[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]
[[Page 37653]]
_______________________________________________________________________
Part III
Office of Management and Budget
_______________________________________________________________________
Office of Federal Procurement Policy
_______________________________________________________________________
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
[[Page 37654]]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
[[Page 37655]]
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
[[Page 37656]]
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
[[Page 37657]]
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