[Federal Register Volume 73, Number 30 (Wednesday, February 13, 2008)]
[Proposed Rules]
[Pages 8260-8262]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-2666]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9904


Cost Accounting Standards Board; Allocation of Home Office 
Expenses to Segments

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

ACTION: Staff Discussion Paper (SDP).

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SUMMARY: The Cost Accounting Standards Board (the Board), Office of 
Federal Procurement Policy, invites public comments on a staff 
discussion paper (SDP) addressing potential revisions to Cost 
Accounting Standard (CAS) 403, ``Allocation of Home Office Expenses to 
Segments.'' This SDP addresses whether the current thresholds that 
require use of the three factor formula for allocating residual home 
office expenses require revision.

DATES: Comments must be in writing and must be received by April 14, 
2008.

ADDRESSES: Due to delays in receipt and processing of mail, respondents 
are strongly encouraged to submit comments electronically to ensure 
timely receipt. Electronic comments may be submitted to 
[email protected]. Please include your name, title, organization, and 
reference case ``CAS-2008-01S.''

[[Page 8261]]

Comments may also be submitted via facsimile to (202) 395-5105. 
Comments via regular mail should be addressed to the Office of Federal 
Procurement Policy, 725 17th Street, NW., Room 9013, Washington, DC 
20503, ATTN: Laura Auletta. Please note that any comments received will 
be posted in their entirety, including any personal and/or business 
confidential information provided, at http://www.whitehouse.gov/omb/procurement/casb.html after the close of the comment period.

FOR FURTHER INFORMATION CONTACT: Laura Auletta, Manager, Cost 
Accounting Standards Board, 725 17th Street, NW., Room 9013, 
Washington, DC 20503 (telephone: 202-395-3256).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

    The Board's rules, regulations and standards are codified at 48 CFR 
Chapter 99. The Office of Federal Procurement Policy Act, 41 U.S.C. 
422(g)(1), requires the Board, prior to the establishment of any new or 
revised Standard, to 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 (i.e., prepare and publish SDP).
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.
    The SDP published with this notice is issued by the Board in 
accordance with the requirements of 41 U.S.C. 422(g)(1)(B), and is the 
first of the four-step process.
    The Board has received two recommendations to revise the CAS 403 
operating revenue thresholds used in determining if a contractor is 
required to apply the three factor formula to allocate residual home 
office expenses to segments. The research accomplished to date by the 
Board staff is the basis for the SDP being released today.

 B. Background

    Over the past few years, the Board has received two proposals to 
revise the CAS operating revenue thresholds for determining if a 
contractor is required to use the three factor formula to allocate 
residual home office expenses to segments.
    1. Consumer Price Index: A proposal from the Aerospace Industries 
Association (AIA) recommends that the operating revenue thresholds be 
raised by 400 percent to reflect the changes in the consumer price 
index (CPI) from 1973 to 2003.
    2. Conduct Staff Study: A proposal from the Department of Defense 
(DoD) recommends that the Board obtain actual statistics of various 
companies and conduct a staff study similar to that performed by the 
original Board. This proposal recommends that the study update the 
thresholds to reflect the impact that economic changes, industry 
changes, and the advent of acquisition reform have had in the years 
since the thresholds were established.

C. Staff Discussion Paper

I. Background

     48 CFR 9904.403-40(c)(2) requires that home office 
residual expenses be allocated to segments using the three factor 
formula if the residual expenses exceed:
    [cir] 3.35 percent of the first $100 million of operating revenue;
    [cir] .95 percent of the next $200 million of operating revenue;
    [cir] .30 percent of the next $2.7 billion of operating revenue; 
and
    [cir] .20 percent of all amounts over $3 billion of operating 
revenue.
     The operating revenue thresholds at 48 C.F.R 9904.403-
40(c)(2) were promulgated in December 1972 and have not been revised in 
the 35 years since.
     The Board has decided to initiate a case to determine if 
the current thresholds require revision. This case will analyze all 
aspects of this issue. For example, in addition to the inflation of the 
dollar, the last 35 years have also seen a change in the nature of home 
offices. In particular, the number of home offices have significantly 
increased due to the proliferation of intermediate home offices. In 
determining whether to revise the current thresholds, the Board will 
need to analyze if and to what extent such a proliferation impacts the 
thresholds. In addition, the Board will need to determine if and to 
what extent a data call is needed to obtain information necessary to 
reach an informed decision on this issue.

II. Staff Research

Comments on Alternatives
    1. Use Consumer Price Index (CPI): On August 26, 2003, AIA sent a 
letter to the Board recommending that the operating revenue thresholds 
be raised by 400 percent to reflect the changes in the CPI from 1973 to 
2003. The staff believes the AIA recommendation offers the advantage of 
a simple and quick revision to the out-of-date thresholds. It is also 
an objective measure of the economic escalation that has occurred since 
the thresholds were initially promulgated. A significant disadvantage 
is that the increase in the CPI may not be a good measure of increases 
necessary to the three factor formula. For example, the number of home 
offices have significantly increased due to the proliferation of 
intermediate home offices. The increase in home offices may warrant a 
smaller increase in the three factor formula than the CPI would 
provide. A second disadvantage is that the Board will not be aware of 
the exact impact the revision will have on the number of companies 
covered by the three factor formula.
    The CPI represents changes in prices of all goods and services 
purchased for consumption by urban households. User fees (such as water 
and sewer service) and sales and excise taxes paid by the consumer are 
also included. Income taxes and investment items (like stocks, bonds, 
and life insurance) are not included. It is an objective measure of the 
economic escalation that has occurred since the thresholds were 
initially promulgated.
    A potential problem concerning the use of the CPI is that 
historical values are not revised when there are improvements in the 
index. Consequently, past errors in methodology are only corrected 
prospectively (i.e., the historical data is not corrected). Most of the 
major improvements in the CPI have tended to reduce measured inflation. 
As a result, the increase in the CPI since 1972 overstates inflation.
    The overstatement in the CPI can be mitigated by using alternative 
versions that incorporate current methodology in measuring past price 
movements. From 1972 to 1978, the best alternative version is the CPI-
U-X1, which provides an adjustment to the CPI that computes housing 
costs using rental equivalents (this method was adopted for the 
official CPI in the early 1980s). However, the CPI-U-X1 does not 
include other improvements to the CPI that were adopted in the early 
1980s.
    The CPI-U-RS, which was developed in the late 1990s, incorporates 
changes in methodology implemented since 1978. Thus, it can be used to 
analyze inflationary trends in the CPI without interference from 
changes in methodology. New values based on current methods are 
released each April.
    From December 1972 through December 1977, the CPI-U-X1

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increased by a factor of 1.43. From January 1978 through February 2007, 
the CPI-U-RS increased by a factor of 3.26. To compute the increase for 
the period December 1972 through February 2007, the factor for the CPI-
U-X1 is multiplied by the factor for the CPI-U-RS (1.43 x 3.26) to 
obtain an inflation factor of 4.66.
    Applying this factor to the current thresholds at 48 C.F.R 
9904.403-50 yields the following revised thresholds for application of 
the three factor formula:
    [cir] 3.35 percent of the first $470 million of operating revenue;
    [cir] .95 percent of the next $930 million of operating revenue;
    [cir] .30 percent of the next $12.6 billion of operating revenue; 
and
    [cir] .20 percent of all amounts over $14.0 billion of operating 
revenue.
    2. Conduct Staff Study: On September 26, 2002, DoD sent a letter to 
the Board recommending that, as part of the comprehensive review, the 
Board obtain actual statistics of various companies and conduct a staff 
study similar to that performed by the original Board. DoD recommended 
that the study update the thresholds to reflect the impact that 
economic changes, industry changes, and the advent of acquisition 
reform have had in the years since the thresholds were established. The 
staff believes that the DoD recommendation offers the Board an 
opportunity to understand the impact that various revisions would have 
on the number of companies subject to the three factor formula before 
drafting an ANPRM. The disadvantage is that the analysis will require 
significant time and effort to accomplish, and it is possible that such 
an analysis would not yield useful data for determining the appropriate 
thresholds.

III. Public Input

    The Board is requesting public input on whether the thresholds 
should be raised, the potential advantages and disadvantages of the two 
alternatives described above, and any additional recommended 
alternatives the commenters may have. Key questions for consideration 
include, but are not limited to, the following:
    1. Should the operating revenue thresholds be revised? Why or why 
not?
    2. If the threshold should be revised, what should be the basis of 
that revision (e.g., CPI, staff study, other)?
    3. What are the advantages and disadvantages of the two 
alternatives described above?
    4. What type of data is currently available for performance of the 
staff study?
    5. Is the administrative burden of collecting the data associated 
with the staff study commensurate with risk?
    6. To what extent does the proliferation of intermediate home 
offices impact any potential revision of the operating revenue 
thresholds?

Paul A. Denett,
Administrator, Office of Federal Procurement Policy.
 [FR Doc. E8-2666 Filed 2-12-08; 8:45 am]
BILLING CODE 3110-01-P