NOTE: This is Part II of a two-part series on this clause.
Applicability: This FAR contract clause is incorporated into all contracts subject to the Cost Accounting Standards. The clause focuses on administering the requirements imposed under the Cost Accounting Standards. This clause provides a process for the contractor and CFAO to administer (1) changes in cost accounting practice (required, unilateral, and desirable changes), and (2) noncompliances. In this Part 2 of the two part series, we will address noncompliances. Note that a Government final determination in administering all CAS issues is made by the Cognizant Federal Agency Official (CFAO). The Procuring Contracting Officer (PCO) must delegate CAS administration to the CFAO, i.e., the PCO is not authorized under the FAR to make CAS determinations.
Key Requirements: A noncompliance is defined in the clause as a failure in estimating, accumulating, or reporting costs to (1) comply with applicable CAS; or (2) Consistently follow disclosed or established cost accounting practices. In addition, CAS regulations state that when there is a noncompliance, the Government is entitled to a price adjustment on existing CAS-covered contracts to the extent the change results in “increased costs in the aggregate” to the Government (plus interest on any of those increased costs that have been paid by the Government). Price adjustments for noncompliances cannot result in the contractor receiving any additional reimbursement, i.e., if the change results in decreased costs in the aggregate to the Government, no price adjustment is made. To implement this requirement, this FAR clause requires the contractor to ssubmit a description of the change necessary to correct the noncompliance within 60 days (or such other date as may be mutually agreed to by the CFAO and the contractor) after the date of agreement with the CFAO that there is a noncompliance. In the event of contractor disagreement with the CFAO determination of noncompliance, the contractor must submit the description within 60 days (or such other date as may be mutually agreed to by the CFAO and the contractor) after the CFAO notifies the contractor of the determination of noncompliance. If the contractor believes the change is immaterial, this statement should accompany the notification submission (if the CFAO agrees with this statement, no further action is required). Unless the CFAO concurs that the change is immaterial, the CFAO will request that the contractor provide a General Dollar Magnitude (GDM) of the cost impact. The clause provides flexibility to the contractor in preparing the GDM. The key is that the GDM provides a reasonable estimate of the dollar magnitude that can be used by the parties to negotiate the price adjustment. For noncompliances, the GDM must also consider the potential impact on actual costs incurred, if the noncompliances relates to costs already incurred under CAS-covered contracts. If the CFAO does not believe the GDM provides a reasonable estimate (e.g., the CFAO believes the method is deficient, the supporting data is inadequate, etc.), the CFAO can require the contractor to submit a detailed cost impact proposal (DCI). The DCI is a contract-by-contract cost impact computation (the CFAO may agree to limit the number of contracts in the DCI). Similar to the GDM, the DCI must also consider costs incurred for noncompliances if the noncompliance relates to costs already incurred under CAS-covered contracts. A DCI generally requires significantly more contractor effort to prepare than a GDM. Based on the results of the GDM and/or DCI, the contractor and the Government negotiate a price adjustment reflecting the increased costs in the aggregate to the Government as a result of the CAS noncompliance.
Compliance Verification: As noted above, the Government is entitled to a price adjustment for increased costs in the aggregate resulting from a CAS noncompliance. Verification of contractor compliance with CAS is performed by the Defense Contract Audit Agency, which performs periodic compliance reviews (e.g., audits/reviews) of the various standards, generally on a rotating basis over a multi-year period. In addition, CAS noncompliances may also be discovered during other audits/reviews, particularly proposal, estimating system, and billing system reviews. The more common CAS noncompliances include, but are not limited to, CAS 401 (failure to propose/accumulate/report costs consistently) and CAS 402 (charging similar costs incurred in the same circumstances in an inconsistent manner, i.e., some as direct costs and others as indirect costs).
Remedies: If the Contractor does not submit the GDM or DCI within the required time-frame, or any extension granted by the CFAO, the CFAO may take one or both of the following actions:
(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; or
(2) Issue a final decision and unilaterally adjust the contract(s) by the estimated amount of the cost impact.
Background: The purpose of this clause is to provide a step-by-step process for administering changes in cost accounting practice and noncompliances. This process provides a logical methodology for negotiating the cost impact. This methodology is very similar for changes in cost accounting practice and for noncompliances. For example, the clause provides for a GDM and, if necessary, a DCI for both changes and noncompliances. It also provides a description of what constitutes increased and decreased costs to the Government by contract type (e.g., fixed price, cost type, etc.) for both changes and noncompliances. The remedies in the clause are also the same for both changes and noncompliances. In addition, the clause does not address how to compute “increased costs in the aggregate” for either changes or noncompliances, because the CAS statute leaves that determination to the CAS Board. However, note that a noncompliance will need to consider the potential impact on actual costs incurred, while a change in cost accounting practice would generally not need to consider that impact (a change should be prospective only, although there are instances where the contractor requests a retroactive change). In addition, the Government is entitled to recoup interest on any increased costs in the aggregate paid if there is a CAS noncompliance.
Other Key Information:
The CAS Board attempted, on several occasions during the 1980’s and 1990’s, to issue a rule on CAS administration, However, significant issues were raised regarding CAS Board proposed rules, particularly in the areas of contractor cost impact submissions (a DCI was required for all changes/noncompliances unless the impact was determined to be immaterial), the methodology for computing the cost impact (the rule was confusing in defining what constitutes increased versus decreased costs), and the negotiation requirements for settling the issue (the rule appeared to require a price adjustment for every contract, no matter the situation – even if there were 5,000 contracts, each one would require a contract modification). In the late 1990’s, it was decided that the FAR would be a better place for addressing the issue of CAS administration. The FAR clause permits the CFAO to negotiate a cost impact with only a GDM, provides a definition of increased/decreased costs for each contract type, and does not include detailed requirements on the final price adjustment negotiations.