Have you made a change in accounting practice that would require a Cost Accounting Standard (CAS) Cost Impact? Watch our latest blog to help you understand the requirements and potential issues.

Preparing a cost impact proposal is one of the most burdensome requirements in government contract cost accounting. Generally, a CAS-covered contractor prepares a cost impact proposal when it:

  1. Makes a change from one compliant cost accounting practice to another compliant cost accounting practice, or
  2. Has been found to be using a cost accounting practice that is not compliant with one of the applicable Cost Accounting Standards, or
  3. Has been cited for using a cost accounting practice that is inconsistent with its established and/or disclosed cost accounting practices.

Some Common Questions Related to CAS Cost Impacts

What is a Cost Impact?

A cost impact analysis is a proposal that outlines the increased/decreased costs on contracts which are applicable to Cost Accounting Standards (CAS) due to a change in accounting practice. The cost impact should identify the increased/decreased costs by CAS-covered contracts by contract type and by various departments/agencies.

There are two types of cost impact analyses:

  1. Gross Dollar Magnitude (GDM) analysis, and
  2. Detailed Cost Impact (DCI) analysis.

A contractor generates the GDM analysis at a high level and generally utilizes backlog as the basis for calculating the cost impacts. The DCI analysis is a contract-by-contract, EAC-by-EAC computation.

FAR 52.230-6 Administration of Cost Accounting Standards provides a step-by-step process for administering changes in cost accounting practice and non-compliances which is in the hands of the cognizant federal agency official (CFAO). The CFAO is normally the Defense Contract Management Agency (DCMA) Administrative Contracting Officer (ACO) assigned to administrate the CAS contract.

When is a Cost Impact Required?

A cost impact analysis is required when a contractor has an accounting change. There are four different types of accounting changes under FAR 52.230-6 that require a cost impact:

  1. Required Accounting Change – A required change occurs with the issuance of a new CAS standard, requirements based on laws, and accounting practices required to be changed to maintain compliance with CAS.
  2. Unilateral Accounting Change – 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 CFAO.
  3. Desirable Accounting Changes – Change that both the contractor and Government agree is desirable.
  4. Non-compliance – Non-compliances arise when the contractor fails to comply with an applicable CAS or to consistently follow any disclosed or established cost accounting practice. There are three FAR provisions (FAR 52.230-2(a)(5), 52.230-3(a)(4), and 52.230-4) which implement the statutory requirement that the Government shall not pay increased costs as a result of a CAS non-compliances. These FAR provisions also require that the Government recover interest from the time the payment of increased costs was made by the Government until the time the adjustment is affected.

A change in cost accounting practice occurs when there is a change in the method or technique for:

  • Determining whether a cost is directly or indirectly allocated,
  • Determining the composition of the cost pools,
  • Determining the selection of the allocation base, and
  • Determining the composition of the allocation base.

What Considerations Should Go into a Cost Impact Calculation?

An integral part of the cost impact proposal is the list of CAS covered contracts and subcontracts that are, or will be, affected by the change or non-compliances. To comply with the requirements of FAR 52.230-6, contractors should maintain a system for identifying accurately and completely all contracts and subcontracts containing the CAS clause.

A detailed cost impact should have data at the contract/subcontract level. The following is a list of data that may be applicable based on the contract types of the CAS covered contracts:

  1. Fixed price
  2. Target/estimated cost
  3. Accumulated cost to date
  4. Estimate to complete
  5. Target profit or fee
  6. Sharing ratio
  7. Ceiling price
  8. Period of performance
  9. Profit or fee impact
  10. Total increase/ (decreased) cost to the Government

A calculation of the increased/(decreased) costs paid by the Government for each contract type is as follows:

  • For flexibly priced contacts: Increased costs to the Government occur when more costs are accumulated as the result of an accounting practice change. Conversely, decreased costs to the Government occur when fewer costs are accumulated as a result of an accounting practice change./li>
  • Fixed price contracts: Increased costs to the Government occur when fewer costs are accumulated as a result of an accounting practice change. Decreased costs to the Government occur when more costs are accumulated as a result of an accounting practice change.

What is the Process for Cost Impact Notification and Resolution?

The cost impact must be submitted within 60 days (or another mutually agreed-upon date) after the proposed change is determined adequate and compliant, the date of the contractor’s agreement with the initial finding of non-compliances, or the date the contractor is notified by the CFAO of a determination of non-compliance.

When a description has been submitted for a change in cost accounting practice that is dependent on a contract award, and that contract is subsequently awarded, a notification to the CFAO should be made within 15 days after the award.

It is the CFAO’s responsibility to provide a resolution of cost impacts and determine if the change is acceptable to the Government or not.

FAR 52.230-6(j) does provide the CFAO with the following options if the contractor fails to submit a cost impact proposal by estimating the potential cost impact:

  1. Withhold an amount not to exceed 10 percent of each subsequent amount payment to the contractor’s affected CAS-covered contracts (up to the estimated general dollar magnitude of the cost impact) until such time as the contractor provides the required information to the CFAO.
  2. Issue a final decision in accordance with FAR 33.211 and unilaterally adjust the contract(s) by the estimated amount of the cost impact.

The consultants at Redstone GCI are experts in CAS. We assist contractors in assessing and implementing accounting practices compliant with all 19 CAS Standards. We also work with contractors in the preparation of disclosure statements and assist through the audit process, including the preparation and calculation of General Dollar Magnitude (GDM) proposals and cost impacts. We are happy to assist you with your CAS compliance.

Learn More About Our Cost Accounting Standards (CAS) Services

Written by Mary Beth Jackson

Mary Beth Jackson Mary Beth Jackson is a Director with Redstone GCI and brings over 30-years of experience and subject matter expertise to our team. She is an experienced industry veteran with a combination of direct experience working for the government, extensive industry experience in large accounting, IT and compliance organizations, as well as experience providing consulting services for many of the largest government contractors. Her combination of experience in senior-level accounting, compliance and IT roles provides for a wealth of background experience and knowledge in regulation (FAR, CAS, DFARS, and other agency supplements), Sarbanes-Oxley, NIST IT and Information Security and many other areas. She frequently assists our clients with strategic initiatives within the accounting, finance, IT and compliance areas include assessment of internal control design and effectiveness, evaluation of DFARS Business Systems, M&A support and post-acquisition integration, and other projects uniquely suited to her background and experience. Professional Experience Mary Beth began her career working with DCAA in 1988 and spent nine years with the agency working on incurred cost audits, forward pricing proposals and rate audits, accounting, estimating, and material management and accounting system audits, cost accounting standards, and disclosure statement reviews. Following her tenure at DCAA, Mary Beth migrated to a large Fortune 500 company where she served in various roles including Compliance Manager for the Defense and Aerospace Division, IT Financial Systems Integration Manager, and Director of IT Governance. In her role as Compliance Manager, Mary Beth spearheaded process improvements to eliminate deficiencies noted by DCAA in the areas of material management and accounting system, estimating system, general accounting system, and cost accounting standard compliance. As IT Financial Integration Manager, Mary Beth designed and implemented global financial applications to enhance the overall financial posture of the company. In 2005, Mary Beth was promoted to Director of IT Governance where she managed the control activities for the IT organization to comply with the Sarbanes Oxley Act. She managed the control framework, which was comprised of IT general controls, application control, security, change management, logical access, and software quality assurance. Most recently, prior to joining Redstone GCI, Mary Beth was the Enterprise Controller for a major aerospace and defense contractor. Mary Beth was responsible for overseeing the implementation of accounting policies and procedures, producing accurate financial statements, establishing and maintaining the internal control environment while ensuring compliance with US GAAP, applicable standards, and statutory requirements. Her role included maintaining of oversight of complex indirect rate structure, establishment and monitoring of the internal controls framework, and subject matter expert in FAR/CAS. Her diverse range of experience in working for DCAA and in the industry at various levels of management provides a unique perspective for our clients and affords her the ability to objectively view unique challenges of our clients and provide practical advice. Education Mary Beth earned Bachelor of Science Degree in Accounting from The University of Alabama in Huntsville. Affiliations Information Systems Audit and Control Association (CISA)

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle.

Topics: Compliant Accounting Infrastructure, Vlog, Cost Accounting Standards (CAS)