumulated in one combined base for one  
                                                          pool.                                                 
(5) Assume the same circumstances as in (c)(4) of this   (5)(i) Before change: Segments A and B each established
 illustration, except that Plants A and B are separate    an assembly overhead pool to accumulate the indirect  
 Segments A and B that are combined as Segment C.         costs applicable to their respective assembly         
                                                          functions. Pooled costs were allocated to final cost  
                                                          objectives based on Segment A's and B's respective    
                                                          assembly direct labor dollars.                        
                                                         (ii) After change: Segment C establishes a single      
                                                          assembly overhead pool to identify and accumulate the 
                                                          costs of Segment A's and Segment B's ongoing indirect 
                                                          assembly functions. Pooled costs are allocated to     
                                                          final cost objectives based on Segment C's total      
                                                          assembly direct labor dollars generated by the two    
                                                          ongoing but separate assembly operations              
                                                         (iii) For the same reasons cited in (c)(4)(iii) of this
                                                          illustration, a cost accounting practice change has   
                                                          occurred.                                             
(6) The contractor changes how the ongoing indirect      (6)(i) Before change: The indirect costs applicable to 
 costs of the manufacturing and assembly operations are   the manufacturing and assembly functions were         
 accumulated and allocated to final cost objectives by    accumulated in a plant-wide indirect cost pool and    
 a segment.                                               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                      
                                                         (iii) The decision to accumulate the ongoing costs of  
                                                          the manufacturing and assembly functions separately,  
                                                          in two pools instead of one, represents changes in the
                                                          methods and techniques used to accumulate indirect    
                                                          costs and in the selection and composition of the pool
                                                          (see explanations in illustration (c)(4)(iii)). 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.                

[[Page 37677]]

                                                                                                                
(7) The contractor transfers the incoming materials      (7)(i) Before change: The cost of performing the       
 inspection function.                                     incoming inspection function was accumulated in an    
(i) Incoming materials are inspected in the same manner   intermediate cost objective that was included in the  
 before and after the change.                             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 methods and techniques
                                                          used to accumulate indirect cost because the costs    
                                                          accumulated in the intermediate cost objective for the
                                                          incoming inspection function are included for         
                                                          accumulation in a different indirect cost pool and a  
                                                          change in the composition of the two pools because the
                                                          incoming inspection function is now included in a     
                                                          different pool. 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 measurement activity for the incoming inspection 
                                                          function.                                             
(8) A contractor establishes a new product line by       (8) As of the effective date of acquisition, the       
 acquiring another company. Both entities are             contractor requires the new segment to accumulate and 
 performing CAS-covered contracts.                        report the continuing costs of the acquired ongoing   
(i) The acquired company will be treated as a new         functions differently, e.g., the acquired company's   
 segment. The acquired segment will complete the CAS-     single overhead pool is split into two new pools. The 
 covered contracts that were novated from the prior       contracting parties agree that the pool split-out     
 company to the contractor. It will not perform any       resulted in changes to the acquired segment's         
 work associated with the contractor's existing lines     previously established cost accounting practices      
 of business.                                            (i) The cost accounting practice changes are subject to
                                                          the contract price and cost adjustment provisions of  
                                                          the acquired CAS-covered contracts                    
                                                         (ii) The initial adoption exception provided by        
                                                          9903.302-2(b)(1) would not apply because this is not a
                                                          first time incurrence of cost or creation of a        
                                                          function, with regard to the ongoing acquired CAS-    
                                                          covered contracts                                     
(9) A contractor expands the existing product line of    (9)(i) As of the effective date of acquisition, Segment
 Segment A by acquiring another company. Both entities    A merges the continuing functions of the acquired     
 are performing CAS-covered contracts.                    company with Segment A's similar functions and merges 
(i) Segment A will operate and manage the acquired        the indirect costs of the acquired company's ongoing  
 company's ongoing operations.                            functions into Segment A's indirect cost pools, in    
(ii) Segment A will complete the acquired CAS-covered     accordance with Segment A's established cost          
 contracts that were novated from the prior company to    accounting practices. The acquired company's          
 the contractor.                                          allocation base is similarly merged into Segment A's  
                                                          allocation base.                                      
                                                         (ii) The cost accounting practices that will be used to
                                                          accumulate and report costs of Segment A's existing   
                                                          and acquired contracts will be different than the     
                                                          practices that were previously used to estimate,      
                                                          accumulate and report contract costs.                 
                                                         (iii) The methods and techniques used to accumulate    
                                                          costs have changed. The acquired contractor's         
                                                          intermediate cost objectives used to accumulate the   
                                                          costs of its ongoing indirect functions and activities
                                                          have been eliminated, because the ongoing costs are   
                                                          now accumulated in Segment A's intermediate cost      
                                                          objectives. Indirect cost accumulation changed because
                                                          the costs of the ongoing activities previously        
                                                          accumulated in two pools are now accumulated in one   
                                                          pool. Accumulation of the allocation base activity    
                                                          changed since the base activity previously accumulated
                                                          in two bases is now accumulated in one combined base. 
                                                         (iv) The pool and base combinations made by the        
                                                          acquiring contractor represent changes in the         
                                                          selection and composition of the pools and the        
                                                          composition of bases for the existing Segment and     
                                                          acquired company.                                     
                                                         (v) The cost accounting practice changes are subject to
                                                          the contract price and cost adjustment provisions of  
                                                          the existing and acquired CAS-covered contracts.      
----------------------------------------------------------------------------------------------------------------

    9. Section 9903.302-4 is proposed to be amended by adding an 
introductory paragraph, and illustrations (h) through (j) to read as 
follows:


9903.302-4  Illustrations of changes which do not meet the definition 
of ``Change to a cost accounting practice.''

    The following illustrations are not intended to cover all possible 
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 37678]]



----------------------------------------------------------------------------------------------------------------
                      Description                                          Accounting treatment                 
----------------------------------------------------------------------------------------------------------------
                          *         *         *         *         *         *         *                         
(h) The contractor transfers an inspection department    (h)(1) Before the transfer, the employee's salary was  
 employee from Plant A to Plant B.                        accumulated as inspection labor and was included in   
                                                          Plant A's overhead pool.                              
                                                         (2) After the transfer, the employee's salary is       
                                                          similarly accumulated in an intermediate cost         
                                                          objective that is included in Plant B's overhead pool.
                                                          The salaries of all employees performing the          
                                                          inspection function at Plants A and B continue to be  
                                                          accumulated in their respective intermediate cost     
                                                          objectives which continue to be included in their     
                                                          respective pools.                                     
                                                         (3) Since the cost of the inspection functions at      
                                                          Plants A and B continue to be accumulated within the  
                                                          same intermediate cost objectives and the selection   
                                                          and composition of the pools has not changed, before  
                                                          and after the employee transfer, no change in cost    
                                                          accounting practice has occurred.                     
(i) A contractor with a corporate home office creates a  (i)(1) After change: The costs of the contractor's home
 new segment for the purpose of entering a new line of    office continue to be accumulated and allocated to    
 business. The new segment will not perform any work      segments in accordance with the contractor's          
 associated with the contractor's existing CAS-covered    established cost accounting practices. The new segment
 contracts.                                               is added to the applicable home office allocation base
                                                          or bases used to allocate home office costs to        
                                                          segments.                                             
                                                         (2) The addition of the new segment to the applicable  
                                                          home office allocation base represents an initial     
                                                          adoption of a cost accounting practice for the segment
                                                          when it was created (see exception at 9903.302-       
                                                          2(b)(1)). Since the selection and composition of the  
                                                          home office pool and applicable allocation bases were 
                                                          not otherwise changed, the described increase in the  
                                                          base for the allocation of home office costs          
                                                          represents an initial adoption of a cost accounting   
                                                          practice that is not subject to the contract price or 
                                                          cost adjustment process.                              
(j) Assume the same circumstances as in (i) of this      (j)(1) For the reasons stated in (i) of this           
 illustration, except that:.                              illustration, the described home office change is not 
(1) The contractor acquired a new segment that is         a cost accounting practice change.                    
 performing CAS-covered contracts from another company.  (2) At the segment level, the first time incurrence of 
(2) The acquired segment will continue to estimate,       the acquiring contractor's home office cost allocation
 accumulate and report costs in accordance with the       is an initial adoption of a cost accounting practice  
 original company's compliant and previously disclosed    (see exception at 9903.302(b)(1). Since the contractor
 cost accounting practices for that segment. A new        adopted the acquired segment's previously established 
 Disclosure Statement is filed to that effect. Also       cost accounting practices, no change in established   
 disclosed is the contractor's home office cost           cost accounting practices occurred for the acquired   
 allocation to the segment.                               CAS-covered contracts.                                
----------------------------------------------------------------------------------------------------------------

    10. Section 9903.306 is proposed to be revised to read as follows:


9903.306  Applicable interest rate.

    The interest rate applicable to any contract price adjustment shall 
be the annual rate of interest established under section 6621(a)(2) of 
Title 26 (26 U.S.C. 6621(a)(2)) for such period. Such interest shall 
accrue from the time payments of the increased costs were made to the 
contractor or subcontractor to the time the United States receives full 
compensation for the price adjustment.
    11. A new subpart 9903.4 is proposed to be added to read as 
follows:
Subpart 9903.4--Contractor Cost Accounting Practice Changes and 
Noncompliances
Sec.
9903.401  Applicability of subpart.
9903.401-1  CAS-covered contracts and subcontracts.
9903.401-2  Educational institutions.
9903.402  Purpose.
9903.402-1  Changes in cost accounting practice.
9903.402-2  Failure to comply (noncompliances) with an applicable 
cost accounting standard or to follow any cost accounting practice 
consistently.
9903.403  Definitions.
9903.404  Materiality determination for making adjustment.
9903.405  Changes in cost accounting practice.
9903.405-1  General.
9903.405-2  Notification of changes in cost accounting practices.
9903.405-3  Determinations, approvals and initiating the cost impact 
process.
9903.405-4  Contractor cost impact submissions.
9903.405-5  Negotiation and resolution of the cost impact.
9903.406  Noncompliances.
9903.406-1  General types of noncompliances.
9903-406-2  Noncompliance determinations and initiating the cost 
impact process.
9903-406-3  Cost estimating noncompliance.
9903-406-4  Cost accumulation noncompliance.
9903-406-5  Technical noncompliances.
9903.407  Illustrations.
9903.407-1  Changes in cost accounting practice--illustrations.
9903.407-2  Noncompliance illustrations.

Subpart 9903.4--Contractor Cost Accounting Practice Changes and 
Noncompliances


9903.401  Applicability of subpart.


9903.401-1  CAS-covered contracts and subcontracts.

    (a) This subpart 9903.4 applies uniformly to all CAS-covered 
contracts and subcontracts affected by a compliant change in cost 
accounting practice and/or a noncompliant cost accounting practice. By 
accepting the first CAS-covered contract or subcontract that 
incorporates part 9903, which includes this subpart 9903.4, the 
contractor agrees to process cost accounting practice changes and 
noncompliance actions occurring after the award of that contract or 
subcontract in accordance with this subpart for all existing CAS-
covered contracts and subcontracts affected by the change or 
noncompliance.
    (b) To aid in meeting the requirements set forth in this subpart 
9903.4 for processing cost accounting practice changes and 
noncompliance actions, the contractor shall maintain a system for 
identifying all existing CAS-covered

[[Page 37679]]

contracts and subcontracts, and their periods of performance.


9903.401-2  Educational institutions.

    (a) This subpart 9903.4 applies to all CAS-covered contracts and 
subcontracts awarded to educational institutions. Such CAS-covered 
contracts and subcontracts incorporate part 9903 by reference and 
contain specific terms and conditions that require the educational 
institution to disclose its cost accounting practices (if specified 
criteria are met), provide notification if a change to a cost 
accounting practice is made and to agree to contract price or cost 
adjustments for material cost impacts attributable to compliant changes 
in cost accounting practices and/or to noncompliant practices. This 
subpart 9903.4 establishes procedures for providing such notifications, 
the submission of requested cost impact data, and determining the 
required adjustments.
    (b) On April 26, 1996, the Office of Management and Budget (OMB) 
incorporated in OMB Circular A-21, Cost Principles for Educational 
Institutions (61 FR 20880, May 8, 1996), the Disclosure Statement (Form 
CASB DS-2) and the CAS applicable to educational institutions that were 
promulgated by the Board at 48 CFR chapter 99 (59 FR 55746, November 8, 
1994). As amended, Circular A-21 also contains certain requirements and 
guidance regarding the notification to be provided when an educational 
institution changes a cost accounting practice and the cost adjustments 
that may be required or other actions to be taken by the cognizant 
Federal agency when Federally sponsored agreements (contracts, grants 
and cooperative agreements) are affected by compliant practice changes 
or noncompliant practices.
    (c) The amended CASB and OMB requirements were intended to be 
compatible and are to be administered by the cognizant Federal agency 
official in a uniform and cost effective manner. To the maximum extent 
feasible, the cognizant Federal agency official should apply a single 
set of procedures when obtaining notifications, cost impact data and 
when determining the adjustments that may be required for individual 
CAS-covered contracts and other Federally sponsored agreements subject 
to amended OMB Circular A-21 that are affected by the same practice 
change or noncompliance. The procedures applied to all Federally 
sponsored agreements, including CAS-covered contacts and subcontracts, 
should be consistent with this subpart 9903.4 requirements and 
objectives. The cognizant Federal agency official may use applicable 
portions of this subpart 9903.4 as guidance and, if mutually agreed to 
by the educational institution, the contracting parties may elect to 
apply the 9903.4 provisions as deemed appropriate in the circumstances.
    (d) Waiver authority. When an educational institution changes a 
compliant cost accounting practice or fails to comply with an 
applicable Cost Accounting Standard that affects CAS-covered contracts 
and other Federally sponsored agreements, the cognizant Federal agency 
official may waive or modify, on a case-by-case basis, applicable 
requirements of this subpart 9903.4 for affected CAS-covered contracts 
and subcontracts as deemed necessary in order to establish appropriate 
alternative procedures or methods for obtaining notifications of 
practice changes, the submission of cost impact data or determining 
contract price or cost adjustments in a uniform manner for all 
Federally sponsored agreements. The basis for the waiver and the 
alternate procedures utilized shall be documented in a written 
determination. This waiver authority does not apply to the adequacy and 
compliance determinations required by 9903.405-3(a).
    (e) A written determination to apply the provisions of this subpart 
9903.4, OMB Circular A-21, or other appropriate procedural guidance to 
educational institutions shall be made by the cognizant Federal agency 
official. Educational institutions should contact their cognizant 
Federal agency for specific instructions within 60 days after receipt 
of a CAS-covered contract that is subject to this subpart.


9903.402  Purpose.


9903.402-1  Changes in cost accounting practice.

    The contract clauses prescribed in 9903.201-4, Contract clauses, 
set forth the requirements for changes in cost accounting practices 
that a contractor may be required to make in order to comply with a 
standard, modification or interpretation thereof that becomes 
applicable to existing covered contracts for the first time due to the 
subsequent award of a covered contract or may otherwise decide to make, 
e.g., a voluntary change from an established or disclosed compliant 
cost accounting practice to another compliant cost accounting practice. 
Section 9903.405 establishes the specific actions to be taken by the 
contracting parties for such compliant cost accounting practice 
changes. Section 9903.405 also establishes procedures for adjusting 
contract amounts that are materially affected by compliant changes in 
cost accounting practices, while not requiring adjustment of all 
contracts that are affected by such changes.


9903.402-2  Failure to comply (noncompliances) with an applicable cost 
accounting standard or to follow any cost accounting practice 
consistently.

    The contract clauses prescribed in 9903.201-4, Contract clauses, 
require the contractor or subcontractor to agree to an adjustment of 
the contract price or cost if the contractor or subcontractor fails to 
comply with an applicable Cost Accounting Standard, modification or 
interpretation thereto, or to follow any cost accounting practice 
consistently, and such failure results or will result in any increased 
cost paid, in the aggregate, by the United States, under CAS-covered 
contracts and subcontracts. Section 9903.406 establishes the actions to 
be taken by the contracting parties in order to resolve the 
noncompliant condition and/or effect recovery of any increased costs 
paid as a result of the noncompliance.


9903.403  Definitions.

    This section 9903.403 defines terms as used in this part 9903, 
including the contract clauses prescribed at 9903.201-4. Where the 
defined terms refer to a ``contractor'' or ``contract'' the definition 
is intended to apply equally, as applicable, to a ``subcontractor'' or 
``subcontract.''
    Applicability date means--
    (1) For required cost accounting practice changes, the date on 
which a contractor is first required to accumulate and report costs in 
accordance with an applicable Standard, modification or interpretation 
thereto; or
    (2) For voluntary cost accounting practice changes, the date on 
which a contractor begins to use a new cost accounting practice for 
cost accumulation and reporting purposes.
    Contracts subject to adjustment means CAS-covered contracts and 
subcontracts, including definitized contract options, that:
    (1) Have contract performance beyond the applicability date of a 
change in cost accounting practice, and have their current contract 
prices based on a previous cost accounting practice; or
    (2) Are affected by the application of a noncompliant practice that 
was used to estimate or accumulate costs.
    Cost impact means the increase or decrease in estimated or actual 
costs allocable to a CAS-covered contract or subcontract due to a 
compliant change in cost accounting practices, a

[[Page 37680]]

noncompliance with a Cost Accounting Standard, or a failure to follow 
cost accounting practices consistently.
    Desirable change means a voluntary change to a contractor's 
established or disclosed cost accounting practices that the cognizant 
Federal agency official finds is desirable and not detrimental to the 
Government pursuant to 9903.201-6 and is therefore subject to the 
equitable contract price adjustment provisions of CAS-covered contracts 
affected by the change.
    Detailed cost impact proposal means a proposal that shows the cost 
impact of a change in cost accounting practice for contracts subject to 
adjustment that have an estimate-to-complete which exceeds a threshold 
amount specified by the cognizant Federal agency official.
    Effective date means:
    (1) For compliance with Standards, modifications and 
interpretations thereto, the date on which a contractor is first 
required to estimate proposed contract costs in accordance with an 
applicable standard, modification or interpretation, as specified by 
the CAS Board; or
    (2) For voluntary cost accounting practice changes, the date on 
which a contractor begins using a new cost accounting practice for cost 
estimating purposes.
    General dollar magnitude estimate means an estimate of the 
aggregate cost impact, by contract type, of a change in cost accounting 
practice, or a noncompliant practice on contracts subject to 
adjustment.
    Increased costs to the Government 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 no actions are taken to preclude the payment of the 
increased costs; or
    (2) For firm fixed-price CAS-covered contracts, when the costs to 
be allocated to the contract are less than the amount of costs that 
would have been allocated to it had the contractor not changed its cost 
accounting practice(s) and the contract price is not adjusted downward 
to reflect the contractor's lesser allocation of cost to the contract.
    Increased costs to the Government 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 these CAS-covered contracts than would 
have been allocated to the contracts had the contractor complied with 
applicable Standards, modifications or interpretations thereto, or 
followed its cost accounting practices consistently.
    Increased costs to the Government 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 CAS-covered contract, and such failure results in a higher 
contract price than would have been negotiated had the contractor 
complied with applicable standards, modifications or interpretations 
thereto, or followed its cost accounting practices consistently.
    Increased costs paid means the amount the Government actually pays, 
in the aggregate, for increased costs resulting from compliant cost 
accounting practice changes or noncompliant cost accounting practices 
used to estimate or accumulate costs.
    Notification date means the date on which the contractor formally 
notifies the cognizant Federal agency official of a planned change in 
cost accounting practices.
    Offset process means the combining of cost increases to one or more 
affected contracts of a given type with cost decreases to one or more 
affected contracts of the same type, for the purpose of mitigating 
action that needs to be taken due to changes in cost accounting 
practices.
    Required change means a change in cost accounting practice that a 
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 currently result in material increased costs to 
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 that has not been deemed desirable by the 
cognizant Federal agency official and for which the Government will pay 
no increased costs.


9903.404  Materiality determination for making adjustment.

    Contract price adjustments or actions to preclude or recover the 
payment of increased costs resulting from compliant changes in cost 
accounting practice, or failure to comply with an applicable Cost 
Accounting Standard, modification or interpretation thereto, or to 
follow any cost accounting practice consistently, shall only be 
required if the amounts are material. In determining materiality, the 
cognizant Federal agency official shall use the criteria specified in 
9903.305. The cognizant Federal agency official should forego 
submission of a General Dollar Magnitude (GDM) Settlement Proposal or a 
detailed cost impact proposal (refer to 9903.405-4), and not adjust 
contracts, if the cognizant Federal agency official determines that the 
amount involved is immaterial.


9903.405  Changes in cost accounting practice.


9903.405-1 General.

    A CAS-covered contractor shall make changes to its established or 
disclosed cost accounting practices when required in order to comply 
with applicable Cost Accounting Standards, including any modification 
and interpretations promulgated thereto. A contractor may change its 
established cost accounting practices voluntarily, provided the 
cognizant Federal agency official is notified of the change and the new 
practice complies with applicable Cost Accounting Standards. CAS-
covered contracts and subcontracts affected by changes in cost 
accounting practices that are either required to comply with Cost 
Accounting Standards, modifications or interpretations thereto, or are 
made voluntarily for which the cognizant Federal agency official has 
made a finding that the change is desirable in accordance with 
9903.201-6 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 compliant 
accounting changes, as set forth in subsections 9903.405-2 through 
9903.405-5. Implementation of any change in cost accounting practice 
without submission of the notification

[[Page 37681]]

required under 9903.405-2 shall be considered a failure to follow a 
cost accounting practice consistently, and shall be processed as a 
noncompliance condition in accordance with 9903.406.


9903.405-2  Notification of changes in cost accounting practices.

    (a) The contractor shall submit to the cognizant Federal agency 
official a description of any planned change in cost accounting 
practices. The date of submission is hereafter referred to as the 
notification date.
    (b) The contractor shall notify the cognizant Federal agency 
official in accordance with the following:
    (1) Required changes shall be disclosed as soon as it becomes known 
that a required change must be made, but no later than the date of 
submission of the price proposal in which the contractor must first use 
the required change to estimate costs for a potential CAS-covered 
contract.
    (2) Voluntary changes (including those ultimately deemed desirable) 
shall be disclosed as soon as the contractor decides to change an 
established or disclosed cost accounting practice. Notification shall 
be provided no later than 60 days before the applicability date or on 
the date of submission of the price proposal in which the contractor 
first uses the changed practice to estimate costs for a potential CAS-
covered contract.
    (c) If a contractor proposes to make the applicability date of a 
voluntary change (including those ultimately deemed desirable) 
retroactive to the beginning of the current fiscal year in which the 
notification is made, the contractor must submit rationale for such 
action and obtain the cognizant Federal agency official's approval. The 
rationale must state the reasons for making a retroactive change.
    (d) When requesting that a voluntary change be deemed desirable, 
the contractor shall provide rationale and data demonstrating that the 
accounting change is desirable and not detrimental to the Government's 
interests or that the change in cost accounting practice was necessary 
to remain in compliance with an applicable Cost Accounting Standard 
(see 9903.201-6).
    (e) Data submission requirements: The contractor shall submit a 
complete description of any change in cost accounting practice, 
including the relevant Disclosure Statement page revisions and 
amendments required to disclose the new practice (see 9903.202-3); any 
additional information which will help the cognizant Federal agency 
official make a determination of adequacy and compliance; and if 
applicable, data demonstrating that the change is:
    (1) Obviously immaterial because the change in practice will not 
result in a greater or lesser allocation of cost to individual CAS-
covered contracts affected by the change, i.e., after the change, the 
amounts of cost allocated to individual covered contracts will 
approximate the amounts that would have been allocated if the change 
were not made,
    (2) Desirable and not detrimental to the interests of the 
Government, and/or
    (3) One that warrants retroactive implementation.


9903.405-3  Determinations, approvals and initiating the cost impact 
process.

    (a) Adequacy and compliance determination. Upon receipt of the 
contractor's notification, the cognizant Federal agency official, with 
the assistance of the auditor, shall review the planned cost accounting 
practice change concurrently for adequacy and compliance. If the 
cognizant Federal agency official identifies any area of inadequacy, a 
revised description of the new accounting practice shall be requested. 
Problems of adequacy should be resolved between the parties as soon as 
possible after the initial notification of the accounting change. If 
the cognizant Federal agency official determines that the disclosed 
practice is noncompliant with any Cost Accounting Standards, 
modifications or interpretations thereto, and the contractor implements 
the practice, the accounting change will be handled as a noncompliance 
under the provisions of 9903.406. Once the cognizant Federal agency 
official has determined that the accounting change is both adequate and 
compliant, the cognizant Federal agency official shall immediately 
notify the contractor.
    (b) Desirable change determinations. When the contractor's 
notification includes a request that a planned voluntary change be 
deemed desirable and not detrimental, the cognizant Federal agency 
official should, in accordance with 9903.201-6, make a decision with 
regard to this finding promptly after the change is determined to be 
adequate and compliant. The cognizant Federal agency official shall 
notify the contractor in writing regarding the decision of 
desirability, and concurrently request the contractor to submit a GDM 
Settlement Proposal.
    (c) Approval of retroactive application date. When a contractor 
notification pertains to a planned voluntary change with a retroactive 
applicability date, the cognizant Federal agency official should review 
the contractor's submitted rationale and promptly determine if the 
requested retroactive application date should be approved or rejected. 
The cognizant Federal agency official shall notify the contractor in 
writing regarding the decision made.
    (d) Obviously immaterial changes. If the cognizant Federal agency 
official determines that the cost impact of a change in cost accounting 
practice is obviously immaterial based on data submitted by the 
contractor pursuant to 9903.405-2(e)(1), or otherwise decides that the 
cost impact is immaterial, the decision will be documented, the 
contractor will be so notified, and the cost impact process will be 
concluded.
    (e) Request for GDM settlement proposal. After a determination of 
adequacy and compliance has been made, the cognizant Federal agency 
official will request a GDM Settlement Proposal, as described in 
9904.405-4(a). The request should specify a date for submission of the 
GDM Settlement Proposal. The contractor shall submit the GDM Settlement 
Proposal on or before the date specified or other mutually agreeable 
date. The cognizant Federal agency official will use the contractor's 
GDM Settlement Proposal to resolve the cost impact of a change in cost 
accounting practice on existing CAS-covered contracts and subcontracts, 
without requiring a detailed cost impact proposal, provided the 
official determines that the GDM Settlement Proposal is adequately 
supported and contains sufficient data.


9903.405-4  Contractor cost impact submissions.

    (a) General Dollar Magnitude (GDM) settlement proposal. (1) The 
purpose of the GDM Settlement Proposal is to provide information to the 
cognizant Federal agency official on the estimated overall impact of a 
change in cost accounting practice on affected CAS-covered contracts 
and subcontracts that were awarded based on the previous accounting 
practice. It provides the contractor an opportunity to propose specific 
adjustments to settle the cost impact of changes in cost accounting 
practices. It also provides a sufficient number of individual contract 
and/or subcontract cost impact estimates to support the general dollar 
magnitude aggregate estimate by contract type and to assist the 
cognizant Federal agency official in determining whether any individual 
contract or subcontract price adjustments will be required. The GDM 
Settlement Proposal is used to determine if the change in cost 
accounting practice has resulted in material increased or decreased 
costs to existing contracts, and to attempt to

[[Page 37682]]

resolve the cost impact of the change in cost accounting practice 
without requiring a detailed cost impact settlement proposal as 
described in paragraph (b) of this subsection.
    (2) The contractor, in the GDM Settlement Proposal, shall show a 
reasonable estimate of the aggregate impact of the change on CAS-
covered contracts and subcontracts subject to adjustment, by contract 
type, from the applicability date of the change to completion of the 
contracts subject to adjustment. The individual contracts selected by 
the contractor for inclusion in the GDM Settlement Proposal shall be 
those contracts with the largest dollar impact. The contractor should 
submit specific adjustments to settle the cost impact of the cost 
accounting practice change(s). The proposed adjustment amounts shall be 
determined in accordance with the requirements of this subpart and may 
include proposed revisions to the profit, fee or incentive provisions 
of affected contracts.
    (3) In computing the cost impact, the contractor shall use a 
consistent cost data baseline for the before and after change amounts. 
The cost impact data should generally be based on the latest forecasted 
direct and indirect cost data used for forward pricing purposes unless 
other data is considered preferable and agreed to by both the 
contractor and cognizant Federal agency official. In most cases, the 
after change cost data baseline should be used because this is the same 
cost data baseline that will be used to determine the revised forward 
pricing rates and current contract estimates-to-complete based on the 
new cost accounting practice.
    (4) Any format which reasonably shows the aggregate impact by 
contract type and provides sufficient contract data to settle the cost 
impact is acceptable. In most situations, the grouping of the CAS 
covered contracts by contracts type within the GDM Settlement Proposal 
may be limited to the following contract types: firm fixed price (FFP); 
time and material (T&M); incentive-type (FPI/CPIF); and other cost 
reimbursement contracts (CPFF, CPAF, CR, etc). One acceptable GDM 
Settlement Proposal format is illustrated as follows:

  Summary--GDM Settlement Proposal of Total Cost Impact on All Covered Contracts Awarded Prior to Applicability 
                                                      Date                                                      
----------------------------------------------------------------------------------------------------------------
                         Required Changes, Voluntary Changes (1) , Desirable Changes (1)                        
-----------------------------------------------------------------------------------------------------------------
                                         Estimate to Complete (2)           Difference cost        Proposed     
                                -----------------------------------------       impact        adjustment amounts
                                  Old practice  (3)    New practice  (4) ---------------------------------------
                                         (A)                  (B)                (A-B)                (5)       
----------------------------------------------------------------------------------------------------------------
AGGREGATE                                                                                                       
    FFP                                                                                                         
    T&M                                                                                                         
    FPI/CPIF                                                                                                    
    OTHER                                                                                                       
    COST TYPE                                                                                                   
    TOTAL                                                                                                       
                                                                                                                
CONTRACTS (6)                                                                                                   
    FFP                                                                                                         
    1.                                                                                                          
    2.                                                                                                          
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
                                                                                                                
    T&M                                                                                                         
    1.                                                                                                          
    2.                                                                                                          
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
                                                                                                                
    FPI/CPIF                                                                                                    
    1.                                                                                                          
    2.                                                                                                          
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
                                                                                                                
    OTHER COST TYPE                                                                                             
    1.                                                                                                          
    2                                                                                                           
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
----------------------------------------------------------------------------------------------------------------
Instructions:                                                                                                   
1. Indicate whether the cognizant Federal agency official has made a finding that the change is desirable, and, 
  if not, attach an explanation detailing the proposed action(s) that will be taken to preclude the payment of  
  aggregate increased costs, if any, pursuant to 9903.405-5(d).                                                 
2. 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.                                                   
3. Enter the total estimated cost to complete all of the CAS-covered contract backlog based on the 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.                                                 
4. Enter the total estimated cost to complete the CAS-covered contract backlog based on the 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 allocation base(s), as          
  appropriate.                                                                                                  

[[Page 37683]]

                                                                                                                
5. The amounts in this column indicate the contractor's proposal to settle the cost impact. Enter the proposed  
  adjustment amounts in the aggregate by contract type and for individual contracts listed, as well as for the  
  ``All Other'' contract category. Proposed revisions to profit, fee, or incentive provisions may also be       
  included. (Attach explanatory schedule.)                                                                      
6. List each contract needed to resolve ``material'' amounts identified in the GDM estimate and, based on the   
  individual contract cost impact computations, enter the indicated data and proposed adjustment amount.        

    (5) The illustrated GDM Settlement Proposal format is an example of 
one method and does not preclude the use of any other format or method 
that displays a reasonable estimate of the cost impact by contract type 
and provides sufficient contract data to settle the cost impact. The 
GDM Settlement Proposal shall be adequately supported. If a GDM 
Settlement Proposal is not adequately supported, or cannot be 
adequately supported by the contractor, the cognizant Federal agency 
official shall request a detailed cost impact proposal in accordance 
with paragraph (b) of this subsection.
    (6) The cognizant Federal agency official should attempt to use the 
contractor's GDM Settlement Proposal to resolve the cost impact process 
to the maximum extent possible. If additional individual contract data 
is determined necessary to resolve the cost impact, the cognizant 
Federal agency official should request the contractor to submit a 
revised GDM Settlement Proposal that includes the specific additional 
data needed, e.g., contracts with a dollar impact exceeding a specific 
dollar amount. The contractor should then submit the revised GDM 
Settlement Proposal on or before the date specified by the cognizant 
Federal agency official or other mutually agreeable date.
    (7) If the impact is immaterial in both the aggregate by contract 
type and for the individual contracts included in the GDM Settlement 
Proposal, the cost impact process may be concluded without any 
adjustments. If the 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 threshold for 
individual contract price adjustments may be based on cost impact 
dollar thresholds, a percentage of the contract price, or a combination 
of the two criteria, e.g., contracts with cost impacts exceeding a 
certain dollar amount provided that the impact exceeds a certain 
percentage of the contract price. The ``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. The materiality thresholds, as used in this paragraph, 
are the amounts below which no adjustments are required.
    (8) Upon receipt, the cognizant Federal agency official should 
promptly evaluate the contractor's GDM Settlement Proposal and, if the 
cost impact is determined to be material, proceed to either negotiate 
and resolve the cost impact, request additional data or request a 
detailed cost impact proposal in a timely manner.
    (b) Detailed cost impact proposal. (1) A detailed cost impact 
proposal is required when the GDM Settlement Proposal cannot be 
adequately supported or does not contain sufficient data to resolve a 
cost impact due to a change in cost accounting practices. It will be 
used by the cognizant Federal agency official in lieu of the GDM 
Settlement Proposal to determine the magnitude of the impact of the 
change on existing CAS-covered contracts and subcontracts subject to 
adjustment and to determine which, if any, should be adjusted for the 
impact of the change. The determination by the cognizant Federal agency 
official of the need for a detailed cost impact proposal is final and 
binding, and not subject to the Disputes clause of the contracts 
affected by the practice changes.
    (2) The detailed cost impact proposal need not include every 
contract and subcontract subject to adjustment as a result of the 
change in cost accounting practices. It typically will include all 
contracts and subcontracts having an estimate-to-complete, based on the 
old accounting practice, exceeding a specified amount established by 
the cognizant Federal agency official. The specified individual 
contract impact amount should be high enough so that the detailed cost 
impact proposal does not contain an excessive number of contracts and 
subcontracts. However, it should contain a sufficient number so that it 
includes a reasonably high percentage of both the backlog of these 
contracts and the aggregate impact amount by contract type. The 
established individual contract estimate-to-complete amount should be 
specified in a formal written request by the cognizant Federal agency 
official for the data. The request should also specify that the 
proposal include an aggregate amount, and be grouped, by contract type.
    (3) The contractor shall submit the detailed cost impact proposal 
on or before the date specified by the cognizant Federal agency 
official or other mutually agreeable date.
    (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 GDM Settlement Proposal or a detailed cost impact proposal.
    (2) The Cost Accounting Standards Board's rules, regulations and 
Standards do not in any way restrict the capacity of the contracting 
parties to select the method by which the cost impact attributable to a 
change in cost accounting practice is resolved. A cost impact may be 
resolved by modifying a single contract, several but not all contracts, 
or all contracts subject to adjustment, or any other suitable technique 
which resolves the cost impact in a way that approximates the amounts 
that would have resulted if individual contracts had been adjusted.
    (b) Offset process. The offset process of combining cost 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 aggregate cost to 
the Government which is materially different from that which would 
result if individual contract prices had actually been adjusted to 
reflect the aggregate impact of the practice change.
    (2) The offset process shall only be applied to contracts that are 
of the same contract type, e.g., FFP, T&M, incentive (FPI/CPIF) or 
other cost reimbursement contracts.
    (3) The offset process should not be used to materially reduce the 
amount of the price adjustment to any one contract that exceeds the 
individual contract cost impact materiality threshold established

[[Page 37684]]

for individual contract price adjustments. It also should not be used 
to reduce the adjustment for these contracts to an amount below the 
established threshold. The offset process is used to determine the 
action required for contract adjustment purposes for the ``all other 
contract'' category.
    (4) Within a segment, the effect of several changes may be combined 
in the offset consideration if the changes all take place at the same 
time. Such offsets may be used:
    (i) Within the same contract to determine if the aggregate impact 
on the individual contract exceeds the materiality threshold;
    (ii) On an overall basis to determine the aggregate ``all other 
contract'' amounts by contract type for all changes; or
    (iii) If any action is required to preclude increased costs for 
concurrent voluntary changes.
    (5) Offsets affecting incentive contracts may be applied, provided 
that the incentive provisions of these contracts are retained or not 
materially altered.
    (6) To minimize action required to resolve cost impacts, cost 
increases at one segment of a company may be offset by decreases at 
another segment within the same contract types if the change causes 
costs to flow between segments either directly or via a higher 
organizational level such as a home office, or is made simultaneously 
at the direction of a higher organizational level such as a home 
office. For such changes, the cost impact 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 GDM 
Settlement Proposal or detailed cost impact proposal has been analyzed, 
the cognizant Federal agency official shall determine, with the 
auditor's assistance, whether contract price or cost adjustments are 
warranted. Any adjustments should be limited to amounts that are 
material.
    (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, in the 
aggregate, by the Government or net upward adjustments to contracts. 
Even if a change produces a zero aggregate impact on the costs of all 
affected contracts, it still may be necessary to adjust the prices of 
one or more contracts of each contract type. Such adjustments may be 
necessary to:
    (i) Maintain consistency between the negotiated contract costs and 
the 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, or selects some other method for settlement in 
accordance with paragraph (a)(2) of this subsection, the negotiated net 
adjustment for each contract type should approximate the amounts that 
would result if the individual contract prices were adjusted to reflect 
the cost impact of the change in cost accounting practice.
    (4) In determining whether contract price or cost adjustments are 
or are not required, the cognizant Federal agency official should 
analyze the contractor's cost impact submission to determine if the 
proposed adjustment amounts exceed the materiality thresholds 
established in accordance 9903.405-4(a)(7), and adjust individual 
contract prices accordingly.
    (5) The cognizant Federal agency official, with the assistance of 
the auditor, should evaluate the aggregate amount by contract type, as 
well as the ``all other contracts'' amount, to determine if these 
amounts exceed the aggregate or ``all other contracts'' materiality 
thresholds established. If these amounts exceed the threshold, 
adjustments may be made by either adjusting contract prices or use of 
an alternate technique which accomplishes the same approximate result 
as if all individual contracts were adjusted. If these amounts do not 
exceed the established aggregate or ``all other contracts'' threshold, 
no adjustments are required, unless individual contracts exceed the 
established individual contract cost impact threshold or adjustments 
are otherwise considered necessary to achieve equity.
    (6) Whenever contract price adjustments are anticipated, the 
cognizant Federal agency official should coordinate the Government cost 
impact resolution plan with affected 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, terms of the contract, and requirements 
of law.
    (d) Action to preclude increased costs paid for voluntary changes. 
(1) In the absence of a finding pursuant to 9903.201-6 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 changes, the 
cognizant Federal agency official shall, in addition to the procedures 
specified in 9903.405-2 through 9903.405-5(c) which apply to all 
compliant accounting changes, take action to ensure that increased 
costs are not paid as a result of a change.
    (2) To decide if action is required to preclude the payment of 
increased costs, the cognizant Federal agency official shall determine, 
with the assistance of the auditor, to what extent the United States 
would pay a higher level of costs, in the aggregate, once all potential 
contract price adjustments are considered. This occurs when the 
estimated aggregate higher allocation of costs to contracts subject to 
adjustment exceeds the estimated aggregate lower allocation of costs to 
other contracts subject to adjustment.
    (3) The cognizant Federal agency official may preclude the payment 
of increased costs resulting form voluntary changes by limiting any 
upward contract price adjustments to affected contracts to the amount 
of any downward contract price adjustments to other affected contracts, 
i.e., no net upward contract price adjustments. The Government may also 
preclude increased costs by not paying the estimated amount of 
increased costs to be allocated to affected flexibly-priced contracts 
that exceeds the estimated reduction of costs to be allocated to 
affected firm fixed-price contracts. The following illustrates the 
actions required so that increased costs are not paid by the 
Government.

[[Page 37685]]



                                  Voluntary Change In Cost Accounting Practice                                  
----------------------------------------------------------------------------------------------------------------
                     Cost shift by contract type                                                                
----------------------------------------------------------------------    Actions to be taken to preclude the   
             Flexibly-priced                    Firm fixed-price               payment of increased costs       
----------------------------------------------------------------------------------------------------------------
Higher (1)..............................  Higher (1).................  No upward price adjustments. Preclude    
                                                                        payment of the higher level of costs on 
                                                                        flexibly-priced contracts.              
Lower (2)...............................  Higher (1).................  Limit FFP upward price adjustments to    
                                                                        amount of flexibly-priced downward price
                                                                        adjustments.                            
Lower (2)...............................  Lower (2)..................  Adjust FFP and flexibly-priced contract  
                                                                        prices downward by the amount of the net
                                                                        downward price adjustment.              
Higher (1)..............................  Lower (2)..................  Limit upward adjustments on flexibly-    
                                                                        priced to amount of downward adjustments
                                                                        on FFP. Preclude payment of any excess  
                                                                        increased costs on flexibly-priced.     
----------------------------------------------------------------------------------------------------------------
Note:                                                                                                           
(1) ``Higher'' indicates that a greater amount of cost will be allocated to the contracts than would have been  
  allocated to them had the contractor not changed its cost accounting practices. This represents increased     
  costs to flexibly priced contracts.                                                                           
(2) ``Lower'' indicates that the costs to be allocated to the contracts are less than the amount that would have
  been allocated had the contractor not changed its cost accounting practices. This represents increased costs  
  to firm fixed-price contracts.                                                                                

    (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 changes are 
subject to equitable adjustments.
    (e) Failure to agree. If the parties fail to agree on the price or 
cost adjustments, the cognizant Federal agency official may make 
unilateral adjustments, subject to appeal as provided in the Disputes 
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 applicable 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. 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  Noncompliance determinations and initiating the cost impact 
process.

    (a) When a Government representative finds a potential 
noncompliance, the representative should, after sufficient discussion 
with the contractor to ensure all relevant facts are known, immediately 
issue a report to the cognizant Federal agency official describing the 
cost accounting practice and the basis for the opinion of 
noncompliance. The representative's opinion on whether correction of 
the potential noncompliant practice would or would not have a material 
cost impact on existing or future CAS-covered contract costs, if known, 
should also be expressed in the report.
    (b) The cognizant Federal agency official should make an initial 
finding of compliance or noncompliance and advise the cognizant auditor 
and contractor in a timely manner after the receipt of the audit report 
of potential noncompliance.
    (c) If the cognizant Federal agency official makes a determination 
of compliance, no further action is necessary other than to notify the 
contractor and the cognizant auditor of the determination.
    (d) If an initial finding of noncompliance is made, the cognizant 
Federal agency official should immediately notify the contractor in 
writing of the exact nature of the noncompliance. The contractor will 
either agree to the noncompliance determination, or disagree and submit 
reasons why the existing practices are considered to be compliant. The 
contractor shall respond by a date specified by the cognizant Federal 
agency official or other mutually agreeable date.
    (e) If the contractor agrees with the initial finding of 
noncompliance, the contractor shall correct the noncompliance and 
submit a noncompliance cost impact submission as requested by the 
cognizant Federal agency official. The contractor's cost impact 
submission shall show the impact of the noncompliance on the affected 
CAS-covered contracts. It may be in a format that is similar to the GDM 
Settlement Proposal shown at 9903.405-4(a)(4), the detailed cost impact 
proposal specified at 9903.405-4(b) or other mutually agreeable format 
which will accomplish the objectives of 9903.406-3 (c) and (d) for a 
cost estimating noncompliance or of 9903.406-4 (c) and (d) for a cost 
accumulation noncompliance. The cognizant Federal agency official shall 
normally request a GDM Settlement Proposal and attempt to resolve the 
noncompliance without requiring a detailed cost impact proposal. The 
following illustration is one acceptable GDM Settlement Proposal format 
for a noncompliant action. This format is only one example of a 
noncompliance cost impact submission and does not preclude the use of 
any other mutually agreeable cost impact submission format. If a GDM 
Settlement Proposal is not adequately supported, or cannot be 
adequately supported by the contractor, the cognizant Federal agency 
official shall request a detailed cost impact proposal for the CAS-
covered contracts materially affected by the noncompliance.

[[Page 37686]]



  Summary--GDM Settlement Proposal of Total Cost Impact on all Covered Contracts Affected by a Cost Estimating  
                                                  Noncompliance                                                 
----------------------------------------------------------------------------------------------------------------
                                           Contract cost amount             Difference cost        Proposed     
                                -----------------------------------------       impact        adjustment amounts
                                     Noncompliant     Compliant practice ---------------------------------------
                                   practice (1) (A)         (2) (B)              (A-B)                (3)       
----------------------------------------------------------------------------------------------------------------
AGGREGATE                                                                                                       
    FFP                                                                                                         
    T&M                                                                                                         
    FPI/CPIF                                                                                                    
    OTHER                                                                                                       
    COST TYPE                                                                                                   
CONTRACT (4)                                                                                                    
    FFP                                                                                                         
    1.                                                                                                          
    2.                                                                                                          
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
    T&M                                                                                                         
    1.                                                                                                          
    2.                                                                                                          
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
    FPI/CPIF                                                                                                    
    1.                                                                                                          
    2.                                                                                                          
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
    ALL OTHER COST                                                                                              
    1.                                                                                                          
    2.                                                                                                          
    ``ALL OTHER''                                                                                               
    TOTAL                                                                                                       
----------------------------------------------------------------------------------------------------------------
Instructions:                                                                                                   
1. Insert the estimated cost amounts that resulted from the application of the noncompliant cost accounting     
  practice and were included in the cost proposal(s) used to negotiate the contract price of affected contracts.
  If the proposed cost and negotiated contract cost were materially different, insert the negotiated contract   
  cost amount that resulted from the application of the noncompliant cost accounting practice(s). Include the   
  estimated cost amounts both in the aggregate and for individual contracts listed.                             
2. Insert the estimated cost amounts (reconstructed based on the same estimated cost levels to which the        
  noncompliant practice was applied) to reflect the estimated costs that would have been proposed (or           
  negotiated, if the estimated costs based on the noncompliant practice in 1 above are based on negotiated      
  costs) if a compliant practice had been used.                                                                 
3. Show amounts proposed for adjustment in order to settle the cost estimating noncompliance. The proposed      
  adjustment amounts should include both adjusted costs and appropriate adjustments for profit, fee, or the     
  contracts' incentive provisions.                                                                              
4. List all contracts that were materially overstated or understated as a result of using the cost estimating   
  noncompliant practice based on the use of a materiality threshold, i.e. all contracts that have contract      
  prices overstated or understated by an amount in excess of a specified threshold.                             
5. Submit a separate schedule that shows the amount of aggregate increased cost actually paid by the United     
  States due to the contract prices that were established based on the noncompliant practice; and, the          
  contractor's proposed amounts, including applicable interest, to be paid or otherwise credited to the United  
  States in settlement of the increased cost payments received by the contractor.                               

    (f) If the contractor disagrees with the initial noncompliance 
finding, the contractor shall provide the cognizant Federal agency 
official with reasons why it disagrees with the initial finding. The 
cognizant Federal agency official shall evaluate the reasons why the 
contractor considers the existing practice to be compliant and again 
make a determination of compliance or noncompliance, and notify the 
contractor and auditor in writing. If the cognizant Federal agency 
official makes a determination of compliance, no further action is 
necessary other than to notify the contractor and auditor.
    (g) Once the cognizant Federal agency official reaches a final 
position that a noncompliance exists, the official shall issue a final 
determination to inform the contractor of the Government's position and 
that failure to agree will constitute a dispute under the Disputes 
clause of the contract. A final determination of noncompliance should 
also include a request for corrective action and a noncompliance cost 
impact submission showing the impact of the noncompliance on CAS-
covered contracts and subcontracts. If the contractor agrees with the 
noncompliance determination, the procedures in paragraph (e) of this 
subsection shall be followed.
    (h) If the cognizant Federal agency official issues an initial 
determination of noncompliance on a revised accounting practice, and 
ultimately determines that the practice is compliant, the revised cost 
accounting practice should be handled in accordance with the procedures 
established in 9903.405.


9903.406-3  Cost estimating noncompliance.

    (a) After a final determination of a cost estimating noncompliance 
is issued by the cognizant Federal agency official, the contractor 
shall correct the practice by changing to a compliant cost accounting 
practice. If the contractor believes the cost impact of the 
noncompliance is not material (i.e., a technical noncompliance, see 
9903.406-5), the contractor shall submit data demonstrating the 
immateriality. If the cognizant Federal agency official agrees that the 
noncompliance does not result in a material impact on CAS-covered 
contracts, the procedures in 9903.406-5

[[Page 37687]]

shall be followed. Otherwise, paragraphs (b) through (g) of this 
subsection shall be followed.
    (b) If the noncompliance occurs because the cost accounting 
practice used for estimating purposes is different than the disclosed 
and established cost accounting practice used for cost accumulation 
purposes, and the cognizant Federal agency official has found the cost 
accumulation practice to be compliant, the contractor shall first 
correct the noncompliance by replacing the noncompliant practice used 
to estimate costs with the compliant cost accounting practice used to 
accumulate and report actual contract costs. Where a previously 
submitted contract cost proposal based on the noncompliant cost 
estimating practice has not yet been negotiated, the contractor shall 
also take action to ensure that any subsequent contract cost 
negotiations of such proposals will be based on cost estimates that 
reflect the corrected and compliant cost accounting practice.
    (c) Once the cognizant Federal agency official determines that the 
contractor's cost accounting practices used to estimate and accumulate 
costs will henceforth be consistent and compliant, the cognizant 
Federal agency official shall request the contractor to submit a 
noncompliance cost impact submission (see 9903.406-2(e)), for CAS-
covered contracts that were negotiated based on the noncompliant 
practice. The cost impact submission will show the estimated contract 
cost amounts that were predicated upon the application of the 
noncompliant cost accounting practice, by contract type, and the 
estimated contract cost amounts that would have resulted had the 
compliant practice been used. The cognizant Federal agency official may 
establish contract thresholds so that any contracts with an immaterial 
cost impact may be omitted from the cost impact submission. The cost 
impact submission shall be in sufficient detail for the cognizant 
Federal agency official to determine whether:
    (1) Any individual contracts are significantly overstated or 
understated as a result of the estimating noncompliance;
    (2) The affected CAS-covered contract prices, by contract type, 
are, in the aggregate materially overstated; and
    (3) Any net increased costs were paid under CAS-covered contracts 
as a result of the noncompliant practice, and if so, the period of 
overpayment.
    (d) The cognizant Federal agency official should use the 
materiality guidelines established in 9903.305 and 9903.404 to 
determine whether any individual contract price adjustments, or 
adjustments for the net overstatement or understatement of contract 
amounts by contract type, due to use of the noncompliant practice are 
warranted. Adjustments should be limited to amounts that are material. 
In no case shall the Government recover costs greater than the 
increased costs, in the aggregate, on the relevant contracts. While 
individual contract prices may be increased as well as decreased to 
resolve an estimating noncompliance, the aggregate value of all 
contracts affected by the estimating noncompliance shall not be 
increased. The following schedule illustrates how to determine the 
contract price adjustments to be required.

                      Requiring Contract Price Adjustments For An Estimating Noncompliance                      
----------------------------------------------------------------------------------------------------------------
   Change in contract cost estimate by contract type if a compliant                                             
                        practice had been used                                                                  
----------------------------------------------------------------------            Actions to be taken           
             Flexibly-priced                   Firm fixed-priced                                                
----------------------------------------------------------------------------------------------------------------
Higher (1)..............................  Higher (1).................  No contract price adjustments are        
                                                                        required since there are no increased   
                                                                        costs to the Government and upward price
                                                                        adjustments, in the aggregate, are not  
                                                                        permitted.                              
Lower (2)...............................  Higher (1).................  Adjust flexibly priced contract prices   
                                                                        down to recover increased cost to       
                                                                        Government. Limit FFP upward price      
                                                                        adjustments to amount of flexibly-priced
                                                                        downward price adjustments.             
Lower (2)...............................  Lower (2)..................  Adjust FFP and flexibly-priced contract  
                                                                        prices downward by the amount of the    
                                                                        increased cost to the Government.       
Higher (1)..............................  Lower (2)..................  Adjust FFP prices downward to recover the
                                                                        increased cost to the Government. Limit 
                                                                        upward adjustments on flexibly-priced to
                                                                        amount of downward adjustments on FFP.  
----------------------------------------------------------------------------------------------------------------
Notes:                                                                                                          
(1) ``Higher'' indicates the estimated costs submitted in the contract cost proposal would have been higher, if 
  the contractor had used a compliant cost accounting practice to estimate the proposed contract costs.         
(2) ``Lower'' indicates that the estimated costs submitted in the contract cost proposal would have been lower, 
  if the contractor had used a compliant practice to estimate the proposed contract costs. This represents      
  increased costs to the Government.                                                                            

    (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(a)(2) of the Internal 
Revenue Code of 1986 (26 U.S.C. 6621(a)(2)) for such period, from the 
time payment by the United States was made to the time the increased 
cost payment is recovered.
    (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 this subsection 9903.406-3 and one to resolve the cost 
accumulation noncompliance in accordance with 9903.406-4.


Sec. 9903.406-4  Cost accumulation noncompliance.

    (a) After a final determination of a cost accumulation 
noncompliance is issued by the cognizant Federal agency official, the 
contractor shall correct the practice by changing to a compliant cost 
accounting practice. If the contractor

[[Page 37688]]

believes the cost impact of the noncompliance is not material (i.e., a 
technical noncompliance, see 9903.406-5), the contractor shall submit 
data demonstrating the immateriality. If the cognizant Federal agency 
official agrees the noncompliance does not result in a material impact 
on Government contracts, the procedures in 9903.406-5 shall be 
followed. Otherwise, paragraphs (b) through (f) of this subsection 
shall be followed.
    (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 submission (see 9903.406-2(e)). The 
submission 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 (except for closed contracts), 
the cost impact submission must show the total overpayments made by the 
United States during the period of noncompliance, so that the proper 
interest amount can be calculated and recovered as required by 
paragraph (e) of this subsection.
    (d) The level of detail to be submitted with a cost impact 
submission for a cost accumulation noncompliance will vary with the 
circumstances. Normally, the cost impact submission will identify the 
aggregate costs by contract type that were accumulated under the 
noncompliant cost accounting practice and the costs that would have 
been accumulated if the compliant cost accounting practice had been 
applied from the time the noncompliant practice was first applied until 
the date the noncompliant practice was replaced with a compliant 
practice. The cost impact submission for a cost accumulation 
noncompliance is primarily used by the cognizant Federal agency 
official to determine if, and to what extent, increased costs were paid 
in the aggregate on covered contracts during the period of 
noncompliance. The level of detail required to adequately support this 
determination should be based on discussions between the contractor and 
the cognizant Federal agency official, with assistance from the 
auditor, and included in the cognizant Federal agency's official 
request for the cost impact submission.
    (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(a)(2) of the Internal 
Revenue Code of 1986 (26 U.S.C. 6621(a)(2)) for such period, from the 
time the payments by the United States were made to the time the 
increased cost payments are recovered. If the increased costs 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 
increased 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).


Sec. 9903.406-5  Technical noncompliances.

    (a) If a noncompliance cost impact is not material in the 
aggregate, 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.
    (c) The contractor shall notify the cognizant Federal agency 
official within 60 days of when the technical noncompliance becomes 
material.


Sec. 9903.407  Illustrations.

    The following illustrations are not meant to cover all possible 
situations, but rather to provide some guidelines in applying the 
procedures specified in 9903.405 and 9903.406. The illustrations are 
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.


Sec. 9903.407-1  Change in cost accounting practice--Illustrations.

    (a) Notification. (1) The contractor provides notification of a 
change in cost accounting practices in April with a proposed 
retroactive applicability date of the beginning of the current year. In 
accordance with 9903.405-2(c), 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 approves of the proposed applicability date (see 
9903.405-3(c)). After determination of adequacy and compliance, the 
cognizant Federal agency official requests a GDM Settlement Proposal 
for contracts negotiated based on the previous accounting practice, 
including those negotiated after the applicability date of the change.
    (2) The contractor provides notification of a voluntary change in 
cost accounting practices in June with a planned retroactive 
applicability date of the beginning of the current year. The cognizant 
Federal agency official finds that the rationale for the retroactive 
applicability date does not justify retroactive implementation (see 
9903.405-3(c)). The contractor is informed that for cost accumulation 
purposes the new practice can be applied no earlier than 60 days after 
the contractor's notification of the accounting change, and that a 
retroactive applicability date will result in a noncompliance with 
disclosed practices and disallowance of any resulting increased costs. 
The contractor notifies the cognizant Federal agency official that, to 
avoid a noncompliance condition, it will change the applicability date 
to the beginning of its next cost accounting period.
    (b) GDM Settlement Proposal. (1) In accordance with 9903.405-3(e), 
the cognizant Federal agency official

[[Page 37689]]

requests a GDM Settlement Proposal by contract type, which would 
include the impact on a sufficient number of contracts of each contract 
type to negotiate the impact of a change in cost accounting practice. 
The contractor supports the GDM Settlement Proposal by using a contract 
cost profile which shows the percentage of the three year forward 
pricing rate base data which consists of existing CAS-covered contracts 
subject to adjustment, and the percentage of the CAS-covered contracts 
subject to adjustment for each contract type. No contracts other than 
some of the individual contracts submitted with the GDM Settlement 
Proposal extend out beyond the three year period. The cognizant Federal 
agency official, with the assistance of the auditor and using the GDM 
Settlement Proposal individual contract data, determines that the 
general dollar magnitude estimate developed by the contractor 
reasonably approximates the aggregate impact, by contract type, of the 
accounting change on contracts subject to adjustment, i.e., contracts 
negotiated based on the previous practice. Pursuant to 9903.405-
4(a)(6), the Government and contractor resolve the impact without a 
detailed cost impact proposal.
    (2) The contractor reports a change in accounting practice which 
changes a direct cost element to an indirect expense. The cognizant 
Federal agency official, with the assistance of the auditor, determines 
that the GDM Settlement Proposal data submitted by the contractor does 
not adequately support the aggregate cost impact, by contract type, of 
the change in accounting practice. Therefore, in accordance with 
9903.405-4(b)(1) and (2), the cognizant Federal agency official 
requests a detailed cost impact proposal to include a sufficient number 
of contracts, by contract type, to resolve the cost impact.
    (3) The contractor submits a GDM Settlement Proposal which includes 
several contracts of each contract type showing the cost impact of the 
change in accounting practice. The impact is developed by computing the 
difference in the estimate-to-complete on these contracts using the old 
and new accounting practices. The cost impact settlement proposal 
includes all contracts that have a cost impact in excess of $1,000,000. 
The cognizant Federal agency official determines that the cost impact 
on each submitted contract was accurately computed. In accordance with 
9903.405-4(a)(6), the cognizant Federal agency official decides that, 
based on the circumstances, contracts having an impact in excess of 
$500,000 are significant enough to require adjustment. The cognizant 
Federal agency official requests the contractor to submit a revised GDM 
Settlement Proposal that includes contracts having an impact in excess 
of $500,000 so that the cost impact can be resolved without a detailed 
cost impact proposal. The cost impact is ultimately negotiated based on 
the contractor's revised GDM Settlement Proposal.
    (4) The same situation described in paragraph (c)(1) of this 
subsection occurs except that the aggregate impact by contract type in 
the GDM Settlement Proposal cannot be reconciled with the aggregate net 
impact of the individual contracts by contract type submitted with the 
proposal. In accordance with 9903.405-4(a)(5), the cognizant Federal 
agency official requests a detailed cost impact proposal to include a 
sufficient number of contracts by contract type to resolve the cost 
impact.
    (5) After reviewing the GDM Settlement Proposal for a change in a 
cost allocation practice, the cognizant Federal agency official decides 
in accordance with 9903.405-4(a)(7) that, due to materiality, no 
additional data is needed and no contract price or cost adjustments are 
warranted.
    (c) Detailed cost impact proposal. (1) In accordance with 9903.405-
4(b)(2), the cognizant Federal agency official submits a written 
request for a detailed cost impact proposal to include all contracts 
with an estimate-to-complete based on the old practice in excess of 
$5,000,000 summarized by contract type. After evaluation of the 
detailed cost impact proposal, the cognizant Federal agency official 
determines whether contract price and/or cost adjustments are required 
in accordance with 9903.405-5(c).
    (2) [Reserved]
    (d) Offset process. (1) In analyzing the contractor's cost impact 
proposal, the cognizant Federal agency official determines that one 
firm fixed-price contract is the only contract that exceeds the 
threshold established for contract price adjustment purposes. The 
impact on that contract is a reduced allocation of $1,000,000, 
requiring a downward adjustment to the contract price. When the 
cognizant Federal agency official applies the offset process to all 
other firm fixed-price contracts subject to adjustment by combining the 
increases and decreases, the result is a higher allocation in the 
aggregate amount of $400,000 on all other firm fixed-price contracts. 
Although no individual contracts making up this aggregate amount exceed 
the established threshold, the cognizant Federal agency official 
decides, in accordance with 9903.405-5(c)(5), that to achieve equity, 
an upward adjustment in the amount of $400,000 is warranted. Rather 
than offset this amount against the one contract exceeding the 
individual contract cost impact threshold, the cognizant Federal agency 
official, in accordance with 9903.405-5(b)(3), selects two 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 same situation exists as described in paragraph (d)(1) of 
this subsection except that the cost impact on the one individual firm 
fixed-price contract has a cost impact showing a reduced allocation of 
$10,000,000 which significantly exceeds the individual contract 
threshold established. The cognizant Federal agency official decides to 
offset the $400,000 impact on the ``all other'' contracts against the 
impact on the contract exceeding the threshold and makes a downward 
adjustment of $9,600,000 thereby reducing the number of contracts 
requiring adjustment, while still following the guidelines of 9903.405-
5(b)(3).
    (3) The contractor makes simultaneous accounting practice changes 
at three of its business units at the direction of the next higher tier 
home office. The cognizant Federal agency official at the home office 
segment decides to handle this change as a voluntary change which 
cannot result in increased costs paid by the United States. Business 
Unit A has a cost impact on contracts subject to adjustment which 
results in a higher level of costs on flexibly-priced contracts of 
$1,000,000 in excess of the lower level of costs on firm fixed-price 
contracts. The impact on flexibly-priced contracts at Business Unit B 
and Business Unit C is a combined lesser allocation of costs of 
$1,200,000 in excess of the higher level of costs on firm-fixed price 
contracts, resulting in net decreased costs on Government flexibly-
priced contracts at the three business units. To demonstrate that the 
accounting change did not result in aggregate increased costs to the 
Government, the contractor submits a consolidated GDM Settlement 
Proposal for the three business units at the home office level. As a 
result of considering the aggregate impact at the three business units 
at the home office level, the cognizant Federal agency official, in 
accordance with 9903.405-5(b)(6), takes no action to preclude the 
increased costs on flexibly-priced contracts at Business Unit A. 
Individual contracts at each business unit that had cost impacts

[[Page 37690]]

exceeding established thresholds were adjusted upward or downward, as 
appropriate, for the amount of the cost impact in accordance with 
9903.405-5(c)(2).
    (4) After determining the individual contracts subject to 
adjustment where the cost impact exceeded the established threshold for 
a change in an actuarial cost method for computing pension costs, the 
contractor computes an aggregate impact for ``all other contracts'' 
amounting to $1,000,000 of lesser allocation of costs for flexibly-
priced contracts and $1,200,000 of lesser allocation of costs on firm-
fixed price contracts. The cognizant Federal agency official considers 
these amounts significant enough to warrant an adjustment. Since the 
impact on the flexibly-priced contracts represents decreased costs to 
the Government and the impact on the firm fixed-price contract 
represents increased costs to the Government, the contractor asks the 
cognizant Federal agency official to offset the increases and decreases 
and make a downward adjustment on the fixed-price contracts for only 
$200,000. The cognizant Federal agency official determines that by 
doing this, the cost to the Government of a lesser pension cost paid of 
$1,200,000 would be materially different than if the individual 
contracts making up these aggregate amounts had been individually 
adjusted downward resulting in a lesser cost paid of $2,200,000. To 
achieve the desired result, the cognizant Federal agency official, in 
accordance with 9903.405-5(b)(1) and (2), selects a number of high 
dollar contracts and adjusts flexibly-priced contracts downward by 
$1,000,000 and firm fixed-price contracts downward by $1,200,000. In 
accordance with 9903.405-5(a)(2), an alternative technique, in lieu of 
adjusting contact prices, which achieves the same result of lesser cost 
paid of $2,200,000 could also have been used for the aggregate ``all 
other contract'' cost impact adjustment.
    (e) Contract price and cost adjustments. (1) After considering the 
materiality criteria in 9903.305, the cognizant Federal agency official 
decides that only contracts that have an impact that exceeds both 
$500,000 and .5% of the contract value will be subject to adjustment 
based on the impact of the accounting change. Of the individual 
contracts submitted with the GDM Settlement Proposal, only nine 
contracts exceed this threshold. The aggregate impact of all other 
contracts by contract type is considered insignificant. In accordance 
with 9903.405-5(c)(4), the cognizant Federal agency official resolves 
the cost impact by adjusting only those contracts that exceed the 
individual contract cost impact threshold, and making no other 
adjustments, without the need for a detailed cost impact proposal.
    (2) The same situation described in paragraph (e)(1) of this 
subsection occurs except that the aggregate amount for all other 
contracts not exceeding the established individual contract cost impact 
threshold is considered significant enough by the Government to warrant 
adjustment. The Government had established $500,000 as the ``all other 
contract'' threshold. The cognizant Federal agency official selects two 
of the largest contracts that do not exceed the threshold, for each 
contract type, for adjustment in the amount of the aggregate ``all 
other contract'' impact. In order to avoid additional contract price 
adjustment action, the contractor, in accordance with 9903.405-5(a)(2), 
proposes an alternative adjustment technique to resolve the aggregate 
``all other contract'' impact amount. The cognizant Federal agency 
official determines that the proposed alternative adjustment technique 
accomplishes the same approximate result as adjusting the two selected 
contracts. The cognizant Federal agency official, in accordance with 
9903.405-5(c)(3), agrees to use the alternative technique, in addition 
to adjusting the individual contracts that exceed the threshold, to 
resolve the impact of the change in cost accounting practice.
    (f) Increased cost. (1) In analyzing the contractor's cost impact 
proposal, the cognizant Federal agency official determines that only 
two firm fixed-price contracts exceed the threshold for contract price 
adjustment purposes. All other amounts related to the cost impact are 
considered immaterial. The change is a voluntary change, i.e., the no 
increased cost limitation applies. The impact on the two contracts are 
a lower allocation of costs in the amount of $1,000,000 for contract A 
and a higher allocation of costs of $2,000,000 for contract B. In order 
to preclude increased costs paid by the United States as a result of 
the change, the cognizant Federal agency official, in accordance with 
9903.405-5(d)(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 paragraph (f)(1) of this 
subsection occurs except that contract B is a CPFF contract. In 
accordance with 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. 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 GDM Settlement Proposal for a 
voluntary change, the cognizant Federal agency official determines that 
five contracts exceed the threshold established for contract price 
adjustment purposes. The 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 (2), no further action is needed to preclude 
increased costs paid, since the impact to the Government after contract 
price adjustments are made is a lesser cost paid in the amount of 
$1,000,000.
    (g) GDM Settlement Proposal based on contractor cost model and 
profile. (1) The contractor has developed a cost model and profile 
which is used for the GDM Settlement Proposal. The cost model and 
profile data are updated whenever circumstances change and dictate 
revision to the data.
    (2) For a voluntary accounting change, the contractor's cost model 
and profile is based on same three year forecast of direct and indirect 
cost data that supports the contractor's forward pricing rates used to 
estimate indirect costs in price proposals. The profile shows that 80% 
of the forecasted allocation base amounts in year 1 are comprised of 
existing covered contracts subject to adjustment, 50% of the amounts in 
year 2 are comprised of existing covered contracts subject to 
adjustment, and 20% of the amounts in year 3 are comprised of existing 
covered contracts subject to adjustment. Of the amounts applicable to 
CAS-covered contracts subject to adjustment, the contractor's cost 
model and profile

[[Page 37691]]

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 activity from the G&A pool to the overhead 
pool. The cognizant Federal agency official has determined that only 
individual contracts that have a cost impact in excess of $100,000 will 
be considered for adjustment, provided that the impact exceeds .5% of 
the contract value. The cognizant Federal agency official has also 
determined that $500,000 will be the adjustment threshold for the ``all 
other contracts'' amounts by contract type. To support the GDM 
Settlement Proposal, the contractor includes three (3) contracts having 
the largest estimate-to-complete, by contract type. Based on the cost 
model and profile the contractor computes the following general dollar 
magnitude impact by contract type:

------------------------------------------------------------------------
                                                               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 GDM Settlement Proposal exceeds the 
threshold established. K1 is a CPFF contract with an impact of a higher 
allocation of $200,000. K2 is a CPIF contract having an impact of a 
higher allocation of $300,000. And K3 is an FFP contract having an 
impact of a lesser allocation of $400,000. After deducting the impact 
of the three contracts exceeding the threshold, the ``all other 
contracts'' amounts are a higher allocation of $115,000 for CPFF 
contracts, a higher allocation of $78,000 for incentive type contracts, 
and a lesser allocation of $117,000 for FFP contracts.
    (5) Since the ``all other contracts'' amounts are less than the 
threshold for each contract type, the cognizant Federal agency official 
requires no adjustments for these amounts. The cognizant Federal agency 
official adjusts the FFP contract downward by $400,000 to preclude the 
increased costs on this contract. Because this is a voluntary change 
with no increased costs to be paid by the Government, the upward 
adjustments to the flexibly-priced contracts must be limited to 
$400,000. The cognizant Federal official decides to adjust the target 
cost on the CPIF contract upward by $300,000, with an appropriate 
upward adjustment of the target fee, in order to avoid distortions of 
contract incentive provisions based on the estimated higher allocation 
of costs (see 9903.405-5(b)(5)). The cognizant Federal agency official 
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 in accordance with 9903.405-
5(d)(3).


9903.407-2  Noncompliance illustrations.

    (a) Estimating noncompliance. (1) The cognizant Federal agency 
official determines that a cost accounting practice that the contractor 
has used for estimating and negotiating costs on CAS-covered contracts 
is noncompliant with an applicable Cost Accounting Standard. The 
practice is also different than the compliant, disclosed and 
established practice used for cost accumulation purposes. Therefore, 
the impact of the noncompliance only affects negotiated contract 
amounts under which the contractor used the noncompliant practice to 
estimate contract costs and any outstanding cost proposals not yet 
negotiated. The cognizant Federal agency official directs the 
contractor to change its estimating practices so that costs will be 
estimated, accumulated and reported consistently based on the 
contractor's established cost accounting practices and not use as a 
basis for the negotiation of contract prices any previously submitted 
contract cost estimates which were predicated on the noncompliant cost 
accounting practice. The cognizant Federal agency official then 
proceeds to request a cost impact submission for the impact of the 
noncompliant practice on covered contracts, as well as the amount of 
the increased costs paid as a result of the noncompliance. In 
accordance with 9903.406-3(d), the cognizant Federal agency official 
determines that the impact on contracts less than $10,000,000 would be 
immaterial, and limits the cost impact submission to contracts of 
$10,000,000 or more in amount. The contractor's cost impact submission 
shows that the contract amounts are overstated (in the aggregate) by a 
significant amount due to use of the noncompliant practice. The 
contracts are adjusted downward in the aggregate to reflect use of the 
compliant practice. Of the total amount of the overstatement in 
contract prices, the cognizant Federal agency official determines that 
50 percent had been paid as of the date of the adjustment of the 
contract values. The cognizant Federal agency official, with the 
assistance of the auditor, computes and recovers interest applicable to 
the increased costs paid, for the period from date of payment to date 
of recovery of the increased costs paid.
    (2) The cognizant Federal agency official determines that the cost 
accounting practice used by the contractor to estimate costs is 
noncompliant and different than the contractor's compliant, disclosed 
and established cost accounting practice. An analysis of the 
noncompliance cost impact submission developed by the contractor shows 
that, except for two large fixed-price contracts, the effect on 
negotiated contract values is immaterial. The cognizant Federal agency 
official determines that the impact on the two large fixed-price 
contracts is material enough to warrant an adjustment to reflect the 
application of the compliant disclosed practice. Since the amount of 
the understatement of the one contract

[[Page 37692]]

exceeds the amount of the overstatement of the other contract, the 
cognizant Federal agency official, 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. The cognizant 
Federal agency official further determines that the cost accounting 
practices used for cost estimating purposes are compliant. The 
noncompliant practice relates to the accumulation of actual indirect 
expenses. The contractor implements the same compliant practice used to 
estimate costs for cost accumulation and reporting purposes. The change 
to the compliant method for cost accumulation and reporting purposes 
results in automatic adjustment of actual costs and recovery of all 
increased cost paid due to the noncompliance. The contractor submits a 
noncompliance cost impact submission showing the amount of the 
increased cost paid during the period of noncompliance by using a 
method that does not require submission of individual contract data. 
The cognizant Federal agency official, with the assistance of the 
auditor, determines that the cost impact submission reasonably reflects 
the extent of the increased costs paid. It is also determined that the 
increased costs were paid evenly over the period of the noncompliance 
and the interest on the increased costs paid is computed using the 
midpoint of the noncompliance as a baseline. Since the increased costs 
have already been recovered through the adjustment of actual costs, the 
Government takes action only to recover the applicable interest by 
requesting a payment for the amount of the interest from the 
contractor.
    (2) The cognizant Federal agency official determines that the 
contractor has accumulated costs based on a cost accounting practice 
that is not compliant with 9904.402 and is not consistent with its 
disclosed and established practice for its CAS-covered contracts. Since 
the noncompliance involves accounting for direct costs as indirect 
costs on some but not all of its CAS-covered contracts, the cognizant 
Federal agency official determines that individual contract data is 
required in order to compute the extent of increased costs paid, if 
any, as a result of the noncompliance. In accordance with 9903.406-
4(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 submission 
that specifies the level of detail required. After analyzing the cost 
impact submission, the cognizant Federal agency official determines 
that the amount of the increased costs paid is immaterial and does not 
warrant action to recover the increased costs, plus applicable 
interest. The cognizant Federal agency official takes action in 
accordance with 9903.406-5, 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. The cognizant 
Federal agency official further determines that the noncompliant 
practice was also used for estimating purposes. In order to determine 
the extent of increased costs, if any, due to both overstated contract 
prices and billings of costs accumulated on CAS-covered contracts, the 
official, in accordance with 9903.406-4(b), requests two separate cost 
impact proposals to cover increased costs. The cost impact submission 
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. 97-17773 Filed 7-11-97; 8:45 am]
BILLING CODE 3110-01-P