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Barry McVay's FEDERAL CONTRACTS DISPATCH

DATE: June 14, 2000

FROM: Barry McVay, CPCM

SUBJECT: Cost Accounting Standards Board; Changes In Cost Accounting Practices

SOURCE: Federal Register, June 14, 2000, Vol. 65, No. 115, page 37469

AGENCIES: Cost Accounting Standards Board (CASB), Office of Federal Procurement Policy (OFPP), Office of Management and Budget (OMB)

ACTION: Final Rule

SYNOPSIS: The CASB is amending its regulations pertaining to actions the cognizant federal agency official (CFAO) can take when a contractor makes a compliant change to an established cost accounting practice or does not comply with applicable Cost Accounting Standards (CAS). This is the culmination of a regulatory process that started with the release of a staff discussion paper in 1993 and the publication of an advance notice of proposed rulemaking in 1995. The resulting final rule has been severely abbreviated because of other recent changes to CAS applicability and proposed revisions to the Federal Acquisition Regulation (FAR) regarding CAS administration.

EDITOR'S NOTE: The CAS are 19 standards which apply to large contractors performing large contracts. They are in Chapter 99 of Title 48 of the Code of Federal Regulations, and are included as an appendix to the paper-version of the Federal Acquisition Regulation (FAR) for information purposes. The CAS are available on the Internet at http://www.arnet.gov/far/97/html/appendix.html.

For more on the Department of Defense (DOD) meeting that was held to discuss its recommended alternative to the CASB's August 20, 1999, third proposed revision, see the February 2, 2000, FEDERAL CONTRACTS DISPATCH "Department of Defense; Public Meeting on Proposed Changes in Cost of Accounting Practices."

For more on the CASB interim rule that revised the thresholds and procedures for the application of CAS to negotiated government contracts, see the February 7, 2000, FEDERAL CONTRACTS DISPATCH "Cost Accounting Standards Board (CASB); Applicability, Thresholds and Waiver of Cost Accounting Standards Coverage."

For more on the interim rule that revised the FAR to implement the CASB February 7, 2000, interim rule, see the June 6, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Circular (FAC) 97-18, Miscellaneous Amendments" (Item 8).

For more on the CASB final rule that finalized the February 7, 2000, interim rule with changes, see the June 9, 2000, FEDERAL CONTRACTS DISPATCH "Cost Accounting Standards Board; Applicability, Thresholds, and Waiver of Cost Accounting Standards Coverage."

For more on the proposed revisions to the FAR pertaining to the cost-impact process that must be followed when a contractor makes a compliant change to a cost accounting practice or follows a noncompliant practice, see the April 18, 2000, FEDERAL CONTRACTS DISPATCH "Federal Acquisition Regulation (FAR); Cost Accounting Standards Administration."

EFFECTIVE DATE: June 14, 2000.

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

SUPPLEMENTAL INFORMATION: The CASB has been working since 1995 on a rule to address (1) what constitutes a change to a cost accounting practice, and (2) what happens when a contractor makes a voluntary change to its cost accounting practices, fails to comply with a CAS, or fails to consistently follow its established cost accounting practices. A notice of proposed rulemaking (NPRM) was published in 1996, and comments submitted on the NPRM persuaded the CASB to publish a second NPRM in 1997. Comments on the second NPRM prompted the CASB to make additional changes and to publish a third NPRM on August 20, 1999 (NPRM-III).

NPRM-III proposed CAS amendments to 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; establish new coverage for "desirable changes"; and add a new Subpart 9903.4, Contractor Cost Accounting Practice Changes and Noncompliances, to establish contractor notification requirements and describe the process for determining and resolving the effect on contract costs of a compliant change to a cost accounting practice or a noncompliant practice.

Fifty-three sets of comments were received in response to NPRM-III. CASB held a public meeting on December 6, 1999, to discuss NPRM-III and the comments. Among those submitting comments and attending the meeting was DOD.

However, the Director of Defense Procurement was concerned about the complexity and level of detail contained in NPRM-III, and the additional administrative burden for contractors and contracting officers that would result from its implementation. On December 19, 1999, DOD held a public meeting to discuss alternatives to NPRM-III. On January 7, 2000, DOD replaced its initial comments on NPRM-III with an alternative proposal for CASB's consideration, and held a public meeting on February 10, 2000, to discuss its alternative. Subsequently, 12 commenters withdrew their comments on NPRM-III and advised CASB that they preferred the DOD alternative. On February 29, 2000, DOD submitted a revised alternate proposal. (Most of the differences between NPRM-III and the DOD proposals were in illustrations contained in CAS 9903.302-3, Illustrations of Changes Which Meet the Definition of "Change to a Cost Accounting Practice".)

While all this was going on, President Clinton signed the National Defense Authorization Act for Fiscal Year 2000 (Public Law 106-65) on October 5, 1999. In Public Law 106-65 was Section 802, Streamlined Applicability of Cost Accounting Standards, which directed that firm-fixed-price contracts or subcontracts awarded on the basis of adequate price competition without submission of cost or pricing data be exempt from CAS, and that the threshold for full CAS coverage be increased from $25,000,000 to $50,000,000. On February 7, 2000, CASB issued an interim rule implementing these changes effective April 7, 2000, and CASB finalized the interim rule without changes on June 9, 2000. (On June 6, 2000, the FAR was amended to implement the February 7, 2000, CASB interim rule.)

Finally, on April 18, 2000, a proposed FAR revision was published to explain the cost-impact process that the government and contractor must follow when a contractor makes a compliant change to a cost accounting practice or follows a noncompliant practice. This proposed rule is considered necessary because the CASB found the government does not implement the administrative process in a uniform manner, and the procedures and processes are not widely understood or adequately documented in the FAR. Though there is no direct correlation between NPRM-III and this proposed rule, they are related.

Based on all of this activity and controversy, the CASB has decided to issue a very small change to its regulation. The primary reasons cited in the introduction to the final rule are: (1) the implementation of Section 802 of Public Law 106-65 "is expected to reduce the number of CAS-covered contracts and the number of contractor business units performing CAS-covered contracts", and (2) the April 18, 2000, proposed FAR revision "addresses many aspects of the fundamental CAS administration process that the Board's proposals also addressed...In view of the circumstances that now prevail, a projected decline in CAS-covered contracts and the expected 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."

The following are the three changes being made to the CASB's regulations by this final rule:

  1. In 9903.201-4, Contract Clauses, the citation of the interest rate to use when recovering increased costs paid due to a contractor's failure to comply with an applicable CAS or to follow any cost accounting practice consistently is made more explicit. "Section 6621 of the Internal Revenue Code of 1986 (26 U.S.C. 6621)" is changed to "section 6621(a)(2) of the Internal Revenue Code of 1986 (26 U.S.C. 6621(a)(2))" in the following three places: (i) paragraph (a)(5) of the "Cost Accounting Standards" clause in paragraph (a); (ii) paragraph (a)(4) of the "Disclosure and Consistency of Cost Accounting Practices" clause in paragraph (c); and (iii) paragraph (a)(5) of the "Cost Accounting Standards -- Educational Institutions" clause in paragraph (e). (EDITOR'S NOTE: 26 U.S.C. 6621 identifies several different interest rates: overpayment, underpayment, federal short-term rates, etc. Paragraph (a)(2) explains the interest rate for underpayments of taxes, which is basically the same thing as overpayments to contractors, at least from the Treasury point of view.)

  2. 9903.201-6, Findings, is revised to establishes new procedures for processing compliant cost accounting practice changes and noncompliant cost accounting practice conditions in accordance with the CAS contract clause requirements in 9903.201-4. Previously, 9903.201-6 required the contracting officer to make a finding "that the [cost accounting practice] change is desirable and is not detrimental to the interests of the Government" before making any equitable adjustment. This rule differentiates the findings the CFAO must make, depending on the nature of the change (the CFAO is "the contracting officer assigned by the cognizant federal agency to administer the CAS"):


  3. 9903.201-8, Compliant Accounting Changes Due to External Restructuring Activities, is added, and it states that "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." (EDITOR'S NOTE: 10 U.S.C. 2325 prohibits the payment of "restructuring costs associated with a business combination of the contractor" unless the Secretary of Defense the savings for DOD will be at least twice the costs or the business combination will preserve a critical capability that might otherwise be lost to DOD. See Defense FAR Supplement (DFARS) 231.205-70, External Restructuring Costs.)

EDITOR'S NOTE: Basically, CASB has decided to punt. Maybe this was to be expected -- it is impossible to write detailed procedures and develop illustrations that neatly cover all the possible permutations involving various mergers and acquisitions and reorganizations. Any such attempt had to be woefully complex, as DOD pointed out (not that DOD's alternatives were much better). Many contractors have maintained all along that NPRM-III and its predecessors were the wrong solution to the wrong problem, but CASB doggedly persisted. And CASB is right about Section 802 reducing the number of contractors subject to CAS, and that the proposed FAR change will clarify the procedures for processing cost-impacts. So, rather than spending any more time and energy trying to draft regulations that will never satisfy the remaining CAS-covered contractors (or DOD), CASB decided to hang its hat on Section 802 and call it quits.

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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