[Federal Register Volume 65, Number 115 (Wednesday, June 14, 2000)]
[Rules and Regulations]
[Pages 37470-37472]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14243]



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Part II





Office of Management and Budget





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48 CFR 9903



Cost Accounting Standards Board; Changes In Cost Accounting Practices; 
Final Rule

  Federal Register / Vol. 65, No. 115 / Wednesday, June 14, 2000 / 
Rules and Regulations  

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9903


Cost Accounting Standards Board; Changes In Cost Accounting 
Practices.

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

ACTION: Final rule.

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SUMMARY: The Office of Federal Procurement Policy, Cost Accounting 
Standards Board (CASB), is amending the Board's regulations pertaining 
to actions the cognizant Federal agency official can take when a 
contractor makes a compliant change to an established cost accounting 
practice that is used to estimate, accumulate and report the costs of 
covered negotiated government contracts or does not comply with 
applicable Cost Accounting Standards (CAS). The amendments provide that 
accounting changes directly associated with external restructuring 
activities that are subject to and meet certain statutory requirements 
are not subject to the CASB's contract price and cost adjustment 
requirements, and establishes new coverage for processing compliant 
cost accounting practice changes and noncompliant cost accounting 
practice conditions in accordance with CAS contract clause 
requirements. The existing CAS contract clause interest rate citation 
is also amended to make explicit the specific interest rate to be 
applied when increased costs paid are recovered by the Government. This 
rulemaking is authorized pursuant to Section 26 of the Office of 
Federal Procurement Policy Act.
    The Board is taking these actions after having given careful 
consideration to the comments it received regarding the Supplemental 
Notice of Proposed Rulemaking issued August 20, 1999 on this topic 
(SNPRM-II).

DATES: The effective date of this final rule is June 14, 2000.

FOR FURTHER INFORMATION CONTACT: Rudolph J. Schuhbauer, Project 
Director, Cost Accounting Standards Board (telephone: 202-395-1052).

SUPPLEMENTARY INFORMATION:

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. Sec. 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 step four of the four-step process.

B. Background

Prior Promulgations.

    Many commenters 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), in an ANPRM 
published on April 25, 1995 (60 FR 20252) and in an NPRM published on 
September 18, 1996 (61 FR 49196). The CASB requested additional 
comments in two Supplemental NPRM's that were published on July 14, 
1997 (62 FR 37654) and August 20, 1999 (64 FR 45700).
    The various Notices proposed to amend the Board's current coverage 
governing what constitutes a change to a cost accounting practice. The 
previously proposed revisions included amendments to conform the 
language contained in the contract clauses for ``Full'' and 
``Modified'' coverage, to address certain Federal agency 
responsibilities, to expand the criteria for desirable change 
determinations and to exempt certain changes in a contractor's cost 
accounting practices from the Board's contract price and cost 
adjustment requirements. A new subpart was also proposed to delineate 
the actions to be taken by the contracting parties when a contractor 
makes a compliant change to a cost accounting practice or follows a 
noncompliant practice.

Public Comments

    Fifty-three sets of public comments were received in response to 
the SNPRM-II. The public comments were received from contractors, 
educational institutions, professional associations, Federal agencies, 
accounting organizations, and individuals. An open public meeting was 
held on December 6, 1999, regarding the Board's SNPRM-II. On January 7, 
2000, the Department of Defense replaced its initial comments submitted 
on November 22, 1999, with an alternative proposal for the Board's 
consideration. Twelve public commenters from the contractor community 
subsequently withdrew their formally submitted comments and advised the 
Board that they preferred the alternate proposal submitted by the 
Department of Defense. On February 29, 2000, the Department of Defense 
submitted a revised alternative proposal. The two alternative proposals 
were developed in an open forum hosted by the National Contract 
Management Association. The February 29, 2000, proposal contained 
alternative language for what constitutes a change to a cost accounting 
practice, for exempting certain accounting changes from the cost impact 
process and for determining when a change to an accounting practice may 
be determined to be a ``desirable'' change. Three of the twelve 
commenters referred to above, further expressed their preference for 
the February 29, 2000, proposal.
    On February 7, 2000, the CASB published an interim rule in the 
Federal Register (65 FR 5990), to adjust CAS applicability requirements 
and dollar thresholds in accordance with the provisions of the National 
Defense Authorization Act for Fiscal Year 2000, Pub. L. 106-65. This 
action is expected to reduce the number of CAS-covered contracts and 
the number of contractor business units performing CAS-covered 
contracts.
    On April 18, 2000, the Civilian Agency Acquisition Council and the 
Defense Acquisition Regulations Council (Councils) proposed to amend 
the Federal Acquisition Regulation (FAR) to delineate the process for 
determining and resolving the cost impact on contracts and subcontracts 
when a contractor makes a compliant change to a cost accounting 
practice or follows a noncompliant practice. The FAR proposal was in 
response to an initiative by the Administrator, Office of Federal 
Procurement Policy. The proposed FAR coverage addresses many aspects of 
the fundamental CAS administration process that the Board's above 
referenced proposals also addressed. The Board encourages the Councils 
to finalize the proposed rulemaking.
    In view of the circumstances that now prevail, a projected decline 
in CAS-covered contracts and the expected

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issuance of more explicit FAR guidance regarding the CAS cost impact 
process, the Board believes that issuance of any amendments to its 
regulations, in addition to those included in this final rule, is not 
presently warranted.

Summary of Amendments

    In subpart 9903.2, CAS Program Requirements, of Part 9903, Contract 
Coverage, subsection 9903.201-4 is amended to clarify, in certain 
prescribed CAS contract clauses, that the applicable interest rate 
cited for use when recovering increased cost paid due to a contractor's 
failure to comply with an applicable CAS or to follow any cost 
accounting practice consistently is the underpayment rate established 
under section 6621(a)(2) of the Internal Revenue Code of 1986 (26 
U.S.C. 6621(a)(2)).
    Subsection 9903.201-6 is amended to provide guidance for 
determining:
-- For a required change, that a change to an established cost 
accounting practice is required to comply with applicable CAS;
-- For a unilateral practice change that a contractor makes, that the 
contemplated contract price and cost adjustments will protect the 
United States from payment of increased costs, in the aggregate; and 
that the net effect of the adjustments being made does not result in 
the recovery of more than the estimated amount of such increased costs;
-- When a compliant change in cost accounting practice may be 
determined to be desirable and not detrimental to the Government's 
interests; and,
-- For a noncompliant cost accounting practice, that the contemplated 
contract price and cost adjustments will protect the United States from 
payment of increased costs, in the aggregate; and that the net effect 
of the adjustments being made does not result in the recovery of more 
than the estimated amount of such increased costs.
    Subsection 9903.201-8 is added to establish that the CASB's 
contract price and cost adjustment requirements are not applicable to 
compliant cost accounting practice changes directly associated with 
external restructuring activities that are subject to and meet the 
requirements of 10 U.S.C. Sec. 2325.

C. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this rule, because this rule imposes no paperwork burden on offerors, 
affected contractors and subcontractors, or members of the public which 
requires 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 rule on contractors and subcontractors 
is expected to be minor. As a result, the Board has determined that 
this is not a ``major rule'' under the provisions of Executive Order 
12866, and that a regulatory impact analysis is not required. 
Furthermore, this rule 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 rule does not require a regulatory flexibility analysis 
under the Regulatory Flexibility Act of 1980.

List of Subjects in 48 CFR Part 9903

    Cost accounting standards, government procurement.

Nelson F. Gibbs,
Executive Director, Cost Accounting Standards Board.
    For the reasons set forth in this preamble, chapter 99 of title 48 
of the Code of Federal Regulations is 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.

    2. Section 9903.201-4 is amended as follows:
    a. The contract clause heading immediately following paragraph (a) 
is revised, and in that contract clause the second sentence of 
paragraph (a)(5) is revised;
    b. The contract clause heading immediately following paragraph (c) 
is revised, and in that contract clause the first sentence of paragraph 
(a)(3)(ii) and the second sentence of paragraph (a)(4) are revised;
    c. The contract clause heading immediately following paragraph (e) 
is revsied, and in that contract clause the second sentence of 
paragraph (a)(5) is revised.
    The revisions read as follows:

9903.201-4 Contract clauses.

    (a) * * * 
* * * * *

Cost Accounting Standards (June 2000)

    (a) * * *
    (5) * * * Such adjustment shall provide for recovery of the 
increased costs to 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 
adjustment is effected. * * *
* * * * *
    (c) * * *
* * * * *

Disclosure and Consistency of Cost Accounting Practices (June 2000)

    (a) * * *
    (3)(i) * * *
    (ii) The Contractor shall, when the parties agree to a change to a 
cost accounting practice and the Contracting Officer has made the 
finding required in 9903.201-6(c) that the change is desirable and not 
detrimental to the interests of the Government, negotiate an equitable 
adjustment as provided in the Changes clause of this contract. * * *
    (4) * * * Such adjustment shall provide for recovery of the 
increased costs to 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 
adjustment is effected. * * *
* * * * *
    (e) * * *
* * * * *

Cost Accounting Standards--Educational Institutions (June 2000)

    (a) * * *
    (5) * * * Such adjustment shall provide for recovery of the 
increased costs to 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 
adjustment is effected. * * *
* * * * *
    3. Section 9903.201-6 is revised to read as follows:

9903.201-6 Findings.

    (a) Required change. (1) Finding. Prior to making any equitable 
adjustment under the provisions of paragraph (a)(4)(i) of the contract 
clause set forth in 9903.201-4(a) or 9903.201-4(e), or paragraph 
(a)(3)(i) of the contract clause set forth in 9903.201-4(c), the 
Contracting Officer shall make a finding that the practice change was 
required to comply with a CAS, modification or interpretation thereof, 
that subsequently became applicable to the contract; or, for planned 
changes being made in order to remain CAS compliant, that the

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former practice was in compliance with applicable CAS and the planned 
change is necessary for the contractor to remain in compliance.
    (2) 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. It also 
includes a prospective change to a disclosed or established cost 
accounting practice when the cognizant Federal agency official 
determines that the former practice was in compliance with applicable 
CAS and the change is necessary for the contractor to remain in 
compliance.
    (b) Unilateral change. (1) Findings. Prior to making any contract 
price or cost adjustment(s) under the change provisions of paragraph 
(a)(4)(ii) of the contract clause set forth in 9903.201-4(a) or 
9903.201-4(e), or paragraph (a)(3)(ii) of the contract clause set forth 
in 9903.201-4(c), the Contracting Officer shall make a finding that the 
contemplated contract price and cost adjustments will protect the 
United States from payment of increased costs, in the aggregate; and 
that the net effect of the adjustments being made does not result in 
the recovery of more than the estimated amount of such increased costs.
    (2) Unilateral change by a contractor means a change in cost 
accounting practice from one compliant practice to another compliant 
practice that a contractor with a CAS-covered contract(s) elects to 
make that has not been deemed desirable by the cognizant Federal agency 
official and for which the Government will pay no aggregate increased 
costs.
    (3) Action to preclude the payment of aggregate increased costs by 
the Government. In the absence of a finding pursuant to paragraph (c) 
of this subsection that a compliant change is desirable, no agreement 
may be made with regard to a change to a cost accounting practice that 
will result in the payment of aggregate increased costs by the United 
States. For these changes, the cognizant Federal agency official shall 
limit upward contract price adjustments to affected contracts to the 
amount of downward contract price adjustments of other affected 
contracts, i.e., no net upward contract price adjustment shall be 
permitted.
    (c) Desirable change. (1) Finding. Prior to making any equitable 
adjustment under the provisions of paragraph (a)(4)(iii) of the 
contract clause set forth in 9903.201-4(a) or 9903.201-4(e), or 
paragraph (a)(3)(ii) of the contract clause set forth in 9903.201-4(c), 
the cognizant Federal agency official shall make a finding that the 
change to a cost accounting practice is desirable and not detrimental 
to the interests of the Government.
    (2) Desirable change means a compliant 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 and is therefore not subject to the no increased cost 
prohibition provisions of CAS-covered contracts affected by the change. 
The cognizant Federal agency official's finding need not be based 
solely on the cost impact that a proposed practice change will have on 
a contractor's or subcontractor's current CAS-covered contracts. The 
change to a cost accounting practice may be determined to be desirable 
even though existing contract prices and/or cost allowances may 
increase. The determination that the change to a cost accounting 
practice is desirable, should be made on a case-by-case basis.
    (3) Once a determination has been made that a compliant change to a 
cost accounting practice is a desirable change, associated management 
actions that also have an impact on contract costs should be considered 
when negotiating contract price or cost adjustments that may be needed 
to equitably resolve the overall cost impact of the aggregated actions.
    (4) Until the cognizant Federal agency official has determined that 
a change to a cost accounting practice is deemed to be a desirable 
change, the change shall be considered to be a change for which the 
Government will not pay increased costs, in the aggregate.
    (d) Noncompliant cost accounting practices. (1) Findings. Prior to 
making any contract price or cost adjustment(s) under the provisions of 
paragraph (a)(5) of the contract clause set forth in 9903.201-4(a) or 
9903.201-4(e), or paragraph (a)(4) of the contract clause set forth in 
9903.201-4(c), the Contracting Officer shall make a finding that the 
contemplated contract price and cost adjustments will protect the 
United States from payment of increased costs, in the aggregate; and 
that the net effect of the adjustments being made does not result in 
the recovery of more than the estimated amount of such increased costs. 
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.

    4. Section 9903.201-8 is added to read as follows:

9903.201-8 Compliant accounting changes due to external restructuring 
activities

    The contract price and cost adjustment requirements of this part 
9903 are not applicable to compliant cost accounting practice changes 
directly associated with external restructuring activities that are 
subject to and meet the requirements of 10 U.S.C. 2325.
[FR Doc. 00-14243 Filed 6-13-00; 8:45 am]
BILLING CODE 3110-01-P