[Federal Register Volume 64, Number 161 (Friday, August 20, 1999)]
[Proposed Rules]
[Pages 45700-45742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21334]



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Part IV





Office of Management and Budget





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48 CFR Part 9903



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

  Federal Register / Vol. 64, No. 161 / Friday, August 20, 1999 / 
Proposed Rules  

[[Page 45700]]



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 third 
round of comments on proposed amendments to the regulatory provisions 
contained in chapter 99 of title 48. The CASB's objective in issuing 
this document is to utilize the proposed amendments as a basis for 
holding an open public meeting, conducting a benchmarking survey, and 
soliciting public comments.
    The proposed amendments, when issued as a final rule, would revise 
the current definitions, exceptions and illustrations governing changes 
in cost accounting practices; exempt certain changes in compliant cost 
accounting practices from the CASB's contract price and cost adjustment 
requirements, and establish new coverage for ``desirable changes.'' A 
new subpart 9903.4, Contractor Cost Accounting Practice Changes and 
Noncompliances, is also proposed. The new subpart would establish 
contractor notification requirements for circumstances when contractors 
make changes to their compliant cost accounting practices. The new 
subpart would also delineate the process for determining and resolving 
the cost impact of a compliant change in cost accounting practice or a 
noncompliant practice on existing covered contract and subcontract 
prices and/or costs.
    Educational Institutions: For covered contracts and subcontracts 
awarded to an educational institution, the proposed subpart also 
provides that certain subpart requirements may be waived, on a case-by-
case basis, if the cognizant Federal agency official concurrently 
establishes with the educational institution an ``advance agreement'' 
that details the specific procedures to be followed for the 
notification and resolution of compliant changes to established cost 
accounting practices and/or the correction of noncompliant practices 
when the educational institution is performing covered contracts, 
covered subcontracts and other Federally sponsored agreements.

DATES: Comments must be submitted in writing, by letter, and should be 
received by October 19, 1999.

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 9013, Washington, DC 
20503. Attn: CASB Docket No. 93-01N(3). 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 Corel 
WordPerfect 8 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: In response to the second of comments 
requested on this topic in the Supplemental Notice of Proposed 
Rulemaking, promulgated on July 14, 1997 (hereinafter referred to as 
``SNPRM-I''), a number of commenters expressed their concerns regarding 
the purpose and scope of the Board's proposed amendments. In 
consideration of those concerns, the Board has decided to request a 
third round of public comments via this Supplemental Notice of Proposed 
Rulemaking (hereinafter referred to as ``SNPRM-II'') To ensure the 
views and concerns of interesteed parties are fully surfaced, the Board 
will also conduct an open public meeting and initiate a 
``benchmarking'' survey.

Open Public Meeting

    In addition to the submission of public comments, the Board will 
schedule an open public meeting to discuss this proposed rule. The 
date, time and location details of that meeting will be the subject of 
a separate Federal Register notice.

Benchmarking Survey

    In response to the Board's prior proposal, some commenters 
generally recommended that the Board field test and/or further study 
the impact its proposal will have on contractors and the Government and 
then to reconsider the need for the proposed amendments. For a more 
detailed discussion of the commenters' concerns, see ``Cost Benefit 
Issues'' contained in Section B below. To better understand such 
concerns, the Board will invite a small number of major defense 
contractors to participate in a coordinated ``benchmarking'' survey. 
The objective of the survey will be to specifically identify the 
additional number of contract price and cost adjustment cases that 
would result if the Board's current proposal were applied to actual 
contractor changes that occurred in a recently completed cost 
accounting period. Participation by contractors will be on a voluntary 
basis. Collection and identification of the survey data is expected to 
be coordinated with the contractor's cognizant Federal audit 
organization prior to its submission. These ``benchmarking'' surveys 
will be formally initiated by the Board through coordination with 
interested industry associations. For those contractors that wish to 
participate in the survey but are not included in the resultant 
contractor groupings established through coordination with the industry 
associations, the survey questionnaire may be obtained by faxing a 
request to the CASB staff at 202-395-5105. In such cases, the survey 
data should be submitted by the due date specified below. Timely 
submitted contractor surveys will be examined, on a sampling basis, by 
the cognizant Federal audit organization after they are received by the 
CASB.

A. Regulatory Process

    The CASB's rules, regulations and Cost Accounting Standards (CAS) 
are codified at 48 CFR Chapter 99. Section 26(g)(1) of the Office of 
Federal Procurement Policy Act, 41 U.S.C. 422(g), requires that the 
Board, prior to the establishment of any new or revised Standard, 
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 Notice is a continuation of the third step of the four-step 
process.

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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 an 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 NPRM also 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. On July 14, 1997, the CASB published the SNPRM-I 
in the Federal Register (62 FR 37654), to solicit additional comments 
concerning certain proposed revisions to the previously proposed NPRM 
coverage and to solicit comments to determine to what extent, if any, 
there may be support for the establishment of new provisions that would 
exempt certain voluntary changes in a contractor's cost accounting 
practices from the Board's contract price and cost adjustment 
requirements.

Public Comments

    Of the sixty-nine sets of public comments received in response to 
the SNPRM-I, fifty-nine were provided in a timely manner. The public 
comments were received from contractors, educational institutions, 
professional associations, Federal agencies, accounting organizations, 
and other individuals. A number of commenters supported the 
establishment of new provisions that would exempt from the Board's 
contract price and cost adjustment requirements those voluntary changes 
in compliant cost accounting practices that directly result from 
changes made by a contractor to improve the economy and efficiency of 
its operations. Some commenters supported the proposed amendments 
contained in the SNPRM-I. Some did not. Others offered suggestions on 
how the proposed coverage might be clarified or otherwise improved. The 
responses received in a timely manner are addressed in Section E, 
Public Comments.
    Certain other inquiries and concerns, of a more general nature, 
that were expressed by several commenters with respect to the Board's 
overall objectives and rationale for the proposed amendments are 
addressed immediately below.

Board Objectives and Rationale

    A number of contractors and professional associations questioned 
the purpose of the Board's proposed amendments and asked if other more 
simplified approaches would not better serve the Government and 
contractors. Some commenters felt that the Board had never supplied a 
clear rationale for the proposed definition of the term ``cost 
accounting practice.'' One commenter stated that because ``cost 
accounting practice'' is not so much an accounting concept as it is a 
key to the administration of CAS, a statement of purpose or rationale 
would help to understand the CAS Board's goal.
    The Board's objectives are discussed below.
    Continuing Board Objective: To support the Government's procurement 
process for negotiated cost-based contracts.
    The Board's continuing objective is to promote an acquisition 
environment wherein Government contracting officials can, with a high 
degree of confidence, rely upon the estimated and actual cost 
information provided by contractors relative to (1) the costs contained 
in and/or submitted in support of proposed contract prices, (2) the 
overall costs of operations and/or (3) the costs of prior contract 
performance. Because the Board's CAS and Interpretations often limit or 
narrow the range of alternative cost accounting practices that might 
otherwise be used by a contractor, or by competing contractors, in 
calculating submitted cost information, Government procurement 
officials can with a greater degree of reliance make meaningful 
analyses and comparisons when contractor submitted cost information is 
derived through a contractor's consistent application of CAS compliant 
cost accounting practices.
    Pursuant to its enabling statue, the Board promulgates CAS and 
Interpretations that are designed to achieve uniformity and consistency 
in the cost accounting practices used by contractors to estimate, 
accumulate and report costs. The concepts of ``uniformity'' and 
``consistency'' are set forth in the Board's ``Statement of Objectives, 
Policies and Concepts'' (57 FR 31036, 7/13/92). The Board's rules also 
require the larger CAS-covered contractors to formally disclose to the 
Government their established cost accounting practices, via submission 
of a disclosure statement. Disclosure reduces the potential for 
Government misunderstandings concerning contractor cost information 
submissions. Consequently, the submission of estimated or actual cost 
information developed by contractors based on the consistent 
application of CAS compliant cost accounting practices enables the 
Government to make more meaningful cost comparisons between competing 
contractors, facilitates the negotiation of fair and reasonable 
contract prices, and permits the Government to make more reliable 
comparisons of a particular contractor's estimated and actual contract 
costs.
    Immediate Board Objective: To bridge the gap between contractor 
cost accounting matters and the Government's procurement process for 
negotiating and administering negotiated cost-based contracts, 
particularly when contractors fail to apply their established cost 
accounting practices in a consistent manner, fail to comply with 
applicable CAS or make compliant changes to their established cost 
accounting practices.
    Statutory Requirement. Under its enabling statute, the Board is 
required to promulgate regulations that require contractors and 
subcontractors to ``* * * agree to a contract price adjustment * * * 
for any increased costs paid to such contractor or subcontractor by 
reason of a change in the contractor's or subcontractor's cost 
accounting practices or by reason of a failure by the contractor or 
subcontractor to comply with applicable cost accounting standards.'' 
Accordingly, the Board's implementing regulations include provisions 
that are designed to establish what constitutes a ``change to a cost 
accounting practice'' and ``increased cost'' to the Government. The 
Board's regulations also provide for contract price and cost 
adjustments if a contractor changes its established cost accounting 
practice or applied a noncompliant practice. The Board's current 
proposal is designed to facilitate the implementation of the Board's 
statutory requirements.
    Cost Accounting Practice Definition: Consistent with the Board's 
statutory requirements, the purpose of the Board's proposed amendments 
to the definitions of the terms ``cost accounting practice'' and 
``change to a cost accounting practice'' is to direct the contracting 
parties to focus on the cost accounting

[[Page 45702]]

practices actually used by contractors to accumulate cost in cost pools 
for subsequent allocation to intermediate and final cost objectives 
when determining if a voluntary change in cost accounting practice has 
occurred. Specifically, the proposed amendments make clear that changes 
in the selection and/or composition of cost pools are changes in the 
methods and techniques used to allocate cost to cost objectives, i.e., 
a change to a cost accounting practice.
    Based on the commenters' stated perceptions, some contractors 
apparently believe that the term ``cost accounting practice'' as 
defined in the Board's existing rules is merely a contractual term of 
art that is used to identify a finite or limited number of 
circumstances which trigger contract price or cost adjustments under 
the terms and conditions of CAS-covered contracts. In their view, a 
change in cost accounting practice only occurs if the change is 
specifically cited or illustrated in the Board's rules. That line of 
reasoning would inappropriately preclude from consideration the 
complete spectrum of cost accounting practices actually used by each 
contractor to accumulate costs in cost pools for subsequent allocation 
to intermediate and final cost objectives. The commenters' inferences 
are that the Board has the ability to promulgate a rule that describes 
or illustrates every conceivable circumstance that the Board considers 
to be a change to a cost accounting practice for each contractor 
performing CAS-covered contracts. That, however, is not feasible or 
desirable. Instead, the Board's objective is to maintain cost 
accounting practice definitions that can be related to each 
contractor's established cost accounting practices.
    The Board's proposed definitions are, therefore, from a broader 
perspective. The Board's objective is to permit the application of the 
Board's rules to all contractors and subcontractors, regardless of 
their specific individual cost accounting practices applied to 
accumulate costs. The Board's expectations are that the contracting 
parties will be able to determine, on a case-by-case basis, whether a 
change in a particular contractor's established cost accounting 
practice has occurred based on the revised language contained in the 
Board's proposed definitions. Under the definition being proposed 
today, if a contractor makes changes that alter the flow of pooled 
costs to intermediate and final cost objectives, for ongoing functions, 
such changes would generally be considered a change in cost accounting 
practice. Thus, it is the substance of the actual change made that is 
to be evaluated by the contracting parties. A cost accounting practice 
change may occur even if it is not specifically depicted in the Board's 
rules.
    The accompanying illustrations are a secondary source of guidance 
regarding the application of the primary policy reflected in the 
definitional language. A determination that a change in practice has 
occurred should normally result whenever there is a change in how 
pooled costs are accumulated for allocation to intermediate and final 
cost objectives. The determination is, therefore, not limited to only 
those circumstances that replicate the conditions associated with the 
changes in cost accounting practices illustrated in the Board's amended 
rule or by any previously proposed coverage (proposed definitional 
language or illustrations) associated with this rulemaking that is not 
eventually incorporated in the final rule.
    Contract Price and Cost Adjustments. In proposing a new subpart 
9903.4, the Board's objective is to establish a definitive cost impact 
process that fully considers and reflects how contractor submitted cost 
information is used by the Government (i) to negotiate contract prices 
at the time of award, (ii) to convert cost ceilings or target costs 
into final contract prices for flexibly priced contracts after award, 
and (iii) to pay contract costs under the terms and conditions of the 
different types of negotiated cost based contracts (FFP, CPFF, etc.) 
that are utilized by the Government to obtain products, supplies and 
services, research, etc.
    Contractor cost estimates submitted to support proposed contract 
prices for the performance of specific tasks generally reflect the 
amount of direct and indirect costs that contractors expect they will 
actually accumulate in accordance with their established cost 
accounting practices after receipt of a contract award, if they were 
selected to perform the specific tasks. The Government's negotiators 
rely upon such cost estimates when they establish the negotiated 
contract price at the time of contract negotiations, prior to contract 
award. If a contractor changes a compliant cost accounting practice 
after contract award, the amount of costs accumulated for existing CAS-
covered contracts may increase or decrease in comparison to the amounts 
that would have been accumulated had no practice change been made. Such 
post award changes made by a contractor could result in the payment of 
increased costs by the Government. If a contractor applied a 
noncompliant cost accounting practice, the amount of estimated costs 
based on the noncompliant practice may result in overstated or 
understated negotiated contract prices and/or the amount of actual 
costs accumulated for resultant CAS-covered contracts may be higher or 
lower than the amounts that would have resulted if a compliant practice 
had been used to accumulate costs. In such circumstances, contract 
price or cost adjustments may be required to preclude the payment of 
increased cost, to correct overstated contract prices and to deobligate 
overstated funding obligations that resulted from an estimating 
noncompliance, or to address individual contract cost overrun or 
underrun conditions that may result. Adjustments may also be required 
so that Government cost comparisons between estimated and actual costs 
of contract performance contained in contract cost status reports 
result in valid comparisons.
    By proposing a definitive cost impact process, the Board is taking 
action to establish how the contracting parties are henceforth to:
     Estimate the amounts by which the amount of costs 
accumulated under existing CAS-covered contracts will increase or 
decrease after a compliant cost accounting practice change is made.
     Convert the estimated changes in cost accumulation 
(increases or decreases) for individual contracts to equitable contract 
price adjustments for ``required'' and ``desirable'' practice changes.
     Determine if ``voluntary'' cost accounting practice 
changes made unilaterally by a contractor after contract award will 
result in the payment of increased costs, in the aggregate, by the 
Government and to prescribe the actions to be taken to preclude the 
payment of the aggregate increased costs. At the time of contract 
award, a contractor agrees to consistently apply its established cost 
accounting practices when accumulating and reporting the costs of 
contract performance. A voluntary change in cost accounting practice 
negates that agreement and triggers the CAS contract clause price and 
cost adjustment provisions which preclude the Government from paying 
aggregate increased costs (as defined by the Board) that may result 
from a voluntary change in cost accounting practice. When a contractor 
makes a voluntary change to its established cost accounting practices, 
the amount of contract costs accumulated by the contractor for 
individual contracts may increase or decrease as compared to the 
amounts

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that would have been accumulated for the individual contracts had the 
practice change not occurred. The cost impact process being proposed 
prescribes how to determine if the Government would pay ``increased 
costs,'' in the aggregate, as the result of a voluntary change in 
practice for the different types of contracts that may be involved (FFP 
or flexibly priced contracts). The increased cost determination is 
predicated upon an analysis of the changes in individual contract cost 
accumulations that are expected to result after the practice change and 
a determination on whether or not contract price adjustments or other 
actions are required to preclude the payment of aggregate increased 
costs, e.g., require adjustment of the Government's contractual 
obligations to pay the negotiated cost-based contract prices (FFP or 
cost ceilings for flexibly priced contracts) which were determined at 
the time of award based on proposed contract costs that were estimated 
in conformity with the contractor's then established cost accounting 
practices and the contractor's agreement to consistently apply such 
established practices when accumulating and reporting the actual costs 
of contract performance.
     Convert the estimated changes in cost accumulations 
(increases or decreases) for individual contracts to contract price 
adjustments and/or other actions that may be required to preclude the 
payment of increased costs or to otherwise reflect the cost impact of 
``voluntary'' cost accounting practice changes.
     Determine if increased cost to the Government, in the 
aggregate, occurred in the event a noncompliant cost accounting 
practice was used to estimate contract costs and/or to accumulate 
contract costs.
     Correct noncompliant conditions.
    The purpose of the foregoing discussion is intended to guide 
interested parties in commenting on the Board's proposal.

Alternative Procedures

    Some commenters advocated that the use of other approaches might 
better serve the Government and its contractors. The thrust of their 
arguments was that other measurement criteria for evaluating the 
reliability of contractor cost submissions and remedies for 
``unreliable'' cost submissions might be developed with the result that 
the contracting parties would incur less administrative costs. General 
references were made to recent regulatory changes established by the 
procurement community in response to acquisition reform legislation 
that produced ``streamlined'' acquisition regulations for contract 
awards where contract prices are generally based on ``adequate price 
competition,'' e.g., the use of ``past performance'' evaluations for 
determining responsible sources and ``Process Oriented Contract 
Administration Services (PROCAS),'' a ``team approach'' review program 
developed by the Defense Logistics Agency that establishes increased 
reliance on contractor internal control procedures so that Government 
surveillance can be lessened. How such alternative processes might be 
related to the implementation of the Board's statutory requirements for 
negotiated cost-based contracts was not, however, detailed. Any 
alternative system, if designed to provide the basis for making 
meaningful evaluations regarding compliance with the Board's CAS and 
the resulting submission and use of contractor prepared cost 
information, would require a baseline or benchmark against which 
submitted cost information could be measured, verified and equitably 
adjusted if unreliable cost information had been submitted. Additional 
contractor reporting systems and new measurement criteria relative to 
the Board's statutory requirements would need to be developed and 
implemented. Team reviews also consume considerable resources, pose 
scheduling delays, and are generally invoked only at the largest 
contractor locations.
    In a cost-based contracting environment, the use of such 
alternative processes may not be as effective or less costly than the 
Board's administrative requirements. The Board has carefully considered 
the commenters' views and believes that its regulatory requirements 
(once amended as proposed in this SNPRM-II) and Standards result in a 
reasonably efficient and effective process for administering contractor 
cost accounting matters that affect the pricing of negotiated cost-
based Government contracts and subcontracts.

Cost Benefit Issues

Cost Accounting Practice Definition
    A number of commenters opined that the costs of implementation of 
the Board's proposed amendments would exceed any cost savings the Board 
might expect from the potential recovery of increased costs paid by the 
Government. The commenters premised their concerns on the notion that 
the proposed amendments to the Board's definitions of a ``cost 
accounting practice'' and ``change to a cost accounting practice'' will 
increase the number of cases (cost accounting practice changes) that 
will need to be reported to the Government and subjected to the Board's 
cost impact process. They reasoned that the increased number of cases 
will, in turn, increase the Government's and contractors' 
administrative costs over the levels currently being experienced. 
Consequently, they generally recommended that the Board field test and/
or further study the impact its proposal will have on contractors and 
the Government and then reconsider the need for the proposed 
amendments. It is their belief that the Board will find that the 
Government's and contractors' administrative cost levels would increase 
substantially while any increase in the levels of ``increased costs'' 
to be recovered by the Government would not justify the higher 
administrative cost levels.
    The Board acknowledges that for some contractors the reported 
number of cost accounting practice changes that would become subject to 
the Board's contract price or cost adjustment process may increase when 
compared to the number currently being reported. The possible increase 
would not be due to the actual number of ``changes'' made each year, 
but rather due to those changes that have been made routinely in the 
past but were not treated by the contractor as a ``change to a cost 
accounting practice'' (e.g., pool combinations, pool split-outs, and 
transfers of ongoing functions from one pool to another pool). Some 
contractors do not believe such changes are currently subject to the 
Board's consistency requirements and CAS contract price and cost 
adjustment provisions due to their interpretations of the Board's 
existing definitions, illustrations and rulemaking history regarding 
the definition of a change to a cost accounting practice.
    Such cost pool changes normally impose additional non-CAS driven 
administrative burdens on both the Government and contractors because 
they generally require the negotiation of revised sets of forecasted 
indirect cost rates for contract cost estimating purposes and the 
establishment of revised sets of provisional and actual indirect cost 
rates for the payment of accumulated actual contract costs. These 
revisions are required whenever changes in the accumulation of pooled 
costs significantly affect estimated and/or actual contract cost 
accumulations. However, this additional administrative cost burden does 
not appear to be a contractor concern since these corollary 
administrative actions were not mentioned. Also not considered was the 
impact of the alternative outcomes and

[[Page 45704]]

alternative administrative actions that would result if the CAS cost 
impact process were not applied to uniformly resolve individual 
contract cost overruns or under-runs that may result from such changes.
    A study of Government cost recoveries is not needed since the Board 
does not expect that only contract price reductions will occur due to 
the promulgation of this proposed rule. The contract price and cost 
adjustments made under the CAS cost impact process generally increase 
and decrease individual contract prices and costs in synchronization 
with the increase or decrease in actual cost accumulations expected to 
result from the practice change. If the Government determines a 
practice change to be a ``desirable change'', then the Government may 
increase, not decrease, contract prices in the aggregate. The objective 
is to track the expected changes in cost accumulation for the 
individual covered contracts and to adjust individual contract prices, 
if necessary. It is not to gain an advantage for the Government. The 
``savings'' will accrue through the Government's continued reliance on 
contractor cost submissions, the Government's ability to adjust 
contract prices and costs to preclude the payment of increased costs 
(as defined by the Board), and the implementation of a less burdensome 
cost impact system.
    The commenters' ``cost savings'' rationale avoided the basic issues 
under consideration by the Board, i.e., what constitutes a change in a 
contractor's established cost accounting practices used to estimate, 
accumulate and report costs for covered contracts, and, has the Board's 
statutory requirement to preclude the payment of ``increased costs'' 
been implemented in an effective manner? Their arguments were limited 
to the premise that if the proposed amendments increase existing 
administrative cost levels to the contractor and/or there is no 
significant increase in the level of amounts recovered by the 
Government, promulgation of the proposed amendments is not justified.
    Throughout this rulemaking process, contractors continued to 
advocate that, from a technical prospective, the definition of a change 
to a cost accounting practice should not be amended, i.e., the Board's 
contract price and cost adjustment provisions should not be triggered 
if a contractor's estimated cost proposal was predicated on the 
accumulation of estimated pooled costs in a particular manner and, 
after contract award, the contractor elected to accumulate actual 
pooled costs differently and thereby altered the amount of actual 
contract costs accumulated for individual contracts. This 
administrative cost burden argument is really an extension of those 
technical arguments which are addressed elsewhere in this Preamble. 
However, as presented, the burden argument ignores the potential direct 
``cost'' risk to the Government in terms of increased contract prices 
or costs that may result and be billed to the Government due to such 
post-award changes. By objecting on the basis that the Board's proposed 
amendments will increase the administrative cost burden, some 
contractors are really arguing that the CASB's requirements for 
adjusting contract prices to reflect the changes in the accumulation of 
pooled costs allocated to individual contracts, should not be applied. 
If such ``burden'' arguments were accepted, the CASB's cost impact 
process would not be used to uniformly resolve individual contract cost 
shifts resulting from such changes. The Board does not agree with such 
views. The Board does not believe that the commenter's arguments have 
technical merit or that the Board's proposal will materially increase 
the overall administrative cost burden level currently imposed by the 
Government on cost-based contractors.
    The Board's objective is to consistently treat unilateral changes 
made by contractors that alter the manner by which the costs of ongoing 
functions are accumulated in cost pools for subsequent allocation to 
intermediate and final cost objectives as a change in cost accounting 
practice. Such contractor changes are viewed as a constant. They occur 
irrespective of the Board's rules, regulations and Standards. 
Therefore, the issue is simply whether changes in the accumulation of 
pooled costs that alter the flow of costs to intermediate and final 
cost objectives are also to be recognized as changes in a contractor's 
cost accounting practices for contract pricing purposes.
    To ensure that equity results from the Government's cost-based 
contract pricing process, the Board is of the opinion that a change 
made by a contractor which alters the flow of costs to cost objectives, 
for ongoing functions, constitutes a change in cost accounting practice 
for contract cost or pricing purposes. In the final analysis, an 
approach that protects the Government's interests in an equitable 
manner, consistent with the Board's enabling statute, is needed in a 
cost-based contracting environment. The benefits of commonly understood 
definitions that result in implementation of the Board's statutory 
requirements will tend to negate the administrative costs of 
implementation even if some administrative cost levels were to increase 
for a short time. This is because the Board's existing rules have not 
resulted in an effective, easily understood and agreed to regulation. 
The contracting parties have experienced contentious disagreements and 
legal disputes concerning amounts paid under covered contracts after 
contractors made ``changes'' that altered the flow of costs to 
intermediate and final cost objectives which in turn altered the 
aggregate amount of accumulated contract costs. Settlement of these 
disagreements and adjudication of the resulting legal cases, 
particularly when extended over long periods of time, have produced 
significant ``administrative costs'' to both the Government and 
contractors. It is the Board's expectation that finalization of this 
proposal to more precisely define what constitutes a ``change to a cost 
accounting practice'' will reduce the potential for such disagreements 
and therefore will obviate the cost of protracted legal proceedings for 
many such changes in the future.
Cost Impact Process
    The Board found that the administrative process for making the 
contract price and cost adjustments has not always been implemented in 
a uniform manner, and that the ``undocumented'' procedures and 
processes for making such adjustments is not widely understood by the 
Government or its contractors. The proposed cost impact process 
delineates the entire process to be followed when a contractor changes 
a compliant cost accounting practice, or is required to correct a non-
compliant practice. It addresses when notification of a practice change 
is required and specifies a flexible process for determining and 
resolving the cost impact of a cost accounting practice change or 
noncompliance. The Board believes that the proposed process, when 
promulgated as a final rule, will prove to be more flexible and less 
burdensome than current practices. It will also facilitate user 
comprehension of the process and thereby tend to reduce the overall 
amount of administrative effort currently being expended to resolve 
individual cases.
In Summary
    The Board's continuing objectives are to maintain its existing 
rules and Standards in a manner that is consistent with its enabling 
statute. The purpose of the Board's current proposal is to focus

[[Page 45705]]

on the two basic issues that are an essential part of the Board's 
overall contract price and cost adjustment process, i.e., what 
constitutes a ``cost accounting practice'' and how to administer CAS-
covered contracts in the event a contractor or subcontractor makes a 
change to its otherwise compliant cost accounting practices or a 
contractor or subcontractor does not comply with an applicable CAS when 
estimating, accumulating or reporting costs. Based on the public 
comments received throughout this proposed rulemaking, it is clearly 
evident that disagreements still exist over what should constitute a 
change in a contractor's established cost accounting practices for 
purposes of triggering the CAS contract price and cost adjustment 
process. Accordingly, the Board believes that the amendments being 
proposed today are needed to facilitate implementation of the Board's 
statutory mandate concerning the payment of increased costs 
attributable to contractor cost accounting practice changes, and that 
the contracting community will benefit from the promulgation of a 
flexible cost impact process that is designed to achieve a more 
flexible and less burdensome administrative process.
    The Board does not believe that its proposed amendments, when 
promulgated as a final rule, will increase the level of administrative 
costs currently being experienced by contractors and Government 
agencies by any appreciable margin. In the long run, the benefits 
accruing from a more precise definition of a ``change to a cost 
accounting practice'' and a more flexible cost impact process should 
reduce, not increase, the overall administrative burden currently being 
experienced by contractors and agencies.
Proposed Amendments
    A brief description of the proposed amendments follows:

Part 9903, Contract Coverage--Proposed Amendments

    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 provide exemption criteria for determining if a voluntary 
change in cost accounting practice associated with certain 
restructuring activities can be exempted from the contract price or 
cost adjustment requirements prescribed in part 9903. Subsection 
9903.201-7 is amended to establish criteria for determining when a 
voluntary change in cost accounting practice is desirable and not 
detrimental to the Government's interests and to establish alternate 
processes for resolving desirable changes. Subsection 9903.201-8 is 
added 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 terms 
``cost accounting practice'' and ``change to a 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:
    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 voluntary change in cost 
accounting practice associated with restructuring activities can be 
exempted from contract price or cost adjustment.
    Provide criteria for determining when a non-exempted voluntary 
change in cost accounting practice can be determined to be a desirable 
change that is not detrimental to the Government's interests.
    Provide a more flexible process for resolving the cost impact of 
certain desirable changes.
    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, 9903.301 is amended to incorporate two 
definitions to clarify the terms ``Function'' and ``Intermediate cost 
objective.'' The amendments made to 9903.302-1(c), Allocation of cost 
to cost objectives, make explicit the methods and techniques that are 
considered to be a cost accounting practice, including the methods and 
techniques used to accumulate the cost of specific activities in cost 
pools. Additional subparagraphs are added to clarify the concepts 
associated with 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 added regarding 
the use of the illustrations that follow. Introductory paragraphs (a), 
(b) and (c) are revised to clarify that the illustrations involve 
``cost accounting practices'' that have changed. The

[[Page 45706]]

illustration at 9903.302-3(c)(3) is 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 a 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 new 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 for the submission of ``cost savings'' 
data that will enable the cognizant Federal agency official to promptly 
determine if a voluntary change can be exempted from contract price or 
cost adjustment. For changes in cost accounting practices that can not 
be exempted, 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 proposed 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 addresses 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 on individual 
contracts 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 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, details the processes 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. 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 proposal 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 proposed rule was developed after consideration of the public 
comments received in response to the Board's NPRM (61 FR 49196, 9/18/
96) and the SNPRM-I (62 FR 37654, 7/14/97) that were published in the 
Federal Register, wherein public comments were invited. The NPRM 
comments received and the Board's actions taken in response thereto 
were reflected in the SNPRM-I. The supplemental comments received in 
response to the SNPRM-I and the Board's actions taken in response 
thereto are summarized in the paragraphs that follow:

Contract Price and Cost Adjustment Exemption

    Comment: Although commenters remained concerned regarding the level 
of detail that would be needed to obtain an exemption, they expressed 
strong support for the creation of a provision that would exempt from 
the Board's contract price and cost adjustment requirements those 
voluntary changes in

[[Page 45707]]

cost accounting practices that are associated with management changes 
made to improve the efficiency and effectiveness of a contractor's 
operations.
    Response: The Board's deliberations focused on how a voluntary 
change to a contractor's established cost accounting practices should 
be treated under the Board's rules when the practice change is directly 
associated with management actions undertaken to improve the economy 
and efficiency of the contractor's operations. It is the Board's 
continuing belief that the Government should be informed of any changes 
made to the contractor's established cost accounting practices that are 
being used to accumulate and report the costs of performing existing 
CAS-covered contracts. Such notification facilitates the contract 
administration process and beneficially reduces the potential for 
disputes, particularly if a disclosure statement is required. However, 
in cases where a change in cost accounting practice is made in 
conjunction with contractor restructuring activities that are 
undertaken to reduce personnel or facilities in order to significantly 
lower the contractor's overall costs of operations, the contract price 
and cost adjustment process contractually required for changes in cost 
accounting practices under existing CAS-covered contracts may not be 
necessary or appropriate.
    For example, assume that after contractor restructuring activities 
and associated practice change(s) are implemented concurrently, a 
reduction in the contractor's future overall operating costs is 
expected and the aggregate costs accumulated for existing covered 
contracts are also expected to be less than the aggregate costs that 
would have been accumulated if the restructuring activities had not 
been made by management. In such cases, it would generally be 
inappropriate to separately adjust existing contract prices or costs 
only for the cost impact of the change in cost accounting practice. 
That is because the aggregate CAS cost impact calculation for a 
practice change is based on the application of the original and changed 
cost accounting practices to the contractor's lower level of costs 
expected to result after restructuring changes are implemented. It does 
not give consideration to the impact that the lower overall operating 
cost levels (cost savings) expected to result from the restructuring 
activities will have, in the aggregate, on accumulated contract costs 
for existing covered contracts. Nor would the CAS cost impact 
adjustments give consideration to the effects of any resulting contract 
ceiling or target price adjustments or decisions that may otherwise be 
made by the Government based on the expected aggregate reductions in 
accumulated costs for the existing contracts as reported in the 
contractor's restructuring cost savings submissions or contract cost 
performance status reports. For such actions, the Government's 
decision(s) would be based on reported cost information that already 
reflects the application of the new changed cost accounting practices 
to the lower level of costs expected to occur after the restructuring 
changes are made by management. Consequently, an independent CAS 
contract price or cost adjustment made for the shift in costs 
attributable only to the cost accounting practice change(s) might 
alter, in part, the contractor's reported cost savings estimates and/or 
any resultant actions otherwise taken by the Government.
    After considering this matter at length, the Board proposes to 
establish contractor notification requirements for any changes made to 
the contractor's established cost accounting practices (at 9903.405-2). 
The Board also proposes to establish an exemption from its contract 
price and cost adjustment requirements for certain voluntary changes 
made to a contractor's cost accounting practices (at 9903.201-6). The 
proposed exemption would become applicable when the cognizant Federal 
agency official determines that the Board's promulgated criteria for 
granting the exemption has been met: i.e., when a contractor adequately 
demonstrates that a planned restructuring activity is expected to 
result in cost savings to the Government; the practice change would not 
occur but for the planned restructuring activity; reductions in 
contractor personnel or facilities will occur; and reduced contract 
cost accumulations are expected to occur, in the aggregate, for 
existing flexibly priced contracts, and all expected future CAS-covered 
contracts and subcontracts.
    If a change in cost accounting practice directly associated with 
planned restructuring activities were exempted, existing flexibly 
priced contracts would, however, remain subject to applicable contract 
terms and conditions prescribed in agency procurement regulations. 
Accordingly, the Contracting Officer may still make individual contract 
cost ceiling and/or target cost adjustments or otherwise take action to 
address any potential contract cost overrun and/or underrun conditions 
that are expected to result due to the restructuring activities.
    The administrative process for requesting the exemption and 
granting an exemption is also proposed at 9903.405-2 and 9903.405-3. 
When a contractor requests an exemption, the submission of some 
contractor information is necessary concerning the contract cost 
accumulation changes and cost savings that are expected to result from 
the planned restructuring activities. Otherwise, the cognizant Federal 
agency official would not have a reasonable basis for determining, in a 
meaningful manner, if a planned cost accounting practice change meets 
the Board's specified exception criteria, and should be exempted, or if 
the practice change should be subjected to the Board's standard 
contract price and cost adjustment process.
    Comment: A Federal agency supported the establishment of an 
exemption for improved management efficiency and effectiveness. It 
recommended, however, that the exemption only be granted when the 
contractor meets the Board's stated requirements and the cognizant 
Federal agency official makes a determination, based on the facts and 
circumstances of the situation, to grant the exemption. A related 
concern was that flexible contract adjustment provisions were needed so 
that adjustments can be made for shifts in contract costs resulting 
from changes made in cost accounting practices to ensure that 
contractor completion of flexibly priced contracts would not be 
jeopardized.
    Response: In considering the establishment of an exemption, the 
Board did not expect to establish a mandatory exemption provision that 
would obviate the need for determinations, on a case-by-case basis, by 
the cognizant Federal agency official on whether a cost accounting 
practice change should be exempted. A unilateral exemption decision by 
the contractor was not envisioned, e.g., the draft ``Option B'' 
language included in the SNPRM-I provided that the contractor would 
request an exemption and the cognizant Federal agency official would 
notify the contractor if the Board's exemption criteria had been met 
and that the voluntary change would be exempt.
    The Board's objective is to not discourage restructuring 
activities. Consequently, the Board is proposing an exemption provision 
so that cognizant Federal agency officials will not be required to 
apply the Board's contract price and cost adjustment process for 
certain changes in cost accounting practice that are directly 
associated with certain restructuring activities. The exemption would 
only apply when a

[[Page 45708]]

cognizant Federal agency official finds that contract price and cost 
adjustments otherwise required under the Board's regulations for 
existing contracts are not considered necessary to protect the 
Government's interest. This would occur where the cognizant Federal 
agency official determines that a contractor has met the Board's 
proposed exemption criteria which includes a demonstration that 
aggregate reductions in contract cost accumulations for existing 
flexibly priced CAS-covered contracts and future CAS-covered contracts 
are expected to result from the planned restructuring activity. 
However, when such ``cost savings'' to the Government are expected to 
occur in the aggregate due to restructuring and a voluntary cost 
accounting practice change is made concurrently with the restructuring 
change, then the two changes made in unison may produce cost underrun 
and/or overrun conditions for some individual flexibly priced type 
contracts. In such cases, the Board would expect that, as a normal 
contract administration matter, the contracting parties would mutually 
agree to concurrently decrease or increase the affected contract 
ceiling or target prices, and revise funding obligations, as necessary, 
to reflect the lower cost accumulations (cost savings), expected in the 
aggregate, for all affected flexibly priced contracts. The overall 
objective of such actions would be to recognize the aggregate ``cost 
savings'' and to address (correct) any individual contract cost overrun 
conditions that might result under existing CAS-covered contracts and 
subcontracts.
    When the aggregate cost accumulations for existing flexibly priced 
contracts are expected to increase due to planned restructuring 
activities, then the cognizant Federal agency official may grant the 
exemption if a determination is made that the ``cost savings'' expected 
to result under future covered contract awards exceed the aggregate 
increase for such existing contracts. However, the resulting cost 
overrun conditions for such exempted CAS-covered contracts would remain 
subject to the same Contracting Officer actions that are normally taken 
to address cost overruns in accordance with the existing contracts' 
other terms and conditions that are prescribed in applicable agency 
procurement regulations.
    The Board's intent is to provide flexibility to cognizant Federal 
agency officials administering CAS-covered contracts and subcontracts 
while also providing assurance to contractors that requests for the 
proposed exemption will generally be granted when the Board's specified 
criteria are applied. The granting or use of the Board's proposed 
exemption should not otherwise disrupt the Government's ongoing 
administration of CAS-covered contracts.
    In response to the commenter's concerns, the Board proposes to 
establish a ``finding'' requirement at 9903.201-6 to clarify that a 
cognizant Federal agency determination is needed before a voluntary 
change in cost accounting practice can be considered exempt from a CAS-
covered contract's contract price and cost adjustment provisions. The 
establishment of an adjustment provision for flexibly priced contracts 
to address the potential cost overrun conditions attributable to a 
change in cost accounting practice associated with a planned 
restructuring activity was not considered necessary.
    Comment: A number of commenters advocated that if an exemption 
provision is promulgated, the coverage should not be limited to 
``transfers of functions'' or ``merger of cost pools.'' Several 
commenters recommended that the exemption language not be limited to 
cost accounting practice changes resulting from ``organizational 
changes.'' Conversely, some commenters objected to the promulgation of 
an exemption based on their belief that an exemption for economy and 
efficiency changes would be abused. They opined that virtually every 
change in cost accounting practice could be covered as a change made 
for ``improved management efficiency and effectiveness.''
    Response: The exemption criteria being proposed today has been 
expanded to include any changes in the ``allocation of cost to cost 
objectives'' (9903.201-6(c)) that occur within a cost accounting 
period, i.e., ``intra-period'' cost shifts. Changes involving the 
``measurement of cost'' or the ``assignment of cost to cost accounting 
periods'' are not subject to exemption.
    The Board also shares the concerns expressed by those commenters 
advocating that no exemption be provided in order to avoid the 
potential for abuse. In that regard, the SNPRM-I ``Option B'' exemption 
criteria has been modified to require an adequate contractor 
demonstration that the planned restructuring activities, when 
implemented, are expected to result in cost savings to the Government, 
in the aggregate. With regard to the latter, this proposed rule also 
requires a demonstration of the expected impact on projected cost 
accumulations for existing CAS-covered FFP contracts. Contract price 
adjustments normally required to resolve the cost impact resulting 
solely from a voluntary change in cost accounting practice would not, 
however, be required for existing CAS-covered FFP contracts, if the 
practice change is exempted. But the data submission in a FFP 
environment would provide support for the determination that similar 
offsetting ``cost savings'' can be reasonably expected to occur in 
future CAS-covered contracts.
    The Board will revisit this matter if subsequent events reveal that 
the proposed exemption is ``abused'' after promulgation as a final 
rule.
    Comment: A commenter opined that the proposed language would limit 
the exemption only to organizational changes that involve ``physical'' 
actions. The commenter recommended that a clarifying revision be made 
to permit changes that make more efficient use of existing facilities 
and personnel or increase productivity of those facilities and 
personnel.
    Response: The proposed requirement for physical actions to evidence 
that a significant nonrecurring management change was being made to 
improve the economy and efficiency of operations has been retained in 
the exception being proposed today. The Board's intent is to provide a 
clear distinction between management actions taken to lower overall 
operating cost levels through reductions in personnel or facilities 
(physical changes) where any associated voluntary change to a cost 
accounting practice should be exempted, and other management actions 
taken to otherwise improve the economy and efficiency of operations 
where any associated voluntary change in cost accounting practice would 
remain subject to the cost impact process required for existing CAS-
covered contracts. The proposed provisions are intended to facilitate 
overall contract administration activities, protect the Government's 
interests and reduce the potential for disagreements over whether a 
particular management change resulting in a voluntary change to an 
established cost accounting practice is an ``exempt'' or a 
``desirable'' change under the Board's rules.
    Comment: The draft Option B exemption should be applicable to all 
organizational changes (both internal and external) that meet the 
benefit test.
    Response: The exemption criteria being proposed today applies to 
all restructuring activities as defined by the Board at 9904.406-61(b). 
It is not limited to ``external restructuring activities'' as currently 
defined in the Defense Federal Acquisition Regulation

[[Page 45709]]

Supplement (DFARS) at DFARS 231.205-70(b)(2).

Contract Price and Cost Adjustment Exemption for Changes in the 
Composition of Overhead and General an Administrative Expense Pools

    Comment: A number of commenters felt the CASB staff's draft 
``Option C'' presented for the Board's consideration was not useful. A 
few commenters believed that the draft ``Option C'' exemption concept 
was feasible and that it provided adequate protection to the 
Government.
    Response: The Board has not incorporated this concept in this 
proposed rule.

Desirable Changes

    Comment: Several commenters who supported the draft ``Option B'' 
exemption provision also advocated that the Board retain the proposed 
SNPRM-I mandatory ``desirable change'' provisions requiring the 
cognizant Federal agency official to find as ``desirable'' all 
voluntary cost accounting practice changes made to improve the 
efficiency and effectiveness of a contractor's operations.
    A Federal agency recommended that the proposed mandatory desirable 
change criteria for changes in cost accounting practice that result in 
``cost savings'' be deleted because the proposed criteria precludes 
consideration of other relevant facts and circumstances. In addition, 
if ``cost savings'' form the basis for granting a requested exemption, 
as advocated by the commenter, then contractors should not have the 
ability to choose between an exemption or a desirable change provision.
    A Federal agency, with oversight responsibilities, recommended 
deletion of the SNPRM-I proposed amendment mandating desirable change 
findings for contractor changes made to improve the economy and 
efficiency of operations, and strongly supported the draft exemption 
provisions included as ``Option B'' because it offered ``* * * controls 
to protect the Government * * *'' The commenter felt that the proposed 
SNPRM-I amendments for desirable changes, at 9903.201-6(c)(2), did not 
offer adequate protection to the Government.
    Response: A desirable change determination permits the contracting 
parties to increase existing CAS-covered contract prices, in the 
aggregate, to reflect the aggregate increased costs to the Government 
(as defined by the Board) that are expected to result from a 
contractor's voluntary change in cost accounting practice. In such 
cases, equitable contract price adjustments are negotiated to resolve 
the cost impact of the changes in contract cost accumulations that are 
estimated to result for the existing CAS-covered contracts due to the 
practice change. Where the cost impact of a practice change on existing 
CAS-covered contracts does not result in increased costs to the 
Government, in the aggregate, a desirable change determination is not 
needed to effect the required contract price and/or cost adjustments, 
in the aggregate. Only if the cost impact of a practice change on 
existing contracts results in aggregate ``increased costs'' after the 
change is made, would a desirable change determination serve a useful 
purpose.
    In the SNPRM-I, the proposed mandatory desirable change 
determination criteria included changes in cost accounting practices 
attributable to organizational changes where ``cost savings'' were 
expected to occur under existing and/or future CAS-covered contracts. 
That provision was proposed as a stand alone amendment in the SNPRM-I, 
on the premise that the proposed mandatory provision would not be 
accompanied by an exemption provision for changes in cost accounting 
practices associated with management changes that are expected to 
result in more economical and efficient operations or cost savings (see 
the introduction to item 2 of the draft ``Option B'' provisions, in the 
SNPRM-I, which indicated that the desirable change criteria proposed at
9903.201-6(c)(2) for economy and efficiency improvements would be 
deleted or modified if the ``Option B'' draft exemption were 
established (62 FR 37671, 7-14-97)).
    The Board believes the underlying merits of cost accounting 
practice changes that result in aggregate ``increased costs'' to the 
Government, as defined by the Board, need to be evaluated on a case-by-
case basis. It would be inappropriate to mandate that ``all'' voluntary 
practice changes made ostensibly for improved economy and effectiveness 
reasons be deemed desirable changes that are not detrimental to the 
Government if expected cost savings to the Government cannot be 
demonstrated for existing and/or future contracts.
    As specified under ``Contract Price and Cost Adjustment 
Exemption,'' the Board concluded that contract prices and costs should 
not be separately adjusted to only reflect the cost impact of a change 
in cost accounting practice when that practice change is associated 
with planned restructuring activities that are expected to produce cost 
savings to the Government. Furthermore, it would be inappropriate to 
establish two provisions, an exemption provision and a desirable change 
provision to cover cost accounting practice changes made for the same 
reason, i.e., restructuring changes that produce cost savings. The 
contracting parties would undoubtedly experience endless debate over 
which one of the two provisions should be applied in a particular 
circumstance.
    The Board has therefore concluded that one consistent approach is 
needed for cost accounting practice changes that are associated with 
management actions which are expected to produce costs savings. In 
consideration of the comments received, the Board's current proposal is 
to require the following:

Where the cognizant Federal agency official finds that cost savings to 
the Government are expected to result from planned restructuring 
activities in accordance with the Board's prescribed criteria, the 
changes in cost accounting practice directly associated with such 
restructuring activities will be exempted from the CAS contract price 
and cost adjustment requirements, unless a determination is made that 
the exemption would otherwise be detrimental to the Government's 
interests.
--Where the cognizant Federal agency official finds that cost savings 
to the Government are expected to result from planned management 
changes, including planned restructuring activities that do not result 
in an exemption determination in accordance with the Board's proposed 
exemption criteria at 9903.201-6, the changes in cost accounting 
practice directly associated with such management changes will 
generally be treated as a ``desirable change.'' In such cases, the CAS 
contract price and cost adjustments normally required to resolve the 
resulting cost impact of the practice change may be otherwise resolved, 
without requiring the submission of additional data in the form of a 
cost impact proposal, provided a determination is made that an 
alternative resolution (based on the contractor's previously submitted 
expected ``cost savings'' and contract cost accumulation changes data 
(see 9903.405-2(e)) is not detrimental to the Government's interests. 
The Board believes that the proposed ``cost savings'' demonstration and 
alternative resolution determination requirements should provide 
adequate controls to protect the Government's interests.

[[Page 45710]]

--All other voluntary changes in cost accounting practices made for any 
other reason will remain subject to the Board's voluntary change ``no 
increased cost'' prohibition and other related desirable change 
provisions (see proposed 9903.201-7(c)(3)).

    In conjunction with the exemption being proposed today, the Board 
has modified the mandatory desirable change amendment that was proposed 
in the SNPRM-I at 9903.201-6(c)(2). Essentially, the Board's current 
proposal is to amend its existing desirable change criteria to provide 
that a voluntary change to a cost accounting practice, including those 
associated with restructuring activities but not exempted under 
9903.201-6(a), shall be deemed to be desirable change if the contractor 
can demonstrate cost savings to the Government, in the aggregate, for 
existing flexibly priced and all future CAS-covered contracts or 
otherwise demonstrate desirability of the practice change (see 
9903.201-7(c) (2) and (3)).
    Comment: A Federal agency responded that contract disputes have 
arisen as to when a voluntary change in cost accounting practice can be 
considered to be a desirable change. The agency recommended that the 
rule state a voluntary change is not to be considered desirable until 
the cognizant Federal agency official notifies the contractor the 
change has been determined to be a desirable change.
    Response: Proposed provisions have been added, at 9903.201-7(b), to 
clarify the purpose of a desirable change determination and that until 
the cognizant Federal agency official determines that a change is 
desirable and not detrimental to the Government, the change shall be 
considered to be a voluntary change for which the Government will pay 
no increased costs.
    Comment: A Federal agency recommended that more flexibility would 
be provided for making desirable change determinations if the phrase 
``provided there is a reasonable expectation that benefits will accrue 
to the Government in future awards'' were deleted from the last 
sentence proposed in the SNPRM-I at 9903.201-6(d).
    However, many industry commenters argued that the cost impact on 
future CAS-covered contracts should be considered by the cognizant 
Federal agency official in determining how to resolve the cost impact 
of a voluntary change in cost accounting practice that results in 
``increased'' cost to the Government. The commenters opined that 
inequitable results that penalize a contractor may occur if decreased 
cost accumulations expected to result for future CAS-covered contracts, 
after the voluntary change is made, are not considered.
    Response: One of the Board's statutory mandates is to preclude the 
payment of increased costs, as defined by the Board, under CAS-covered 
contracts due to voluntary changes in cost accounting practices made by 
contractors after contract award. Under the terms and conditions of the 
Board's implementing contract clauses, a contractor agrees to 
consistently follow its established cost accounting practices when 
accumulating and reporting the costs of contract performance after 
contract award. A contractor also agrees that if a voluntary change is 
made, the Government will not pay any aggregate increased cost for 
existing covered contracts whose negotiated prices were predicated on 
cost estimates that were premised on the consistent application of the 
contractor's previously established cost accounting practices.
    The Board's voluntary change--no increased cost prohibition, limits 
potential contract price and/or cost adjustments, so that any resultant 
increased costs to the Government under existing contracts are not 
paid, i.e., after the change, the amounts paid by the Government in the 
form of adjusted contract prices and/or increased contract cost 
accumulations, in the aggregate, can not be more than the aggregate 
amount the Government would have paid under the terms of the existing 
CAS-covered contracts if the contractor had continued to consistently 
apply its established cost accounting practices for the accumulation 
and reporting of contract costs. In essence, the Board's no increased 
cost prohibition provides that the Government's liability to pay 
contractually specified sums, in the aggregate, can not be increased 
unilaterally by a contractor that makes a voluntary change to its 
established cost accounting practices after contract award. The 
objective is to encourage the consistent application of a contractor's 
established cost accounting practices and to discourage voluntary 
changes that would otherwise result in the payment of increased costs 
by the Government under existing covered contracts. It would therefore 
be inappropriate for the Board to mandate that the cost impact expected 
to occur on potential future covered contracts, which may or may not be 
awarded, be considered when determining the cost impact that a 
voluntary change will have on existing contracts for purposes of 
mitigating the application of the prescribed no increased cost 
prohibition provisions to existing contracts.
    Since future contract prices will reflect estimated costs that are 
already based on the application of the new cost accounting practice, 
they require no adjustments and there is no cost impact calculation 
required for such contracts. The cost impact calculation due to changes 
in cost accounting practices is limited to existing covered contracts. 
The calculation is based on the differences in accumulated contract 
costs that are expected to result for the existing covered contracts 
based on the application of the old and new cost accounting practices 
to the projected ongoing level of costs expected to occur after the 
practice change is made. For voluntary changes, the no increased cost 
prohibition is then used to limit any upward contract price or cost 
adjustments, in the aggregate, to the aggregate amount of downward 
adjustments being made for the existing CAS-covered contracts.
    The Board believes, however, that equitable solutions can be 
achieved under the rules being proposed today. In cases where a 
continuing long term relationship between the Government and a 
contractor is evident and when a voluntary change in cost accounting 
practice is not otherwise determined to be exempt from contract price 
or cost adjustment (9903.201-6), a contractor may request the cognizant 
Federal agency official to determine that the voluntary change is not 
detrimental to the Government (9903.201-7) so that the affected 
existing covered contracts and subcontracts desirable change provisions 
can be applied (9903.405-2(e) and 9903.405-2(f)(3)). To support the 
request, a contractor should demonstrate to what extent cost 
accumulations for projected new CAS-covered contract work included in 
the contractor's forecasted business base are expected to decrease as a 
result of the voluntary change. The calculations should also be based 
on the differences in accumulated contract costs that are expected to 
result for the anticipated future CAS-covered contracts based on the 
application of the old and new cost accounting practices to the same 
projected ongoing level of costs expected to occur after the practice 
change is made that is used to determine the cost impact on existing 
contracts.
    The cognizant Federal agency official may consider such data, from 
an equity standpoint, when determining if the existing contract prices 
should be increased, in the aggregate, under a contract's desirable 
change provisions.
    In consideration of the commenters' expressed concerns, the 
proposed proviso of concern to the Federal

[[Page 45711]]

commenter has been deleted. In addition, paragraph 9903.201-7(d) has 
been expanded to clarify that a desirable change determination may be 
appropriate to the extent there is a reasonable expectation that the 
costs of anticipated future CAS-covered contract awards will decrease 
after a voluntary change is made by a contractor.

Cognizant Federal Agency Responsibilities

    Comment: A Federal agency recommended that the SNPRM-I proposed 
responsibilities at
9903.201-7(d)(1) and (2) for the cognizant Federal agency official 
involving the processing of contract price modifications be deleted 
because it duplicates and conflicts with existing coverage currently 
included in FAR Part 30, at FAR 30.601(a) and 30.602-1(c).
    Response: A change in cost accounting practice made by a contractor 
may affect some or all existing CAS-covered contracts awarded by one or 
more agencies, e.g., agencies within the Department of Defense or other 
defense or civilian agencies. The proposed responsibilities in question 
are premised on the concept that a cognizant Federal agency approach 
shall be followed to resolve the cost impact that a particular change 
in cost accounting may have on all affected CAS-covered contracts 
regardless of the number of awarding agencies involved. The proposed 
requirements recommended for deletion would, if finalized, require the 
cognizant Federal agency official to coordinate all actions needed to 
implement the negotiated cost impact settlement on behalf of the 
Government with the contractor.
    When the cognizant Federal agency official negotiates contract 
price adjustments to resolve a cost impact, the current FAR provisions 
cited by the commenter do not establish a coordinated systematic 
approach to effect the necessary contract price adjustments. The 
cognizant Federal official is excused from any further actions after 
the negotiation memorandum is distributed to affected agencies. No 
follow up action by the cognizant Federal official is required if all 
the contract prices that the contractor and cognizant Federal agency 
official have agreed to modify are not so modified. The contractor 
would have to follow up with the other agencies on an individual basis 
in order to obtain the necessary contract price adjustments. This could 
prove to be a difficult task, particularly in cases where the other 
agencies are expected to increase the price of their CAS-covered 
contracts. Additionally, the FAR does not require the other agencies to 
support the cognizant Federal agency official. The proposed provisions 
are considered appropriate in the circumstances and have been retained 
at 9903.201-8.

Contract Clauses

    Comment: Federal agencies suggested that the proposed provisions on 
interest should be conformed throughout the rule to cite Section 
6621(a)(2) of the Internal Revenue Code and that the contract clause 
interest provisions through out the proposed rule be conformed.
    Response: The suggestions were adopted. The proposed contract 
clause provisions were conformed for consistency with the interest 
provisions specified in proposed 9903.4 for estimating noncompliances 
and cost accumulation noncompliances.
    Comment: Why was the provision in the contract clause paragraph 
(a)(4) at 9903.201-4(a) that reads ``* * * agree to an equitable 
adjustment as provided in the Changes clause * * *'' deleted?
    Response: The CAS contract clauses' equitable adjustment provisions 
are not dependent upon another contract clause. The Board's proposed 
amendments provide for equitable adjustments in accordance with the 
contract clause and part 9903.
    Comment: A Federal agency recommended that the contract clauses for 
educational institutions and United Kingdom contracts be updated and 
conformed with the amended Full and Modified contract clauses.
    Response: The Clause 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 one commenter responded to the 
NPRM and the SNPRM-I on this matter. Accordingly, the Board believes 
that such amendments are not currently warranted.

Intermediate Cost Objective Definition

    Comment: Commenters suggested that the definition of the term 
``intermediate cost objective'' would be easier to implement and 
understand if the phrase ``* * * included in specific indirect cost 
pools * * *'' were deleted from the proposed definition.
    Response: The concept of an intermediate cost objective evolved 
from the Board's promulgation of CAS 9903.402, in 1972, when a 
definition of the term ``indirect cost'' was promulgated. That 
definition introduced the concept that a cost was not direct if it was 
identified with two or more final cost objectives or with at least one 
``intermediate cost objective.'' The latter term, however, remained 
undefined. How costs are grouped for cost accumulation purposes and 
their subsequent allocation to intermediate and final cost objectives 
constitutes a cost accounting practice, i.e., the ``accounting methods 
or techniques used to accumulate costs'' (9903.302-1(c)). Also, it is 
recognized that at times, for reasons of economy and efficiency, 
certain costs of a direct nature may be accumulated in cost pools that 
are subsequently allocated to final cost objectives as direct cost.
    In view of the commenters' concerns, the proposed definition was 
revised to clarify that different cost elements and the costs of 
various functions can be accumulated in a varying number of 
intermediate cost objectives that are included in specific cost pools, 
e.g., overhead cost pools, G&A expense pools, service center expense 
pools and other expense pools, and/or cost pools that are allocated as 
direct costs. All such pooled costs are subsequently allocated to other 
intermediate and/or final cost objectives in accordance with applicable 
CAS and/or the contractor's established, and, if required, disclosed 
cost accounting practices.

Cost Accounting Practice Change Definitions and Illustrations

    Comment: A number of commenters stated that the proposed amendments 
have improperly expanded the meaning of the term ``cost accumulation'' 
and that such expansion is unfortunate since almost any change in the 
flow of cost to contracts will be treated as a cost accounting practice 
change.
    Response: The Board does not agree with the commenters' rationale. 
To accumulate cost, a contractor must apply its established, and, if 
required, disclosed cost accounting practices, i.e., the accounting 
methods or techniques used to accumulate cost for CAS-covered 
contracts. The Board's definition at 9903.302-1(c) presently states 
that one of the examples of a cost accounting practice involving the 
allocation of cost to cost objectives are ``the accounting methods or 
techniques used to accumulate cost . . .'' The Board has not expanded 
the definition or proposed a new requirement. The reason for the 
Board's proposed

[[Page 45712]]

amendments is that under the present definition, some contractors have 
concluded that the methods or techniques used to accumulate costs in 
cost pools are not a cost accounting practice and that changes made to 
the methods or techniques used to accumulate costs in cost pools are 
not a change in cost accounting practice. Some contractors, in their 
responses to the SNPRM-I, specified that they do not believe that a 
change in cost accounting practice occurs when cost pools are combined 
or split-out, or when ongoing functions are transferred from one cost 
pool to another cost pool; based, presumably, on their interpretation 
of the Board's existing definition. With regard to changes which alter 
the flow of costs to contracts, the commenters' inferences appear 
contrary to the basic consistency requirements of CAS 9904.401 or 
9905.501, as applicable, which require that a contractor's established 
cost accounting practices be applied consistently when estimating, 
accumulating and reporting costs.
    The Board's proposed amendments would make it explicit that the 
methods or techniques used to accumulate costs in cost pools are to be 
considered a cost accounting practice when a contractor estimates, 
accumulates and reports costs, and that a change made to the methods or 
techniques used to accumulate cost in cost pools is a change in cost 
accounting practice under the Board's rules. In response to the 
commenters' expressed concerns, some editorial changes were made to 
clarify the Board's stated concepts regarding use of the phrase 
``accumulate cost.''
    Comment: A Federal agency recommended that the words ``item of cost 
or a group of items of cost'' proposed for inclusion at 9903.302-1(c) 
be replaced with the words ``accumulate and distribute.'' They believe 
that the proposed wording might be interpreted, by some, to mean that 
the transfer of one direct labor employee from one plant to another 
plant could be viewed as a change in cost accounting practice. Some 
contractor representatives also expressed concern that the SNPRM-I 
proposal introduced uncertainty with regard to the transfer of 
personnel from one functional activity to another.
    Response: The agency's suggestion was adopted. The words 
``accumulate and distribute'' were previously proposed in the NPRM and 
appear to more clearly convey the primary cost accounting concept being 
addressed in this rulemaking, i.e., that the methods and techniques 
used for the allocation of cost to cost objectives include the 
selection and use of specific cost pools to accumulate costs for 
subsequent distribution to other intermediate and final cost 
objectives.
    Comment: A Federal agency agreed with the proposed provision at 
9903.302-1(c)(2), but recommended that the words ``elements of cost'' 
be deleted since the composition of cost pools does not include 
specific elements of cost. This comment also relates to the concern 
that an individual employee could be an ``element of cost'' and if 
transferred to another segment might be construed to be a change in 
cost accounting practice, which would conflict with the proposed 
illustration at 9903.302-(4)(h). The word ``specific'' in the phrase 
``the accumulation of specific costs'' was also recommended for 
deletion.
    Response: Cost pools accumulate costs by elements of cost and if 
required to disclose their cost accounting practices in a disclosure 
statement, a contractor performing a CAS-covered contract is required 
to disclose if an element of cost is to be treated as a direct cost or 
an indirect cost and which elements of cost are included in each 
indirect cost pool.
    With the revised language change, made in response to the preceding 
comment made by the same agency, and the retention of the cited 
illustration, it should be clear that the Board does not expect the 
contracting parties to treat employee transfers as a change in cost 
accounting practice. This matter was also addressed in the SNPRM-I 
preamble comments (62 FR 37660, 7/14/97). Accordingly, the words of 
concern to the commenter were retained.
    Comment: A Federal agency recommended deletion of the word 
``measure'' from the proposed provision used to describe the 
``allocation measurement activity'' at 9903.302-1(c)(3) to avoid 
potential conflict with the cost ``measurement'' term found at 
9903.302-1(a). Some contractor representatives recommended similar 
changes.
    Response: The words ``measurement,'' ``measure'' and ``activity'' 
were deleted as suggested in 9903.302-1(c)(3) and where they were used 
in a similar manner in the illustrations proposed under 9903.302-3(c).
    Comment: At 9903.302-2(a)(3), the proposed coverage on functional 
transfers should not be limited to costs in indirect cost pools, and 
intra-segment transfers.
    Response: The proposed coverage was revised to address the 
commenter's concerns.
    Comment: A Federal agency recommended that the words ``home 
office'' be added to the exception provision in the last sentence 
proposed at 9903.302-2(b)(1), because functional transfers to or from 
intermediate home offices were excluded from the proposed coverage.
    Response: The recommended change was adopted.
    Comment: Some commenters objected to the proposed reference to each 
contract at 9903.302-2(c)(1) and recommended deletion of the proposed 
coverage.
    Response: The reference to each CAS-covered contract refers to the 
terms and conditions contained in each contract. The proposed coverage 
was retained.
    Comment: A Federal agency and some contractors commented that the 
proposed language at 9903.302-2(c)(2) referencing a noncompliant 
practice change was not clear.
    Response: The proposed coverage was revised to separately address 
compliant and noncompliant actions.
    Comment: Several commenters recommended a number of clarifying 
edits to the proposed language included at 9903.302-3(c)(4), (6), (7), 
(8), and (9).
    Response: Where deemed appropriate, the referenced illustrations 
were revised for clarity, and to reflect the use of consistent language 
in similar circumstances.
    Comment: Delete or revise the illustrations that mention 
``intermediate cost objectives'' as the intent of the purpose of the 
illustration may not be clearly understood.
    Response: The primary purpose of the illustrated changes was to 
clarify that a cost accounting practice change results if the costs of 
an ongoing function (which were accumulated in an intermediate cost 
objective established for that function) that are originally included 
in one cost pool are subsequently transferred to and included in a 
different cost pool. That concept can also be illustrated by stating if 
the costs of an ongoing function are or are not included in the same 
cost pool before and after a change is made. The illustrations at 
9903.302-3(c)(7) and (9), and at 9903.302-4(h) were therefore so 
revised. The references to intermediate cost objectives were deleted.
    Comment: A Federal agency suggested deletion of the comment that 
the change in cost accounting practice depicted in the proposed 
illustrations at 9903.302-3(c)(8)(i) and (9)(v) are subject to the 
acquired CAS-covered contract's contract price and cost adjustment 
provisions. They opined that incorporation in the proposed 
illustrations may cause potential confusion and disputes since similar 
statements were not included in all of

[[Page 45713]]

the proposed illustrations of changes in cost accounting practices.
    Response: All changes in cost accounting practice are subject to 
the applicable contract clause provisions governing changes in cost 
accounting practices. In the case of an acquired contract, the 
additional comment was incorporated to emphasize that an acquiring 
contractor must abide with the acquired CAS-covered contract's terms 
and conditions governing changes in cost accounting practices in the 
event any changes in cost accounting practices are made after the 
effective date of the acquisition. If the commenter's suggestion were 
adopted, an acquiring contractor might argue that the referenced 
contract price and cost adjustment provisions do not apply since they 
were subsequently deleted from the Board's proposed amendments. The 
proposed provisions were retained.
    Comment: A commenter recommended a number of clarifying edits to 
the proposed language included at 9903.302-4(h), (i), and (j).
    Response: Where deemed appropriate, the referenced illustrations 
were revised for clarity.
    Comment: Some commenters inquired if the use of a ``special 
allocation'' method (e.g., 9904.410-50(j)) is an initial adoption of a 
cost accounting practice or a change in cost accounting practice.
    Response: If a contractor's established cost accounting practices 
do not include the use of a special allocation methodology when 
estimating and accumulating costs for CAS-covered contracts, and 
subsequently the contractor decides to apply a special allocation 
methodology while performing ongoing CAS-covered contracts, the 
contractor would no longer be in compliance with the consistency 
requirements of CAS 9904.401 and 9905.501. However, under the contract 
clause terms of CAS-covered contracts, the contractor can make a 
voluntary change to its established cost accounting practices. If 
material, the resultant cost impact due to the change in cost 
accounting practice could result in contract price or cost adjustments, 
at no aggregate increased cost to the Government.

The Cost Impact Process

    Comment: One commenter suggested changes to the definition for 
``Increased cost to the Government due to a change in compliant cost 
accounting practices' included at 9903.403 on the basis that, as 
proposed, the definition incorrectly implies that increased costs exist 
only when no action is taken to preclude payment of increased costs.
    Response: The Board has revised the proposed language to clarify 
that increased costs resulting from a voluntary change in cost 
accounting practice represent the increase in cost to the Government 
that occurs after a change is made, before any actions are taken to 
preclude the payment of the resultant increased cost by the Government. 
After a voluntary change in cost accounting practice is made, increased 
cost to the Government occurs only when a greater amount of costs are 
accumulated and claimed as contract costs under existing flexibly 
priced contracts. For existing firm-fixed-price contracts, increased 
costs to the Government only occur if a lesser amount of cost is 
accumulated after the practice change is made, before the negotiated 
contract prices are adjusted downward to reflect the aggregate 
reduction in accumulated costs. If a downward adjustment is not made, 
the Government will be charged the resultant increased cost in the form 
of a higher fixed contract price that provided for the higher 
allocation of cost to the contract that would have resulted had there 
not been a change in cost accounting practice.
    Comment: A Federal agency requested that the Board clearly state in 
both the preamble and the rule which provisions represent mandates and 
which provisions are intended to be applied at the discretion of the 
cognizant Federal agency official.
    Response: The Board has used the word ``shall'' when referring to 
an action that is mandatory, and the terms ``may'' and ``should'' when 
referring to an action that is discretionary.
    Comment: A Federal agency requested that the Board provide more 
flexibility with regard to the adjustment of individual contract prices 
that exceed established materiality thresholds.
    Response: The Board has eliminated use of words that suggest 
absolute mandates such as ``required'', ``requirements'' and 
``necessary.'' These words have been replaced with terms that make it 
clear that the provisions included in the rule for adjusting individual 
contract prices should be followed only when the cognizant Federal 
agency official decides to resolve a cost impact action by modifying 
contract prices.
    Comment: A Federal agency requested that the Board add a provision 
at 9903.405-2 covering ``Notification of changes in cost accounting 
practices'' which would require that contractors notify the Government 
of the proposed effective and applicability dates of a change in cost 
accounting practice.
    Response: The Board adopted the suggested change. The addition of 
the ``effective date'' notification requirement will help clarify which 
contracts were proposed and/or negotiated after the effective date of 
the change in cost accounting practice and should therefore not be 
subject to contract price and/or cost adjustment.
    Comment: Many industry commenters requested that the Board 
eliminate the proposed requirement, at 9903.405-4(a), that some 
individual contract data be included in the General Dollar Magnitude 
(GDM) settlement proposal. They suggested that the contracting parties 
attempt to resolve the cost impact action based on the GDM aggregate 
estimate before requiring the submission of any individual contract 
data.
    Response: The Board rejects this suggestion.
    Under current Government procurement regulations governing the cost 
impact process, the required GDM estimate is used solely to determine 
whether or not the cost impact of a change in cost accounting practice 
is not material and, therefore, no detailed cost impact proposal will 
be required. If such an immateriality determination cannot be made, 
then the contractor must submit a detailed cost impact proposal for all 
existing covered contracts and subcontracts affected by the change in 
cost accounting practice or the estimating noncompliance. Originally, 
the procurement regulations required the submission of a GDM estimate 
by contract type and Federal agency, with no instruction as to what 
action the agencies should take based on the contractor's GDM estimate 
data. Furthermore, the GDM estimate is currently required to be 
submitted at the same time as the notification of the change in cost 
accounting practices, with a cost impact proposal to be submitted at a 
later date. Thus, it appears that the GDM estimate was never intended 
to serve as the basis for making contract price or cost adjustments to 
resolve a material cost impact action.
    Under the Board's proposal, the contracting parties can resolve a 
cost impact action based on a three step process. The cost impact 
resulting from a change in cost accounting practice can be resolved 
without the submission of any contract cost data if the change is 
obviously immaterial (9903.405-3(d) in the SNPRM-I), or if not 
obviously immaterial by the submission of a GDM Settlement Proposal or 
a detailed cost impact proposal.
    When not obviously immaterial, the cost impact of a practice change 
can be

[[Page 45714]]

resolved by the submission of a GDM estimate and some individual 
contract data, without having to resort to a detailed cost impact 
proposal. The GDM estimate and Contractor Settlement Proposal were 
previously proposed as two separate submission requirements in the 
ANPRM. Based on a public commenter's suggestions, the two submission 
requirements were proposed in the SNPRM-I as a combined ``GDM 
Settlement Proposal.'' The Board continues to believe that when 
material changes result in the amounts of accumulated contract costs, 
either in the aggregate or for individual contracts, due to a change in 
cost accounting practice, then the aggregate cost data included in the 
GDM estimate is insufficient for the cognizant Federal agency official 
to make an informed judgment on how to best resolve the cost impact. If 
no individual contract data were required at the time of the GDM 
estimate submission, the cognizant Federal agency official would need 
to obtain individual contract data in order to protect the interests of 
the Government, e.g., in order to: (1) evaluate the accuracy of the GDM 
estimate amounts by contract type; (2) determine what adjustments may 
be needed to resolve any resultant contract cost overrun and/or 
underrun conditions, and/or (3) ascertain if a detailed cost impact 
proposal should be requested.
    The Board believes that the proposed three step process included in 
this proposed rule provides the contracting parties with the best 
opportunity to resolve the cost impact action with a minimum of 
contract data. Under the GDM Settlement Proposal concept, a contractor 
is expected to make the initial decision as to the number of individual 
contracts, within each contract type, for which contract data is needed 
to settle the cost impact action. If the cognizant Federal agency 
official accepts the contractor's settlement proposal, no further 
contract data need be submitted. Of course, if agreement to resolve the 
cost impact action does not occur based on a contractor's proposed 
settlement approach, then the cognizant Federal agency official may 
still request data for some additional contracts or a detailed cost 
impact statement, if deemed necessary. The Board's objective is to 
permit the contracting parties to resolve the cost impact action 
without having to resort to the current process which requires the 
submission of detailed cost impact data for all contracts.
    The Board believes that the commenter's suggested approach would 
only serve to delay the proper resolution of the cost impact for CAS-
covered contracts. The suggestions were not adopted. However, the 
provision at 9903.405-3(f) was revised to emphasize that a GDM 
Settlement Proposal is not required if the cost impact of a change in 
cost accounting practice is determined to be obviously immaterial.
    Comment: One Federal agency recommended revising the provisions for 
the offset process included at 9903.405-5(b) to be ``general 
guidelines'' rather than ``rules.'' They stated that general guidelines 
should normally be followed, but the cognizant Federal agency official 
should be permitted to deviate from the guidelines, provided the 
application of the offset process results in adjustments that 
approximate, in the aggregate, the cost impact that would have resulted 
had individual contracts been adjusted.
    Response: Since all of the provisions promulgated by the CASB are 
in essence and in fact ``rules,'' the Board has deleted the reference 
to ``rules of offset'' from 9903.405-5(b). The Board believes that this 
proposal when considered in its totality, including the offset 
provisions, provides the cognizant Federal agency official with 
sufficient flexibility to resolve a cost impact action in a manner 
deemed most appropriate considering both individual circumstances and 
protection of the Government's interests. The provisions which the 
Board has included for use of the offset process are designed to insure 
that the process, whenever used, is applied consistently and in such a 
way that material cost impact amounts, both in the aggregate and for 
individual contracts, are appropriately calculated in the prescribed 
manner.
    Comment: One commenter suggested that the Board sanction the use of 
the final indirect expense rate settlement process rather than contract 
price adjustments as a method to resolve the cost impact action. The 
commenter expressed the opinion that contract adjustments should only 
be used as a final resort.
    Response: The Board's proposed rules provide significant 
flexibility with regard to the method used by the cognizant Federal 
agency official to resolve a cost impact action by inclusion of the 
phrase ``other suitable technique.'' However, the Board would caution 
the contracting parties with regard to use of any method which results 
in further inconsistency between the contract price amounts and 
accumulated contract costs due to the cost accounting practices used to 
estimate proposed costs and to accumulate costs during contract 
performance.
    Adjustment of indirect expense rates to settle a cost impact action 
can result in the adjustment of the wrong contracts for the impact of 
the change in cost accounting practices. This method also results in 
the establishment of final indirect expense rates that are not 
consistent with a contractor's established and disclosed cost 
accounting practices for allocating indirect costs to final cost 
objectives. Adjusting indirect expense rates to resolve the cost impact 
would in most cases require an adjustment to the indirect expense pool 
that exceeds the amount of the actual cost impact adjustment amount in 
order to ensure that the aggregate cost impact amount calculated for 
all affected CAS-covered contracts is recovered on the open flexibly-
priced contracts being performed during the particular cost accounting 
period to which the ``adjusted'' rates apply. Use of this approach 
distorts the accumulation of costs used for contract cost and pricing 
purposes, in that the resultant accumulated costs recognized for CAS-
covered contracts will be greater or less than the costs that would 
have been accumulated as actual ``booked'' costs in accordance with a 
contractor's established cost accounting practices had the indirect 
cost pools, and the indirect cost rates used to allocate such costs to 
final cost objectives, not been adjusted to reflect the cost impact of 
a change in cost accounting practice. Such pool adjustments may further 
distort the difference between the costs that would have originally 
been allocated to the affected CAS-covered contracts as actual 
``booked'' costs and the costs that will be allocated to those 
contracts for contract costing purposes based on the adjusted final 
rates if multiple cost accounting periods are involved and/or if the 
Government's percent of participation in the allocation base is not 
consistent. The Board therefore disagrees with the position presented 
by the commenter. Adjustment of contract prices is the method which 
most consistently reflects the requirements of both the applicable 
contract clause and CAS 9904.401 or 9905.501, as applicable, regarding 
consistency in the cost accounting practices used to both estimate and 
accumulate costs on CAS-covered contracts. The Board finds 
inappropriate the commenter's suggestion that the Board endorse a 
position which holds that such adjustments should only be used as a 
last resort. To the contrary, the Board believes that any method that 
further distorts the Board's consistency requirements, such as the 
adjustment of

[[Page 45715]]

indirect expense rates, should be a method that is only used as a last 
resort. If the cognizant Federal agency official determines that 
adjustment of contract prices is not warranted to resolve the cost 
impact action, the Board is of the view that a transfer of funds 
between the Government and a contractor is the most appropriate ``other 
suitable technique'' that can be used to settle the action.
    Comment: Federal agency and industry commenters expressed concerns 
regarding the SNPRM-I prefatory comments stating that:

    The Board is of the opinion that modification of contract and 
subcontract prices * * * 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 * * *

    The Federal agency advocated that maximum flexibility be provided 
for the resolution of the cost impact resulting from a change in cost 
accounting practice. The contractor commenters recommended that no 
``preference'' be stated in the final rule.
    Response: The Board's contract clauses included in individual CAS-
covered contracts require contractors to consistently apply their 
established cost accounting practices when accumulating and reporting 
the costs of performing CAS-covered contracts. However, the CAS 
contract clause provisions also permit a contractor to make a voluntary 
change to its established cost accounting practices, provided the cost 
impact resulting from the change is addressed. For voluntary changes, 
the contractor agrees to contract price and/or cost adjustments which 
are limited to a no increased cost to the Government provision. If the 
cognizant Federal agency official determines that the practice change 
is desirable and not detrimental to the Government, the contract prices 
can be adjusted to reflect the aggregate change in the amount of 
accumulated contract costs that is expected to result due to the 
practice change.
    After contract price adjustment and/or actions taken to preclude 
the payment of increased costs, the cost-based contract prices (FFP or 
cost ceiling) are once again comparable with the increased or decreased 
contract costs that will be accumulated consistently in accordance with 
the changed cost accounting practices, after a voluntary practice 
change is made. Such actions taken to resolve the cost impact of a 
practice change also resolve any resultant potential contract cost 
overrun or cost underrun conditions that are attributable to the 
practice change. Thus, contract price and cost adjustments are 
generally the required, not preferred, method for resolving the cost 
impact resulting from a change in cost accounting practice.
    In the SNPRM-I, the Board concluded that ``* * * the decision on 
how to best achieve an equitable solution, in the aggregate, remains a 
cognizant Federal agency official responsibility.'' The Board's 
comments were intended to acknowledge that there may be circumstances 
where the required contract price and/or cost adjustments need not be 
made. For example, this might be the case where the cost impact, in the 
aggregate, is considered material in and of itself, but the cognizant 
Federal agency determines contract price and/or cost adjustments are 
not warranted because contract performance would not be jeopardized (no 
significant cost overrun condition resulted) and the increase or 
decrease in expected cost accumulations would not distort or adversely 
impair the usefulness of the contractor's reported contract cost 
information (actual costs and estimated costs to complete) that is 
included in contract status reports. However, to achieve equity, some 
consideration for the cost impact should be obtained or granted. In 
such cases, another suitable technique may be used to resolve the cost 
impact, e.g., a monetary exchange between the contracting parties. This 
alternate approach would also produce administrative cost savings since 
the contracting parties would not have to process contract 
modifications or take further actions to preclude the payment of 
increased costs on individual contracts.
    On the other hand, in a case where the cost impact, is considered 
material and, by not processing contract price and/or cost adjustments, 
the Government would pay increased costs (as defined by the Board), the 
contractor's ability to perform the contract is adversely affected, 
and/or the cost data included in the contractor's status reports would 
not be meaningful, then the required contract price and/or cost 
adjustments should be processed.
    To address the commenters' expressed concerns, the Board is 
proposing additional provisions at 9903.405-5(e) to emphasize that the 
cognizant Federal agency official does have the flexibility to resolve 
a cost impact due to a change made to a compliant cost accounting 
practice by use of alternative actions, i.e., other than contract price 
adjustment or actions taken to preclude the payment of increased costs. 
Cautionary provisions pertaining to the use of such alternative actions 
were also included.
    Comment: A Federal agency recommended deleting the phrase ``and 
negotiate'' from the description of a cost estimating noncompliance at 
9903.406-1(a). They explained that an estimating noncompliance results 
when the contractor estimates costs using a noncompliant accounting 
practice. They further stated that under the proposed provision, an 
estimating noncompliance would exist only if the noncompliance was used 
for both estimating and negotiating the contract. Such a definition, 
they believe, will result in significant disputes as to whether a 
contractor's final price negotiation included or excluded the impact of 
the change in cost accounting practice.
    Response: Only those contracts that had their contract price based 
on a noncompliant practice can be included in the universe of contracts 
subject to adjustment as a result of an estimating noncompliance. 
Therefore, it must be demonstrated that not only did the contractor 
estimate costs using a noncompliant practice for a potential CAS-
covered contract, but also that the contract price was established 
using data that was based on the use of a noncompliant practice. There 
may be situations in which a contractor estimates costs using a 
noncompliant practice, but either the Government rejects the use of 
that practice to negotiate the contract amount or the contractor 
voluntarily changes to a compliant practice prior to the negotiation of 
the contract price. In such situations, the negotiated contract price 
or cost ceiling would not have been based on the use of a noncompliant 
cost accounting practice. Hence, it would not be appropriate to include 
these contracts in a cost impact proposal for an estimating 
noncompliance. For those contracts that were estimated using a 
noncompliant practice and that noncompliant practice was used to 
determine the contract price, the contracting parties must determine 
the impact on those contracts as a result of the noncompliant practice. 
In order to clarify the Board's position on this matter, the Board has 
revised the proposed language at 9903.406-1(a).
    Comment: One commenter recommended that, in order to avoid 
duplication, the provision regarding situations where a noncompliant 
practice is used for both cost estimating and cost accumulation 
purposes be moved to 9903.406-1 rather than including this provision at 
both 9903.406-3(g) and 9903.406-4(b).

[[Page 45716]]

    Response: The Board agrees and has adopted this recommendation 
(9903.406-1(b)).
    Comment: One Federal agency recommended that the proposed table at 
9903.406-3(d) address a cost impact due to a noncompliance in terms of 
the change in allocation that resulted from using a noncompliant cost 
accounting practice rather than in terms of the change in allocation 
that would have resulted had a compliant accounting practice been used. 
Through discussions with contracting officers, they determined that 
most contracting officers address the cost impact in terms of the 
change in allocation that resulted from using a noncompliant practice.
    Response: The Board adopted this recommendation and has revised the 
table at 9903.406-3(d) accordingly.
    Comment: One commenter recommended adding the concept of computing 
interest based on the midpoint of the period for a cost accumulation 
noncompliance described at 9903.406-4(e) to cost estimating 
noncompliances at 9903.406-3.
    Response: Upon further review of this provision, the Board has 
concluded that inclusion of a method to be used to calculate the amount 
of interest due to increased costs paid as a result of a noncompliant 
practice is overly instructional and prescriptive in nature and 
therefore should not be included in this rule. The Board therefore has 
deleted the prescribed method of computing interest from the rule. 
Federal agencies should establish reasonable methods for determining 
the amount of interest to be recovered based on increased costs paid 
due to a noncompliant practice.
    Comment: Several commenters recommended the deletion of the term 
``technical'' from the provision at 9903.406-5 describing immaterial 
noncompliances. A Federal agency recommended deletion of the proposed 
provision at 9903.406-5(a)(2) which provides that a contractor is not 
excused from the obligation to comply with the applicable Standards or 
rules and regulations involved when an immaterial noncompliance exists. 
An industry commenter further requested deletion of the proposed 
requirement at 9903.406-5 which requires a contractor to notify the 
cognizant Federal agency official within 60 days of when the technical 
noncompliance becomes material.
    Response: The Board has adopted all of the suggested revisions. The 
Board agrees that a cost accounting practice is either compliant with 
applicable Cost Accounting Standards or it is not. The term ``technical 
noncompliance'' has acquired an accepted usage by various groups that 
deal with CAS administration matters in referring to noncompliant 
practices that do not result in material increased costs. However, in 
order to avoid any confusion by parties not familiar with this 
terminology, the Board has replaced the term ``technical'' with the 
term ``immaterial'' in this proposed rule.
    Since it should be apparent that, absent the granting of a waiver 
or exemption, contractors are never ``excused'' from the obligation to 
comply with applicable CAS Board rules and regulations, the Board 
proposes to delete the SNPRM-I provision at 9903.406-5(a)(2). The 
provision retained within 9903.406-5, which allows the cognizant 
Federal agency official to recover any subsequent increased costs plus 
applicable interest that may result from the currently immaterial 
noncompliance, provides adequate protection to the Government in these 
situations.
    Comment: A Federal agency recommended deleting the specific reason 
used by the contractor in the illustration at 9903.407-1(a)(1) as 
justification for requesting a retroactive applicability date for the 
change. They explained that inclusion of a specific reason could be 
interpreted to mean that this specific reason should be determined 
appropriate justification for approval of a retroactive applicability 
date in all cases.
    Response: The Board has deleted the specific reason included in the 
illustration.

Educational Institutions

    Comment: A Federal agency recommended that the last sentence 
proposed at 9903.401-2(e) be revised to reflect a one time notification 
requirement.
    Response: The suggested language was adopted.

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 document. All comments must be in writing and submitted timely to 
the address indicated in the ADDRESSES section of this document.
    The Board is considering the establishment of certain new 
``exemption'' and ``desirable changes'' provisions that it believes 
would facilitate the overall process governing compliant changes in 
cost accounting practices. Therefore, the Board invites interested 
parties to specifically comment on the following amendments being 
proposed today:

--Proposed 9903.201-6, Findings--Voluntary changes exempt from contract 
price and cost adjustment, which proposes to exempt certain voluntary 
changes to a cost accounting practice from contract price and cost 
adjustment when specified criteria are met. 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.
--Proposed 9903.201-7, Findings--Desirable changes, which proposes to 
establish criteria for determining when a voluntary change to a cost 
accounting practice, not otherwise exempt from contract price and cost 
adjustment under 9903.201-6, can be deemed to be desirable and not 
detrimental to the Government. Such determinations would permit the 
equitable adjustment of existing CAS-covered contracts that are 
materially affected by aggregate ``increased costs'' resulting from a 
voluntary change made to a cost accounting practice.
--Proposed 9903.201-7(c)(2) which includes a proposal to establish 
alternative processes for resolving the cost impact associated with a 
``desirable'' change.

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 immediately 
following 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,

[[Page 45717]]

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 (August 1999)

    (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 cost accounting practices disclosed for 
this contract shall be the same cost accounting 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(a)(2) of the Internal Revenue Code of 
1986 (26 U.S.C. 6621(a)(2)) for such period, from the time the 
payment by the United States was made to the time the increased cost 
payment is recovered by the United States. 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 applicable 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 an entity 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 practices, and to follow 
disclosed and established cost accounting practices consistently.

Cost Accounting Standards--Modified Coverage (August 1999)

    (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 cost accounting practices 
disclosed for this contract shall be the same cost accounting 
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

[[Page 45718]]

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(a)(2) of the Internal Revenue Code of 
1986 (26 U.S.C. 6621(a)(2)) for such period, from the time the 
payment by the United States was made to the time the increased cost 
payment is recovered by the United States. 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 applicable 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 an entity 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  Findings--Voluntary changes exempt from contract price and 
cost adjustment.

    (a) Prior to making any contract price or cost adjustment under the 
provisions of paragraph (a)(4)(ii) 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 voluntary change in cost 
accounting practice can or can not be exempted from contract price and 
cost adjustment under the exemption criteria specified in this 
subsection. The cognizant Federal agency official may, however, make a 
finding that the voluntary change in cost accounting should not be 
exempted from contract price and cost adjustment under the exemption 
criteria specified in this subsection when such action would otherwise 
be detrimental to the Government's interests.
    (b) The determination as to whether or not a voluntary change in 
cost accounting practice should be exempted from contract price and 
cost adjustment requirements specified in CAS-covered contracts and 
subcontracts shall be made on a case-by-case basis in accordance with 
the exemption criteria specified in paragraph (c) or (d) of this 
subsection.
    (c) Exemption For Voluntary Cost Accounting Practice Changes 
Associated With Contractor Restructuring Activities That Are Made By 
Management To Reduce Personnel or Facilities. Changes in the methods 
and techniques used for the ``allocation of cost to cost objectives,'' 
including the transfer of functions from an existing cost pool, cost 
pool split-outs or cost pool combinations, that are associated with 
restructuring activities (see 9904.406-61(b)) which are undertaken to 
improve future operations and reduce overall cost levels in future 
periods through work force reductions and/or physical realignment or 
reduction of facilities, including plant relocations, shall not be 
subject to the contract price or cost adjustment requirements of part 
9903, the cognizant Federal agency official determines, in writing, 
that:
    (1) The voluntary change in cost accounting practice is being made 
concurrently with planned restructuring activities and would not be 
made but for the restructuring actions being taken.
    (2) Future ``cost savings'' to the Government (i.e., the 
accumulation of less contract costs), in the aggregate, for existing 
flexibly priced CAS-covered contracts and anticipated and reasonably 
predictable future CAS-covered contracts, are expected to result from 
the planned restructuring activities.
    (3) The ``cost savings'' calculation(s) represented the difference 
between:
    (i) The total amount of costs that would be accumulated for 
existing flexibly priced CAS-covered contracts

[[Page 45719]]

and reasonably predictable future CAS-covered contracts, in accordance 
with the contractor's established cost accounting practices, at the 
estimated operating cost levels that would continue if the planned 
restructuring activities were not made, and
    (ii) The total amount of costs that would be accumulated for such 
CAS-covered contracts, in accordance with the contractor's new changed 
cost accounting practices, at the estimated new cost levels that would 
result if the planned restructuring activities were made.
    (d) An agency ``cost savings'' determination, made in accordance 
with the agency's promulgated regulations, resulting in the approval of 
proposed contractor restructuring activities may be used in lieu of the 
cost savings determinations required under paragraph (c) of this 
subsection.
    (e) When a determination is made to grant an exemption, the 
cognizant Federal agency official shall notify the contractor that the 
voluntary change(s) to established cost accounting practices required 
to implement the planned restructuring activities will be exempt from 
the contract price and cost adjustment provisions contained in existing 
CAS-covered contracts that are affected by the changes.
    (f) When the cognizant Federal agency official determines that a 
voluntary change to the contractor's cost accounting practices does not 
meet the exemption criteria specified in this subsection or is 
otherwise determined detrimental to the Government's interests, the 
cognizant Federal agency official shall inform the contractor of the 
determination and initiate the cost impact process in accordance with 
9903.405-3 or otherwise proceed to resolve the cost impact pursuant to 
9903.201-7(c)(2), if applicable. The contractor may request a desirable 
change determination in accordance with 9903.201-7 and subpart 9903.4 
prior to the submission of a requested cost impact submission.
    (g) If a voluntary change in cost accounting practice is made for 
any reason, even if the voluntary change is exempted from contract 
price and cost adjustment, the resultant changed cost accounting 
practices 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.
    4. Section 9903.201-7 is proposed to be revised to read as follows:


9903.201-7  Findings--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 voluntary change in cost 
accounting practice is desirable, as defined at 9903.403, i.e., 
desirable and not detrimental to the interests of the Government, and, 
if the voluntary change in cost accounting practice is associated with 
contractor restructuring activities, a finding that the change in cost 
accounting practice should not be exempted from contract price or cost 
adjustment process under the provisions of 9903.201-6(a).
    (b) The determination as to whether or not a voluntary 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. The cognizant 
Federal agency official may, however, determine that a change in cost 
accounting practice is not desirable under the criteria specified in 
this subsection when such action would otherwise be detrimental to the 
Government's interests. Normally, a desirable change determination is 
only necessary if a voluntary change results in aggregate increased 
costs to the Government, for existing CAS-covered contracts, and the 
cognizant Federal agency official contemplates making potential 
contract price adjustments that would increase, in the aggregate, the 
existing contract prices that the Government would be obligated to pay. 
Pending receipt of a written notification that the cognizant Federal 
agency official has determined that a voluntary change in cost 
accounting practice will or will not be treated as desirable and not 
detrimental to the Government, the change shall be considered to be a 
voluntary change for which the Government will pay no increased costs, 
in the aggregate.
    (c) A voluntary change in cost accounting practice shall be deemed 
to be desirable and not detrimental to the interests of the Government 
if the cognizant Federal agency official determines that:
    (1) For a Cost Accounting Standard with which the contractor has 
complied, the change is necessary in order for the contractor to remain 
in compliance with that Standard.
    (2) Cost savings to the Government, in the aggregate, will occur 
under existing flexibly priced and reasonably predictable future CAS-
covered contracts and subcontracts as a result of management changes, 
and associated cost accounting practice changes where there is a 
reasonable expectation that more efficient and economical operations 
will result. In such cases, the contracting officer may proceed to 
equitably resolve the cost impact of the practice change on all 
existing individual CAS-covered contracts (i.e., shifts in accumulated 
contract costs attributable to the practice change) by obtaining a 
contractor cost impact proposal and negotiating equitable contract 
price and/or cost adjustments pursuant to 9903.4. Alternatively, the 
contracting officer may otherwise resolve the matter based on the 
contractor's previously submitted contract cost accumulation data that 
was included in the contractor's written request for a desirable change 
determination (see 9903.405-2(e)). In that case, the contracting 
officer may forgo the submission of a cost impact proposal and related 
adjustments of individual contract prices and/or cost allowances, 
provided a determination is made that an alternate resolution 
adequately protects the Government's interests.
    (3) Circumstances, other than those listed in paragraph (c)(1) and 
(c)(2) of this subsection, included as justification in the 
contractor's written request for a desirable change determination, 
which clearly demonstrate that the change in cost accounting practice 
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 cost impact that a proposed practice change 
will have on a contractor's or subcontractor's current CAS-covered 
contracts. A voluntary change in cost accounting practice may be 
determined to be desirable and not detrimental to the Government's 
interest even though existing contract prices and/or cost allowances 
may increase. However, the amount of increased costs recognized by the 
Government when making equitable adjustments under paragraph (c)(2) of 
this subsection will be limited to the estimated amount of cost 
accumulation reductions that are expected to occur under reasonably 
predictable future CAS-covered contracts because of the practice change 
(See illustration at 9903.407-1(h)). To what degree such expected cost 
accumulation reductions for forecasted CAS-covered contracts may be 
considered requires case-by-case determinations. Such consideration 
should be based on data that fully supports such a condition and 
discussions held with the contractor, the cognizant auditor and 
affected Federal agency officials. Cognizant Federal agency official 
determinations of expected future contract cost

[[Page 45720]]

reductions shall not be subject to the disputes provisions of CAS-
covered contracts.
    5. Section 9903.201-8 and is proposed to be added to read as 
follows:


9903.201-8  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

    6. 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 and 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. 
Costs allocated to specific intermediate cost objectives are 
accumulated in specific cost pools that include overhead pools, general 
and administrative expense (G&A) pools, and service center or other 
expense pools. These accumulated costs are 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.
* * * * *
    7. 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 accumulate 
and distribute costs to intermediate and final cost objectives. The 
allocation of cost to cost objectives includes both the direct and 
indirect allocation of costs.
    (1) Examples of cost accounting practices involving the allocation 
of cost to cost objectives are the accounting methods and techniques 
used to:
    (i) Accumulate cost for cost objectives and cost pools,
    (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

[[Page 45721]]

    (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 base for a cost pool (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 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.
    8. 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 cost pool to another cost 
pool, segment or home office.
    (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, segment, or 
home office 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 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. If a cost accounting practice previously used to 
estimate, accumulate or report costs of the acquired covered 
contract(s) before or after the effective date of the merger or 
acquisition is found to be noncompliant, the cost impact of the 
noncompliance shall be resolved in accordance with the requirements of 
part 9903.
    (3) This paragraph (c) applies equally to CAS-covered subcontracts 
acquired by a contractor or subcontractor.
    9. Section 9903.302-3 is proposed to be amended by adding a new 
introductory paragraph, revising introductory paragraphs (a), (b) and 
(c), revising the illustration at (c)(3) and by adding new 
illustrations (c)(4) through (c)(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.
* * * * *

------------------------------------------------------------------------
              Description                      Accounting treatment
------------------------------------------------------------------------
 
*                  *                  *                  *
                  *                  *                  *
(3) The contractor changes to a          (3)(i) Before change: The
 different allocation base.               contractor used a direct
                                          manufacturing labor hours base
                                          to allocate costs accumulated
                                          in the manufacturing overhead
                                          pool to final cost objectives.
                                         (ii) After change: The
                                          contractor uses a direct
                                          manufacturing labor dollars
                                          base to allocate costs
                                          accumulated in the
                                          manufacturing overhead pool to
                                          final cost objectives.

[[Page 45722]]

 
                                         (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 .
(4) A Segment combines the cost pools    (4)(i) Before change: The
 of two similar ongoing functions.        Segment established separate
(i) The ongoing assembly operations at    assembly overhead pools to
 Plants A and B are merged.               accumulate the indirect 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
                                          single assembly direct labor
                                          dollars allocation base that
                                          is generated by the two plant
                                          locations.
                                         (iii) The methods and
                                          techniques used to accumulate
                                          cost changed because the
                                          indirect cost pools selected
                                          by the segment to accumulate
                                          the cost of specific
                                          activities changed from two
                                          pools to one pool. 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 originally
                                          accumulated separately for
                                          Plants A and B is now
                                          accumulated in one combined
                                          base .
(5) Assume the same circumstances as in  (5)(i) Before change: Segments
 (c)(4) of this illustration, except      A and B each established an
 that Plants A and B are separate         assembly overhead pool to
 Segments A and B that are combined as    accumulate the indirect costs
 Segment C.                               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       (6)(i) Before change: The
 ongoing indirect costs of the            indirect costs applicable to
 manufacturing and assembly operations    the manufacturing and assembly
 are accumulated and allocated to final   functions were accumulated in
 cost objectives by a segment.            a plant-wide indirect cost
                                          pool and allocated to final
                                          cost objectives by use of a
                                          direct labor dollars base
                                          comprised of manufacturing and
                                          assembly direct labor dollars.
                                          During each cost accounting
                                          period, a single plant-wide
                                          indirect cost rate was used to
                                          allocate the accumulated
                                          indirect costs to individual
                                          final cost objectives.
                                         (ii) After change: The ongoing
                                          indirect costs of the
                                          manufacturing and assembly
                                          functions are split-out and
                                          accumulated separately in a
                                          manufacturing cost pool and an
                                          assembly cost pool. The costs
                                          accumulated in each pool 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 methods and
                                          techniques used to accumulate
                                          costs have changed because the
                                          indirect cost pools selected
                                          to accumulate the costs of
                                          specific functions have
                                          changed from one pool to two
                                          pools. The composition of the
                                          pools changed because the two
                                          specific functions originally
                                          included in one pool are now
                                          split-out and included in two
                                          pools. The composition of the
                                          allocation base changed
                                          because the selected
                                          allocation base previously
                                          accumulated in one plant-wide
                                          base is now accumulated
                                          separately, in two allocation
                                          bases, for the manufacturing
                                          and assembly operations.
(7) The contractor transfers the         (7)(i) Before change: The cost
 incoming materials inspection function.  of performing the incoming
(i) Incoming materials are inspected in   inspection function was
 the same manner before and after the     accumulated in the Segment's
 change.                                  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.

[[Page 45723]]

 
                                         (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 incoming
                                          inspection function is now
                                          included in a different pool,
                                          i.e., the composition of each
                                          pool has changed. 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 for the incoming
                                          inspection function.
(8) A contractor establishes a new       (8) As of the effective date of
 product line by acquiring another        acquisition, the contractor
 company. Both entities are performing    requires the new segment to
 CAS-covered contracts.                   accumulate and report the
(i) The acquired company will be          continuing costs of the
 treated as a new segment. The acquired   acquired ongoing functions
 segment will complete the CAS-covered    differently, e.g., the
 contracts that were novated from the     acquired company's single
 prior company to the contractor. It      overhead pool is split into
 will not perform any work associated     two new pools. The pool split-
 with the contractor's existing lines     out resulted in changes to the
 of business.                             acquired segment's previously
                                          established cost accounting
                                          practices.
                                         (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    (9)(i) As of the effective date
 product line of Segment A by acquiring   of acquisition, Segment A
 another company. Both entities are       merges the continuing
 performing CAS-covered contracts.        functions of the acquired
(i) Segment A will operate and manage     company with Segment A's
 the acquired company's ongoing           similar functions and merges
 operations                               the indirect costs of the
(ii) Segment A will complete the          acquired company's ongoing
 acquired CAS-covered contracts that      functions into Segment A's
 were novated from the prior company to   indirect cost pools, in
 the contractor.                          accordance with Segment A's
                                          established cost accounting
                                          practices. The acquired
                                          company's 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 changed because the
                                          indirect cost pools selected
                                          for the accumulation of costs
                                          has changed from two pools to
                                          one pool. The composition of
                                          Segment A's pool changed
                                          because the specific functions
                                          originally included in the two
                                          indirect cost pools are now
                                          included in the one pool. The
                                          composition of the allocation
                                          base changed because the
                                          selected allocation base
                                          originally accumulated
                                          separately for Segment A and
                                          the acquired company is now
                                          accumulated in one combined
                                          allocation base.
                                         (iv) The cost accounting
                                          practice changes are subject
                                          to the contract price and cost
                                          adjustment provisions of the
                                          existing and acquired CAS-
                                          covered contracts.
------------------------------------------------------------------------

    10. 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 
events 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.
*                  *                  *                  *          
        *                  *                  *

------------------------------------------------------------------------
              Description                      Accounting treatment
------------------------------------------------------------------------
 
*                  *                  *                  *
                  *                  *                  *
(h) The contractor transfers an          (h)(1) Before the transfer, the
 inspection department employee from      employee's salary was
 Plant A to Plant B.                      accumulated as indirect
                                          inspection labor and was
                                          included in Plant A's overhead
                                          pool.
                                         (2) After the transfer, the
                                          employee's salary is similarly
                                          accumulated 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 overhead pools.
                                         (3) Since the cost of the
                                          ongoing inspection functions
                                          at Plants A and B continue to
                                          be accumulated within the same
                                          indirect cost pools 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.

[[Page 45724]]

 
(i) A contractor with a corporate home   (i)(1) After change: The costs
 office creates a new segment for the     of the contractor's home
 purpose of entering a new line of        office continue to be
 business. The new segment will not       accumulated and allocated to
 perform any work associated with the     segments in accordance with
 contractor's existing CAS-covered        the contractor's established
 contracts.                               cost accounting practices. The
                                          new segment 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 illustration, except that:
    (1) The contractor acquired a new    (j)(1) For the reasons stated
     segment from another company that    in (i) of this illustration,
     is performing CAS-covered            the described home office
     contracts..                          change is not a cost
                                          accounting practice change.
    (2) The acquired segment will        (2) At the segment level, the
     continue to estimate, accumulate     first time incurrence of the
     and report costs in accordance       acquiring contractor's home
     with the original company's          office cost allocation is an
     compliant and previously disclosed   initial adoption of a cost
     cost accounting practices for that   accounting practice (see
     segment. A new Disclosure            exception at 9903.302-2(b)(1).
     Statement is filed to that effect.   Since the contractor adopted
     Also disclosed is the contractor's   the acquired segment's
     home office cost allocation to the   previously established cost
     segment.                             accounting practices, no
                                          change in established cost
                                          accounting practices occurred
                                          for the acquired CAS-covered
                                          contracts.
------------------------------------------------------------------------

    11. 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 or cost 
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 the payment by the United 
States was made to the time the increased cost payment is recovered by 
the United States.
    12. A new subpart 9903.4 is proposed to be added to read as 
follows:

Subpart 9903.4--Contractor Cost Accounting Practice Changes and 
Noncompliances

9903.401  Applicability of subpart.
9903.401-1  CAS-covered contracts and subcontracts.
9903.401-2 Educational institutions.
9903.402  Purpose.
9903.402-1  Changes in cost accounting practice.
9903.402-2  Failure to comply (noncompliances) with an applicable 
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  Immaterial 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 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

[[Page 45725]]

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 contracts 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 
subpart 9903.4 requirements 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 the first 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 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 9903.201-7 and is therefore not subject to the 
voluntary change--no increased cost prohibition 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.
    Immaterial noncompliance means a noncompliant cost accounting 
practice

[[Page 45726]]

that does not currently result in material increased costs to the 
Government.
    Increased costs due to a cost accumulation noncompliance means the 
increase in cost to the Government that results 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 due to a cost estimating noncompliance means the 
increased costs to the Government 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 due to a voluntary change in cost accounting 
practice means the increase in cost to the Government that occurs:
    (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 
practice, before any 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, before any contract price adjustment is made to 
reflect the contractor's lesser allocation of cost to the contract.
    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 
contractor is required to make in order to comply with applicable 
Standards, modifications or interpretations thereto, that subsequently 
become applicable to an existing CAS-covered contract due to the 
receipt of another CAS-covered contract or subcontract.
    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 
contractor cost impact submissions (9903.405-4), and not adjust 
contracts, if the cognizant Federal agency official determines that the 
amounts involved are 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 
9903.201-7 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 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. Such notification shall include the proposed effective and 
applicability dates. 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

[[Page 45727]]

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 providing notification of a voluntary change, the 
contractor shall provide sufficient information to support the 
cognizant Federal agency official's determination that the planned 
voluntary change should or should not be exempted from contract price 
and cost adjustment (9903.201-6). The contractor shall state if the 
cost accounting practice change is or is not associated with 
restructuring activities; and if it is, the contractor shall:
    (1) Submit a comprehensive description of the planned restructuring 
activities.
    (2) Demonstrate, in summary fashion, to what extent the 
contractor's total operating cost levels are expected to decrease (or 
increase) as a result of the planned restructuring activities.
    (3) Demonstrate that changes to the contractor's established cost 
accounting practices are associated with the planned restructuring 
activities and the resultant practice changes would not be made but for 
the management actions being taken.
    (4) Demonstrate that aggregate cost accumulations for existing CAS-
covered contracts and reasonably predictable future CAS-covered 
contracts, by contract types, will decrease, increase or remain the 
same after the planned restructuring activities are implemented. The 
required cost comparison calculation methodology is summarized as 
follows:

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

    (5) In lieu of the methodology in paragraph (d)(4) of this section, 
the contractor may refer the cognizant Federal agency official to its 
``cost savings'' proposal otherwise submitted in accordance with 
applicable agency regulations governing restructuring activities.
    (e) 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 
(9903.201-7). The contractor shall state if the cost accounting 
practice change is or is not associated with planned management 
changes; and if it is, the contractor shall:
    (1) Submit a comprehensive description of the planned management 
changes.
    (2) Demonstrate, in summary fashion, to what extent the 
contractor's total operating cost levels are expected to decrease (or 
increase) as a result of the planned management changes.
    (3) Demonstrate that changes to the contractor's established cost 
accounting practices are associated with the planned management changes 
and the resultant practice changes would not be made but for the 
management actions being taken.
    (4) Demonstrate that aggregate cost accumulations for existing CAS-
covered contracts and reasonably predictable future CAS-covered 
contracts, by contract type, will decrease, increase or remain the same 
after the planned management changes are implemented. The required cost 
comparison calculation methodology is summarized as fellows:

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

    (f) 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 (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) A voluntary change that is or is not exempt from contract price 
and cost adjustment,
    (3) Desirable and not detrimental to the interests of the 
Government, and/or
    (4) 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

[[Page 45728]]

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) Voluntary change exemption determinations. When a contractor 
provides notification of a planned voluntary change and submits the 
data required by 9903.405-2, the cognizant Federal agency official 
should, in accordance with 9903.201-6, determine if the voluntary 
change can be exempted from contract price and cost adjustment, and 
notify the contractor of the determination made. Notification should be 
made promptly after the change is determined to be adequate and 
compliant.
    (c) 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 9903.201-7, 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, or initiate actions required to otherwise resolve 
the matter (see 9903.201-7(c)(2)). The notification shall also include 
a statement indicating that the potential modification of CAS-covered 
contracts are subject to the availability of funds.
    (d) 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.
    (e) 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(f)(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.
    (f) Request for GDM Settlement Proposal. When the cost impact of a 
change in cost accounting practice is not determined to be obviously 
immaterial, the cognizant Federal agency official will request a GDM 
Settlement Proposal, as described in 9904.405-4(a), after the 
determination of adequacy and compliance has been made. 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 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 contract 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:

BILLING CODE 3110-01-U

[[Page 45729]]

[GRAPHIC] [TIFF OMITTED] TP20AU99.001



[[Page 45730]]

[GRAPHIC] [TIFF OMITTED] TP20AU99.002


BILLING CODE 3110-01-C
    (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 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 cognizant Federal agency official determines that the 
cost 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 cost impact either in the aggregate by contract type or on 
individual contracts is determined to be material, the procedures in 
9903.405-5, Negotiation and Resolution of the Cost Impact, should be 
followed.
    (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 will be requested by the cognizant Federal agency official 
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 practice. 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

[[Page 45731]]

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 the formal written request for a detailed cost impact 
proposal.
    (3) A detailed cost impact proposal will normally include the 
following:
    (i) Cost estimates-to-complete based on the old (established) and 
new (changed) cost accounting practice and the resultant cost impact, 
grouped by contract type, for each CAS-covered contract and subcontract 
exceeding the specified amount.
    (ii) Aggregate cost estimates to complete based on the old and new 
cost accounting practice and the aggregate cost impacts, by contract 
type, for ``all other'' CAS-covered contracts and subcontracts that are 
below the specified amount. The ``all other contract'' amounts are the 
difference between the aggregate amounts by contract type and the net 
sum totals of the impact of the submitted individual contracts by 
contract type.
    (iii) Aggregate cost estimates to complete based on the old and new 
cost accounting practice and the aggregate cost impacts, by contract 
type, for all CAS-covered contracts and subcontracts that are affected 
by the change in cost accounting practice.
    (4) 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.
    (5) 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 impact 
increases with cost impact decreases may be used to reduce the number 
of individual contract price or cost adjustments or preclusion of 
increased cost actions required as a result of a change in cost 
accounting practice. In applying this process, the following provisions 
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 for 
individual contract price adjustments (9903.405-5(c)(1)). 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 to determine:
    (i) If the aggregate impact within the same contract exceeds the 
individual contract's materiality threshold;
    (ii) On an overall basis, 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 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. The determination to require or not to require 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 
materiality thresholds, as used in this paragraph, are the amounts 
below which no adjustments are required.
    (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

[[Page 45732]]

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 made to:
    (i) Maintain consistency between the negotiated contract costs and 
the costs to be allocated to the contract using the new practice, while 
at the same time reducing potential contract cost overrun and underrun 
conditions resulting from the change in cost accounting practices;
    (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) If the resolution of the cost impact action will be 
accomplished by means of contract price adjustments, 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 with paragraph (c)(1) 
of this subsection, 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 Procuring 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 9903.201-7 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) 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.
    (3) 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.
    (4) The cognizant Federal agency official may preclude the payment 
of increased costs resulting from 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.

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BILLING CODE 3110-01-C
    (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) Use of another suitable technique. The cognizant Federal agency 
official may otherwise resolve the cost impact of a change in cost 
accounting practice (e.g., by a monetary exchange between the 
contracting parties), when the cognizant Federal agency official 
determines, in writing, that contract price and/or cost adjustments or 
actions to preclude the payment of increased costs are not warranted 
because:
    (1) Contract performance would not be jeopardized (the contractor 
agrees to absorb any resultant contract cost overrun conditions),
    (2) Cost ceilings or target price reductions for flexibly priced 
contracts are not desired by the Government,
    (3) The impact on incentive fee or profit that results from failure 
to adjust the target cost on incentive contracts is not material, or is 
otherwise considered in the cost impact settlement, and
    (4) The increase or decrease in expected contract cost 
accumulations would not distort or adversely impair the usefulness of 
the contractor's reported contract cost information (actual costs and 
estimated costs to complete) that is included in contract status 
reports.
    (f) 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 
provision of each affected contract's CAS contract clause.


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

[[Page 45734]]

proposed costs on CAS-covered contracts and the noncompliant practice 
was used to determine the contract prices, 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 for a 
cost estimating noncompliance or 9903.406-4 for a cost accumulation 
noncompliance. If the noncompliance 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 
9903.406-4.
    (c) Noncompliant cost accounting practices that do not result in 
material increased cost to the Government should be processed as an 
immaterial noncompliance in accordance with 9903.406-5.


9903.406-2  Noncompliance determinations and initiating the cost impact 
process.

    (a) When a Government representative encounters 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.
    (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 
provision included in each affected contract's CAS contract clause. 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.
    (i) Contractor cost impact submissions. 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. 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. 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 it may be in another mutually agreeable format. The 
chosen format must result in the submission of cost impact data that 
will enable the cognizant Federal agency official to 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 
following illustration is one acceptable GDM Settlement Proposal format 
that may be used for a noncompliant action. The illustrated 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.

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BILLING CODE 3110-01-C


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 obviously immaterial, 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 shall be 
followed. Otherwise, paragraphs (b) through (f) 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 (9903.406-2(i)), 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

[[Page 45737]]

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, including cost ceilings or target 
costs, as applicable, 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.

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BILLING CODE 3110-01-C


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 believes the cost impact of the 
noncompliance is obviously immaterial, 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 (e) of this subsection 
shall be followed.
    (b) 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 (9903.406-2(i)). The submission 
shall identify the cost

[[Page 45738]]

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 (d) of this subsection.
    (c) 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.
    (d) 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.
    (e) Negotiation and resolution of the cost impact should be 
accomplished in accordance with 9903.405-5(a).


9903.406-5  Immaterial noncompliances.

    If a noncompliance cost impact is not material in the aggregate, 
the cognizant Federal agency official shall notify the contractor in 
writing that:
    (a) The practice is noncompliant via a final determination of 
noncompliance;
    (b) Corrective action should be taken; and
    (c) 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.


9903.407  Illustrations.

    The following illustrations are not intended 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 
intended to be considered only as examples. In actual cases, the 
individual circumstances need to be reviewed and considered to ensure 
equity for both parties.


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

    (a) Notification. (1) The contractor provides notification of a 
change in cost accounting practice in April with a proposed retroactive 
applicability date of the beginning of the current year. In accordance 
with 9903.405-2(c), the contractor provides rationale for the beginning 
of the current year applicability date. The cognizant Federal agency 
official approves of the proposed applicability date (9903.405-3(d)). 
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 practice 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 
(9903.405-3(d)). 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(f), 
the cognizant Federal agency official 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

[[Page 45739]]

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 (b)(3) of this 
subsection occurs except that the aggregate impact by contract type in 
the GDM Settlement Proposal can not 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 firm-fixed-
price contracts for upward adjustment, in addition to the $1,000,000 
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 provisions 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 
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)(i).
    (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 (the 
sum of the $1,000,000 cost impact on the flexibly-priced contract and 
the $1,200,000 cost impact on the fixed-priced contract). Therefore the 
contractor's proposed resolution would not result in the same aggregate 
cost impact as the amount that would result from adjustment of 
individual contracts. 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 contract 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

[[Page 45740]]

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)(4), 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)(4), 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 additional $1,000,000 of increased costs in accordance 
with 9903.405-5(d)(4).
    (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 cost 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 impact. In accordance with 
9903.405-5(d)(1) and (3), no further action is needed to preclude 
increased costs paid, since the impact to the Government after contract 
price adjustments are made is a lesser cost paid in the amount of 
$1,000,000.
    (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 shows the following breakdown by contract type:
[GRAPHIC] [TIFF OMITTED] TP20AU99.007



[[Page 45741]]


    (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:
[GRAPHIC] [TIFF OMITTED] TP20AU99.008


    (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 (9903.405-5(b)(5)). The cognizant Federal agency official then 
limits the upward adjustment to the CPFF contract to $100,000. Action 
must also be taken to preclude payment of the additional $100,000 of 
costs on the CPFF contract in accordance with 9903.405-5(d)(4).
    (h) Desirable change determination. A contractor provides 
notification of a proposed voluntary change in cost accounting practice 
and requests a cognizant Federal agency official determination that the 
change is desirable and not detrimental to the Government. The request 
is supported with data that demonstrates that aggregate cost 
accumulations for existing flexibly priced CAS-covered contracts and 
reasonably predictable future CAS-covered contracts will decrease after 
the planned management changes are implemented. The cost impact of the 
practice change on all existing individual CAS-covered contracts (i.e., 
shifts in accumulated contract costs attributable to the practice 
change) results in $500,000 of increased cost to the Government. There 
are expected cost reductions of $200,000 on future CAS-covered 
contracts. The cognizant Federal agency official determines that there 
is a continuing long-term relationship with the contractor and that, 
after the change is made, there is a reasonably predictable expectation 
that the estimated costs of anticipated future CAS-covered contracts, 
as reflected in the contractor's forecasted business base used to 
develop the projected indirect cost rates applied in contract cost 
proposals, will be lower than the estimated future contract costs that 
would result if the voluntary change were not made. In accordance with 
9903.201-7(d), the cognizant Federal agency official determines the 
voluntary change is desirable and not detrimental to the Government and 
provides equitable adjustments in the aggregate amount of $200,000 to 
resolve the increased costs on existing CAS-covered contracts caused by 
the voluntary change.


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 valued at 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

[[Page 45742]]

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 exceeds the amount of the 
overstatement of the other contract, the cognizant Federal agency 
official, in accordance with 9903.406-3(d), 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 CAS 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(c), 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, Immaterial noncompliances.
    (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 9903.406-1(b), requests two separate 
contractor cost impact submissions (9903.406-2(i)). The cost impact 
submission for the overstated contract prices will be as described in 
9903.406-3(c), and the cost impact proposal for the overbilled 
accumulated costs will be as described in 9903.406-4(c).

[FR Doc. 99-21334 Filed 8-19-99; 8:45 am]
BILLING CODE 3110-01-U