* NOTE: This is Part I 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 1 of the two part series, we will address changes in cost accounting practice. 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 change in cost accounting practice is defined in the CAS regulations. These regulations further state that when there is a required change in cost accounting practices (e.g., a change that was not made voluntarily by the contractor), all existing CAS-covered contracts are subject to a price adjustment (up or down) based on the amount of “increased costs in the aggregate” resulting from the change. When there is a unilateral change in cost accounting practice (e.g., a voluntary change made by the contractor), 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. Price adjustments for unilateral changes can not 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 submit, to the CFAO, a description of any cost accounting practice change. 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. In addition, as part of the GDM submission, the contractor can also request that the CFAO determine the change to be a desirable change (when such a determination is made, the CFAO is empowered to negotiate a price adjustment that is less than the increased costs resulting from the change). 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). 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 (or possibly decreased costs in the aggregate to the Government if it is a required change).
Compliance Verification: As noted above, the Government is entitled to a price adjustment for increased costs in the aggregate resulting from changes in cost accounting practice. To provide greater assurance that the Government receives these price adjustments, the Defense Contract Audit Agency performs periodic compliance reviews (e.g., audits/reviews) of the various standards, generally on a rotating basis over a multi-year period. In addition, changes in cost accounting practice may be discovered during other compliance reviews, such as proposal or estimating system audits/reviews.
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 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. The clause also provides a description of what constitutes increased and decreased costs to the Government for each type of contract (e.g., fixed price, cost type, etc.). However, the clause does not address how to compute “increased costs in the aggregate” because the CAS statute leaves that determination to the CAS Board. At this time, the CAS Board has no rules addressing “increased costs in the aggregate”, thus leaving that issue open to interpretation.
Other Key Information:
The CAS Board attempted, on several occasions during the 1980’s and 1990’s, to issue a rule on CAS administration, Those attempts resulted in proposed rules that were, in some cases, almost 100 pages long. In the late 1990’s, it was decided that the FAR would be a better place for addressing the issue of CAS administration. While a CAS administration clause previously existed in the FAR, it was very sparse and provided no flexibility. For example, the old clause required submission of a DCI for any change that was not determined immaterial by the CFAO. The new clause permits the CFAO to negotiate a cost impact with only a GDM, which can save significant resources for both the contractor and the Government. The process in the current clause resulted from two proposed rules and two public meetings, and incorporated significant industry input into the final product.