Most contractors that have contracts/subcontracts subject to full CAS coverage will eventually want to make a change to a cost accounting practice because there is a “better” allocation method or a change is required to remain in compliance with CAS.
What is a Cost Accounting Practice Change?
The 19 CAS standards in 48 CFR 9904 address the measurement, assignment and allocation of costs. So, a change to an accounting practice is a change in the
- Measurement of costs
- Assignment of costs to cost accounting periods
- Allocation of costs to cost objectives
Basically, it is a change to a current accounting practice and unless the change is immaterial, an estimate of the impact on CAS covered contracts is required. These estimates can be either a general dollar magnitude or detailed cost impact, depending on the materiality and situation. It should also be noted that not all changes a company makes are cost accounting practice changes. Some exceptions include:
- Initial adoption of a cost accounting practice
- Partial or total elimination of a cost or the cost of a function
- Revision of a cost accounting practice for a cost which was previously immaterial.
What are the Different Types of Cost Accounting Practice Changes that a Contractor Can Submit?
There are three types of accounting changes are discussed in FAR 30.603:
- Unilateral
- Desirable and
- Required
Why Does it Matter?
The type of accounting change that is submitted is important because the contractor will either be responsible for increased costs on CAS covered contracts or the Government will negotiate an equitable adjustment as a result of the change.
The most common accounting change that contractors make are unilateral changes. These are changes that are initiated by contractors to change from one CAS compliant practice to another CAS compliant practice. There is no requirement for the contractor to make this change. An example would be changing the allocation base of Human resource costs from payroll costs to headcount. The Government will not pay increased costs on CAS covered contracts as the result of a unilateral change. This is because the contractor chose to make a change and it shifted costs causing an increase to CAS covered contracts. Since this is the most common change, contractors should evaluate the impact to the CAS covered contracts before you make the change since the Government will not reimburse you for increased costs and the contractor is likely going to have to pay the Government to ensure that does not happen.
A desirable change is when a contractor submits a unilateral change that the Government and the contractor agree is beneficial to all parties. The contracting officer will determine the change as desirable and negotiate an equitable adjustment. However, good luck trying to submit a desirable change, since this type of change is rarely used. Contracting Officers generally do not want to be second guessed by their management when making a desirable change because they would be allowing increased costs to be recouped on Government contracts through an equitable adjustment. If it is not determined to be desirable by the government, then it reverts back to a unilateral change discussed above.
A required change is when a contractor submits a change to comply with a new or modified cost accounting standard or when the change is necessary to remain in compliance with CAS. There have not been recent changes to cost accounting standards and we do not see them occurring in the near future. However, a required change can occur when a contractor changes its G&A allocation base from total cost input to a value-added base, as a result of a contract award with a large amount of subcontract costs distorting the allocation of G&A costs to that contract. The Government will negotiate an equitable adjustment on a required change.
Accounting changes also require advance notification to the Government, not less than 60 days prior to the change, along with rationale to support that the cost impact is immaterial for a unilateral/desirable change or a detailed cost impact for a required change (FAR 30.603-2 and 30.603-3.
Takeaways
While there are three types of accounting changes defined in CAS, most accounting practice changes submitted by contractors are unilateral and contractors will be responsible for increased costs on CAS contracts. Redstone GCI recommends contractors analyze the impact on cost on CAS covered contracts before any accounting practice change is made. If there is significant increased cost on CAS covered contracts as a result of changing the practice, you may want to consider not making the change.
How Redstone GCI can help
Redstone can assist your company with the following:
- Evaluating the impact of a change on CAS covered contracts in advance of making a change
- Determining whether a change is a cost accounting practice change
- Calculating a general dollar magnitude or detailed cost impact
- Updating disclosure statement language
- Assisting with responses to DCAA noncompliance reports/ACO determinations of noncompliance
- Training on Cost Accounting Standards via webinar or onsite training
Lynne is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to Commercial Item Determinations and support, Cost Accounting Standards, DFARS Business System Audits, Proposals, and Incurred Cost. Prior to joining Redstone Government Consulting, Lynne served in several capacities with DCAA and DCMA for over 35 years. Professional Experience Lynne began her career working with DCAA in the Honeywell Resident Office, Clearwater, FL in 1984. Lynne’s experience included various positions which involved conducting or reviewing forward proposals or rate audits, financial capability audits, progress payments, accounting and estimating systems, cost accounting standards, claims and disclosure statement reviews. She is an expert in FAR, DFARS, CAS and testified as an expert witness. Lynne assisted in drafting the commercial item guidance for DCAA Headquarters. Lynne was assigned as a Regional Technical Specialist where she provided guidance to 20 field offices on highly complex or technical issues relative to forward pricing, financial capability or progress payment issues. As an Assistant for Quality, she was involved in reviewing and ensuring audit reports were in compliance with policy and GAGAS as well as made NASBA certified presentations to the staff including but not limited to billing reviews, CAS, unallowable cost and progress payments. To enhance her experience in government contracting, Lynne accepted a position with DCMA in 2015 as part of the newly organized DCMA Cadre of Experts in the Commercial Item Group. This included performing reviews of prime contractor’s assertions and/or commercial item determinations as well as performing price analyses. Lynne was a project lead and later became a lead analyst where she engaged with the buying commands on requests and reviewed price analysis reviews performed by a team of 5 analysts. She also assisted the DCMA CPSR team relative to commercial items and co-instructed the Commercial Item Training presented to DCMA. Education Lynne earned a Bachelor of Science Degree in Accounting from the University of Central Florida. Certifications State of Florida Certified Public Accountant State of Alabama Certified Public Accountant Defense Acquisition Workforce Improvement Act (DAWIA) Level III- Auditing DAWIA Level III – Contracting