Future Role of the C A ost ccounting S tandards B oard Prepared for Congress by the Cost Accounting Standards Board Review Panel April 2, 1999 Summary SUMMARY OF RECOMMENDATIONS Congress asked the General Accounting Office (GAO) to establish a panel of experts to study and make recommendations regarding the Cost Accounting Standards (CAS) Board and the CAS system against the background of the far-reaching procurement reforms of recent years. This group, the CAS Board Review Panel, believes that there is a continuing need for the CAS and the CAS Board. Cost- based contracts continue to represent the majority of all federal contracting dollars and the original purposes of the CAS--principally, the need for uniformity and consistency to protect the government from certain risks inherent in cost-based contracts and to improve communications between the government and contractors with regard to those contracts--remain. While there continues to be a need for the CAS, the Panel believes reforms are needed to encourage the participation of new commercial companies in government procurement and to reduce the burden of government unique accounting requirements on smaller companies. The Panel believes that a number of reforms can reduce the burdens and costs of the CAS system without diminishing its benefits. Implementing these reforms will help expand the government’s industrial base and provide relief for smaller firms, with no significant reduction in the amount of dollars subject to CAS coverage. Changes to the Board’s Location and Membership. The Panel believes that consideration of changes to the Board’s location, membership, and staffing is warranted and will improve the Board’s effectiveness. In particular, the Board’s placement in the Office of Federal Procurement Policy (OFPP) within the Office of Management and Budget (OMB) has imposed limitations on the Board’s work and raised questions regarding its independence. In considering an alternative, the Panel believes that the Board should be an independent organization, although it could be placed within a host agency, either the General Services Administration or the Department of Defense (DOD), as long as the Board’s autonomy is ensured. In terms of membership, the Panel recommends that the Board continue to have a majority of government members; the Chair be a government officer; and that other members include a representative of DOD (which continues to be responsible for the majority of CAS-covered contracts), a representative of a civilian agency, an industry representative, and a representative of the accounting profession (not a government employee). The Panel believes that, given the Comptroller General’s independence and particular interest in the CAS, there would be value in adding the Comptroller General as a non-voting member. Changes in CAS Applicability. The Panel recognizes that increases to the applicability thresholds as well as the creation of new exemptions to CAS coverage are controversial areas. Accordingly, the Panel searched for ways to reduce the costs of the CAS system while maintaining its benefits for those contractors with a significant pricing risk to the government. Based on its analysis of the numbers of i Summary contractors and percentages of dollars that would be affected, the Panel concludes that the current $500,000 contract application threshold should be retained, but that the OFPP Act of 1988 should be amended so that the applicability of the CAS to non-exempt contracts would be triggered only by receipt of a contract of $7.5 million or more. According to the Panel’s analysis, if this change is implemented, about 97 percent of CAS-covered dollars will continue to be subject to the CAS, but the number of contractor segments subject to CAS coverage will significantly decrease. The Panel also recommends that the threshold for full CAS coverage be increased from $25 million to $50 million. In addition, the Panel recommends that firm fixed-price contracts be exempt from the CAS in those cases where the government does not obtain certified cost or pricing data at the time of award. The Panel reached this conclusion because when certified cost or pricing data is not obtained, the safeguards provided by the CAS are not necessary. Transfer of Administrative Responsibilities to Contracting Agencies. The Panel recommends that Congress provide contracting agencies with responsibility for contract administration related to the CAS, such as the authority to waive CAS requirements. Consistent with recent procurement reforms, which have vested more discretion in contracting agencies in such contract administration matters, the granting of waivers by the concerned agencies would be more efficient and expeditious, and would allow the CAS Board to focus on maintaining a system of cost accounting requirements. Review of Standards. The Panel believes that an overall review of the CAS and their attendant requirements is warranted to judge whether the standards should be streamlined. In that review, consideration should be given to the experience gained in the twenty years since the standards were initially promulgated; the contentions that procurement policy and funding concerns have inappropriately shaped the standards; the areas in which the CAS and generally accepted accounting principles overlap and differ; and the possibility that the disclosure statement may be unnecessarily burdensome. The Panel also concludes that there is no longer a continuing need to include CAS 405 (accounting for unallowable costs) and CAS 406 (cost accounting period) in the definition of modified coverage in light of other applicable requirements. ii Contents Summary of Recommendations .................................................................................... i Chapter 1 Introduction ............................................................... 1 Background ................................................................ 1 Early cost allocation rules ......................................... 3 Events leading to the development of the CAS ........ 4 Establishment and history of the CAS Board .......... 6 Recent acquisition reforms ....................................... 8 Chapter 2 The CAS and Other Cost Rules .............................. 12 The CAS ................................................................... 12 Other cost rules ....................................................... 15 Audit oversight ........................................................ 17 Chapter 3 CAS Applicability .................................................... 19 Benefits and costs of the CAS ................................. 19 CAS applicability and coverage thresholds ............ 25 Firm fixed-price contracts ....................................... 31 Conclusion ................................................................ 33 Recommendations ................................................... 34 Chapter 4 The CAS Board’s Operations and Review of the Standards ......................................... 35 Accounting rules versus contract administration .. 35 Review of the standards .......................................... 40 Conclusion ................................................................ 44 Recommendations ................................................... 44 Chapter 5 Need for and Organization of the CAS Board ........ 46 Continued need for a CAS Board ............................ 46 Organization of the CAS Board .............................. 47 Recommended changes............................................ 54 iii Contents Appendices Appendix I The CAS Board Review Panel list of Panel Members ...................... 57 Appendix II Potential benefits of CAS as identified by the Comptroller General in 1970 ................................................................................. 59 Appendix III The CAS ............................................................................................. 61 Appendix IV The CAS exemptions ......................................................................... 63 Appendix V The CAS applicability and coverage diagram .................................. 64 Appendix VI Sample disclosure statement form ................................................... 65 Appendix VII Comparison of the CAS and FAR cost principles ........................... 106 Appendix VIII List of surveyed contractors and IDCC firms ................................ 116 Appendix IX Testimonies and other statements ................................................. 119 Appendix X Methodology used to identify the CAS-covered contracts..................................................................... 354 Appendix XI Full versus modified coverage risks ............................................... 362 Appendix XII Analysis of the CAS Board waiver requests................................... 364 Appendix XIII Comparison of the CAS and GAAP................................................. 367 Appendix XIV DOD’s cost-based contracting ......................................................... 370 Appendix XV Summary information on selected boards...................................... 371 iv Contents Table Table 5.1 Structure of original and current CAS Boards ................. 47 Figures Figure 3.1 Comparing current CAS coverage with alternative trigger contract amounts and a full coverage threshold of $50 million ..................................................... 29 Figure 3.2 Type of subcontracts used by selected DOD contractors on cost-based government contracts .............. 33 Abbreviations ABC Activity Based Costing AICPA American Institute of Certified Public Accountants ASBCA Armed Services Board of Contract Appeals ASPR Armed Services Procurement Regulation B&P Bid and Proposal CAS Cost Accounting Standards CBO Congressional Budget Office CPA Certified Public Accountant DCAA Defense Contract Audit Agency DCMC Defense Contract Management Command DOD Department of Defense DOE Department of Energy IDCC Integrated Dual-use Commercial Companies FACA Federal Advisory Committee Act FAR Federal Acquisition Regulation FASA Federal Acquisition Streamlining Act FASB Financial Accounting Standard Board FERC Federal Energy Regulatory Commission FIFO First-in, First-out FPDS Federal Procurement Data System G&A General and Administrative Expense GAAP Generally Accepted Accounting Principles GAO General Accounting Office GSA General Services Administration ICC Interstate Commerce Commission IR&D Independent research and development JDAMS Joint Direct Attack Munitions System JPATS Joint Primary Aircraft Training System LIFO Last-in, First-out NASA National Aeronautics and Space Administration OFPP Office of Federal Procurement Policy OPM Office of Personnel Management OMB Office of Management and Budget v Contents Abbreviations RAPB Railroad Accounting Principles Board STB Surface Transportation Board TD Treasury Decision TINA Truth in Negotiations Act vi Chapter 1 INTRODUCTION BACKGROUND Since the early part of the century, the federal government has had accounting requirements or criteria designed to protect it from the risk of overpaying for goods and services by governing the manner or degree to which contractors apportion costs to their cost-based contracts with the government. A key role in the current rules is played by the 19 standards that were developed in the 1970s by the Cost Accounting Standards (CAS) Board, a body created by Congress for the purpose of developing a set of uniform and consistent standards. The 19 standards and their attendant regulations impose unique and significant accounting requirements on companies that are awarded cost-based contracts by the government. In recent years, the dominant trend in government contracting has moved toward simplifying the government’s acquisition process and eliminating government-unique requirements. While the CAS system has largely remained untouched by these reforms, there have been calls to adjust the standards or exempt more contracts from the burden of compliance with them. The wisdom of doing so turns largely on cost/benefit analyses weighing the benefits of the CAS system against its costs, as well as on judgments about the level of risk the government should tolerate in possible accounting, pricing, and costing techniques that may result in overpayments by the government. Congress asked that the General Accounting Office (GAO) establish a panel of experts to study issues concerning the CAS system and make recommendations to Congress. Noting that the contracting environment in the federal procurement system has significantly changed since the establishment of the original CAS Board more than 25 years ago, Congress asked that the CAS Board Review Panel focus on such things as the: · viability of the CAS Board’s original mission after major changes in the procurement laws; · extent to which a board is advisable to regulate contractor cost accounting practices; · extent to which the cost allocability functions of such a board should be combined with functions related to determinations of cost allowability; 1 · composition, membership, and structure of such a board to ensure its independence and balance; and · provision of adequate staff and resources for such a board. Congress directed that the Panel consist of members from the government’s procurement/acquisition offices, private industry, and the private accounting profession (but not CAS Board members or staff). Congress further directed that the Panel’s activities should “include opportunities for substantial participation and analysis by industry and the private accounting profession, as well as government representatives.” In accordance with this direction, GAO created a Panel of 10 members with extensive knowledge of accounting and finance and proven track records of concern for the public interest in matters related to the CAS.1 Five were from the government, four from private industry, and one from the private accounting profession. In considering the various issues that Congress raised, the Panel received an enormous amount of information and advice from government representatives, industry, and the private accounting profession. For example, as part of the data gathering process for this report, the Panel held public hearings on June 16-18, 1998, at which more than 25 officials from government and industry presented views about the future role of the CAS Board and the standards themselves. The Panel also met with the current members of the CAS Board. The Panel’s work was supported by staff working groups formed under GAO’s sponsorship to provide support to the Panel members as well as administrative support to the study. The working groups consisted of staff from GAO, other government agencies (Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and Office of Personnel Management (OPM)), the legal and public accounting community, and industry. The members of these working groups brought substantial expertise on issues relating to contract administration, government requirements, and industry compliance with the CAS requirements. To review the past and current role of the CAS Board, the working groups researched the events leading to the creation of the standards and the CAS Board as well as the events leading to more recent changes in acquisition laws. The Defense Contract Audit Agency (DCAA) and the Defense Contract Management Command (DCMC) presented data to evaluate contracts to which the CAS apply and analyze potential changes in the CAS thresholds. In addition, to learn about the costs and benefits of the CAS and how contractors manage the CAS requirements, a group of primarily commercial companies and the major DOD contractors was surveyed, and the testimony of government and 1 See appendix I for a list of Panel members. 2 industry representatives was considered. GAO staff reviewed internal Board documentation and held meetings with the Executive Secretary and other Board staff to analyze recent CAS Board promulgations. A draft report was developed that was then fully reviewed by the Panel members, who brought to bear their individual expertise. The Panel found a continuing need for the CAS and CAS Board, but it concluded that some changes are appropriate. This report is the result of this extensive effort and presents the Panel’s unanimous conclusions and recommendations. The following sections of this chapter trace the early history of cost allocation rules and the events that led to the development and adoption of the present-day CAS Board. The chapter closes with a summary of some of the more relevant aspects of the recent reforms that have been implemented in the federal procurement process. EARLY COST ALLOCATION RULES The federal government has often used contracts in which the price is based upon the contractor’s cost of performing (cost-based contracts),2 and the government has recognized the need to protect itself from being mischarged by defining the costs that can be recovered under the contracts (“allowability”) and establishing some rules for the allocation of indirect costs to the contracts. As early as 1916, the Munitions Manufacturers Tax legislation specified which costs could be recognized when determining profits on government contracts for purposes of determining a tax on munitions contractors’ profits.3 Government contracting officers began referring to this legislation to determine which costs would be reimbursed on federal cost-type contracts. Beginning in 1934, the Department of Treasury issued rules (culminating in Treasury Decision [T.D.] 5000) that were followed by government contracting officers. T.D. 5000 defined various types of costs and identified certain ones as unallowable, and provided principles for allocating indirect costs to federal contracts. In 1942, the War and Navy Departments jointly published a set of cost principles, dubbed the “Green Book,” which were also widely used by contracting officers. The Green Book took a cost-by-cost approach to the apportionment of cost categories. For example, the Green Book provided that shop engineering expenses could be allocated by job or project and calculated as percentages of direct labor or production costs. 2 Throughout this report, references to cost-based contracts include all cost-type contracts as well as those fixed-priced contracts where the contractor’s estimated or actual costs play a role in determining the amount the government pays. 3 38 Stat. 781 (1916). 3 In 1949, the Armed Services Procurement Regulation (ASPR) superseded the Green Book and T.D. 5000 for DOD contracts. The ASPR addressed the allowability of various costs and stated general principles regarding how costs should be allocated. In 1959, the ASPR was amended to introduce more detailed and specific allocation rules, although contractors were still allowed broad latitude in measuring, assigning, and allocating costs. These rules were essentially the same as those contained in the Federal Acquisition Regulation (FAR) today. While not a cost allocation rule, a significant statute relevant to contractor costs is the Truth in Negotiations Act (TINA).4 TINA was first enacted in 1962 after congressional studies found cases of overpricing in negotiated DOD contracts because of inflated or erroneous cost estimates. TINA was intended to protect the government from the risk of overpayment by placing the government on equal footing with contractors in negotiating contract prices and giving the government the right to seek contract price adjustments if contractors breach their duties under TINA. EVENTS LEADING TO THE DEVELOPMENT OF THE CAS In 1968, during Congress’s consideration of whether the Defense Production Act of 1950 should be extended, Admiral Hyman G. Rickover testified that it was nearly impossible to ascertain the profit on a particular contract because of the lack of control over the definitions and the shifting treatment of contract costs. He proposed that Congress provide for the development of uniform accounting standards for defense contracts so that these costs could be measured and controlled. As a result, the House Banking and Currency Committee conducted hearings to determine whether a uniform set of cost accounting principles should be developed. At the time, negotiated cost-based contracts represented the overwhelming majority of all military procurements on a dollar-value basis, and various witnesses testified that uniform cost accounting rules were necessary because the lack of such standards substantially increased costs of procurement and difficulties in contract administration. Witnesses testified that without such standards it was difficult for the government to compare competing companies’ contract price estimates because various contractors might use different accounting methods to measure and allocate costs. Moreover, witnesses reported that once contracts had been awarded, carrying out accurate audits was difficult because contractors sometimes presented costs in their proposals differently from the way they charged the government during contract performance. It was also argued that the various existing laws that were intended to control contractor 4 The provisions of TINA are discussed in chapter 2. 4 costs and excess profits (including the Renegotiation Act of 19515 and TINA) were not sufficient to protect the government’s interests. Other witnesses disagreed with both the need for, and workability of, uniform cost accounting rules. These witnesses argued that uniform standards were unnecessary because federal regulations governing cost allocation (that is, the ASPR) and the Generally Accepted Accounting Principles (GAAP) already contained the necessary cost accounting guidelines. Such standards, they also argued, would unnecessarily interfere with commercial accounting practices. The House Banking and Currency Committee report issued after the hearings concluded that the absence of uniform cost accounting rules was substantially increasing procurement costs and that there were inadequate safeguards against excess profits.6 However, Congress did not then require the development of uniform standards but directed GAO to undertake a study on the feasibility of establishing such standards.7 After a year of study, the Comptroller General reported that uniform and consistent standards were feasible and recommended that such standards be developed.8 In its report, GAO reported a number of cases of cost misallocation, including cases in which contractors: (1) used one set of generally accepted accounting methods to estimate contract costs and a different set to record actual performance costs; (2) double-counted a cost, once as direct and again as indirect; (3) hid unallowable direct charges in overhead rates; (4) included costs that were exclusively or mostly related to commercial operations in general overhead pools and charged part of these to government contracts; (5) recovered cost overruns on independent research and development by charging the costs under another name; (6) treated capital outlays as current expenditures and charged the entire amount to the government; or (7) failed to credit the government for refunds and discounts they received from subcontractors and suppliers. The GAO report identified several potential benefits of uniform and consistent standards. The study noted that such standards could (1) facilitate the preparation and reporting of cost information by contractors and its audit and evaluation by the government; (2) provide guidance to ensure that costs would be reported on a consistent basis and be comparable with those proposed, projected, or otherwise reported; (3) improve communications among the government, Congress, industry, and the public; (4) promote a common understanding of the methods of cost determination and minimize controversy in the administration 5 65 Stat. 7 (1951). 6 House Report No. 1455, May 23, 1968. 7 82 Stat. 279 (1968). 8 Report on the Feasibility of Applying Uniform Cost-Accounting Standards to Negotiated Defense Contracts by the Comptroller General of the United States, January 1970. 5 and settlement of contract disputes; and (5) eliminate differences within the government regarding acceptable accounting practices.9 The GAO report did not discuss the potential costs associated with the implementation of standards. Although neither the benefits nor the costs of implementing standards were quantified, the study concluded that for a variety of reasons the “cumulative benefits from the establishment of cost accounting standards should outweigh the cost of implementation.” In 1970, when the extension of the Defense Production Act was again under consideration, the Senate Banking and Currency Committee was presented with the GAO report. The committee report on the Defense Production Act concluded that accurate measurement of contractors’ costs was needed in negotiated contracts both during price negotiations and during contract performance and noted that financial accounting standards (e.g., GAAP) could not satisfy the government’s requirements because “unlike financial accounting, which concentrates on a company’s total operations for a given period, cost accounting is concerned with allocating a part of a company’s total expenses to a specific product or service.”10 According to the committee, the essential problem was that contractors could, to a significant degree, control their reported costs on negotiated contracts simply by picking and choosing the accounting methods most advantageous to them. ESTABLISHMENT AND HISTORY OF THE CAS BOARD Against this background, Congress in 1970 created the CAS Board as an independent board located within the legislative branch.11 The Board was chaired by the Comptroller General, who appointed four other members. The Board was authorized to promulgate standards designed to achieve uniformity and consistency in cost accounting practices used by federal contractors on national defense contracts in excess of $100,000. By the end of the decade, the Board had issued 19 standards that stated principles for the measurement, assignment, and allocation of a variety of cost subjects.12 During that period, the Board also issued various amendments and interpretations to its standards. The Board exempted some classes of contracts from CAS coverage (for example, contracts with small businesses) and established procedures for waiving the CAS for particular contracts. Two of the more significant actions by the Board were the establishment of a trigger contract and 9 See appendix II for a complete list of benefits projected in the GAO report. 10 Senate Report No. 91-890, May 21, 1970. See also House Report No. 91-1330, July 27, 1970. 11 P.L. 91-379, August 15, 1970, 84 Stat. 796 (1970). Funds were first appropriated for the Board’s operation in the 1971 Supple- mental Appropriation Act, 84 Stat. 1991 (1971). 12 The CAS system is discussed in chapter 2. 6 the use of two tiers of CAS coverage, full and modified. Under the trigger contract approach, a contractor segment was not subject to CAS coverage until that segment received a non-exempt contract in excess of $500,000. After that, all non-exempt contracts received by that segment in excess of $100,000 were CAS-covered. Once a segment had a CAS-covered contract, the two tiers of CAS coverage determined whether that contract was subject to modified coverage (compliance with CAS 401 and CAS 402) or full coverage (compliance with all standards). Full coverage was applicable to non-exempt contracts when total contract awards for a contractor segment exceeded a certain dollar threshold; modified coverage applied when total contract awards did not exceed that threshold. In 1980, Congress considered the CAS Board’s task essentially complete and did not renew its funding.13 Because it did not receive a fiscal year 1981 appropriation, the CAS Board ceased its operations. Congress, however, did not repeal the law that created the Board, and the standards remained in effect. In the absence of the Board, DOD took responsibility for maintaining the standards and their accompanying rules and regulations during the 1980s. DOD believed that future revisions to the CAS could be introduced through the normal procedures for revising procurement regulations and that there would be no need for a CAS Board. Industry was strongly opposed to DOD taking over the CAS Board’s functions, and several government agencies—NASA, the General Services Administration (GSA), and GAO—also challenged DOD’s authority to revise the CAS. Between 1980 and 1988, disputes emerged over the interpretation of 9 of the 19 standards. For example, shortly after the CAS Board ceased operations, DOD determined that the standard addressing depreciation of tangible capital assets (CAS 409) ran counter to its procurement policies aimed at promoting higher contractor productivity. To avoid that conflict, DOD interpreted and later proposed to amend that standard to provide the flexibility to reach advance agreements with contractors on shorter depreciation periods, allow more rapid capital equipment depreciation, and recognize replacement costs as the basis for depreciation. GAO opposed DOD’s proposal to amend this standard and took the position that CAS 409 should not be a vehicle for defense contractors to stimulate cash flow and returns on investment. GAO argued that CAS 409 was based on the most appropriate cost accounting practices, whereas the DOD initiative was “an arbitrary measure which has been devised for other than cost accounting purposes.”14 Later, DOD essentially abandoned its position. The disputes regarding the various standards caused increasing numbers of government and industry representatives to conclude that the standards needed to 13 In November 1980, the Comptroller General issued a report, Cumulative Progress Report to the Congress, 1971-1980, which indicated that the Board had substantially completed its assigned task of promulgating the CAS. 14 GAO also warned that this DOD initiative could cost as much as $2.4 billion. 7 be reviewed and possibly amended. There were also suggestions that the CAS thresholds might be obsolete and questions as to how the CAS requirements could be waived in the absence of a CAS Board. These were among the factors that drew attention to the need to reestablish an independent board to administer the CAS. In 1988, in the Office of Federal Procurement Policy (OFPP) Act,15 Congress reestablished the CAS Board. The new Board was placed in OFPP, which is part of the Office of Management and Budget (OMB). The reestablished Board was given broader authority than its predecessor. For example, the CAS now apply by law to all federal contracts, not just defense contracts. The Board was also given “exclusive” authority to make, promulgate, amend, and rescind the CAS, and the OFPP Administrator was charged with ensuring that no agency regulations were inconsistent with the CAS. RECENT ACQUISITION REFORMS A recurring goal of recent statutory and regulatory changes in the government’s purchasing processes has been to adopt practices more like those of the commercial marketplace and to increase the availability of commercial products to meet government needs. These acquisition reforms also vested more discretion in contracting agencies to allow them to better exercise their business judgment in making contracting decisions. It was believed that the implementation of these procurement reform initiatives would result in substantial cost savings. In the National Defense Authorization Act of 1991, Congress declared that the time had come to start the process of streamlining the hundreds of individual federal laws that formed the underpinnings of the defense acquisition system.16 To that end, Congress directed DOD to establish a panel of experts (known as the Section 800 Panel) to study acquisition laws and to make specific recommendations for streamlining them. The Section 800 Panel was particularly concerned that government-unique requirements, such as the CAS, were among the reasons why many contractors chose to separate their government and commercial production facilities. The Panel’s report stated that these barriers to civilian-military integration not only added to the costs of doing business with the government, but also “walled off ” the rapid advances being made in commercial research and development from easy exploitation and use in military systems.17 The Section 800 Panel recommended that the CAS be retained but urged the CAS Board to take prompt action to facilitate purchases of commercial items and services. 15 P.L. 100-679, 102 Stat. 4059 (1988), codified at 41 U.S.C. 422. 16 P.L. 104 Stat. 1587 (1990). 17 Final Report of the Acquisition Law Advisory Panel, January 1993. 8 The Panel believed that, even without new laws, the Board had the authority to exempt classes of contractors and subcontractors and types of contracts and subcontracts from the CAS. The Panel stated that, “as a priority matter,” the CAS Board should use its existing authority “to exempt contracts for commercial items or at least limit the standards that would be applicable to government contracts for commercial items.” The Panel believed that prompt action would be “among the most important steps” that could be taken to facilitate the government’s purchase of commercial items and services and to allow contractors offering commercial products to the government “to be able to integrate defense and commercial production where economically feasible without being subject to restrictive cost accounting standards.” The Panel also stated that the implementation of this recommendation would “result in cost savings by allowing businesses to consolidate the production of commercial and defense related products in a single business unit without altering existing accounting or management practices.” Congress adopted many of the recommendations of the Section 800 Panel in the Federal Acquisition Streamlining Act of 1994 (FASA),18 which contained sweeping statutory procurement reforms. FASA contained more than 200 sections, changing the laws that govern how federal agencies annually acquire almost $200 billion in goods and services. The major issues covered by FASA include buying commercial items, using commercial practices, reducing administrative operating costs by eliminating burdensome paperwork, increasing the importance of past performance in selecting contractors, empowering contracting officers to exercise business judgment, and streamlining the entire acquisition process. FASA established preferences for purchasing commercial end items and components. It also required agencies, to the maximum extent practicable, to specify their needs in terms of functions to be performed, performance required, or essential characteristics; define requirements to allow commercial items to compete; and conduct market research to find commercial products that can meet their needs. FASA also expanded the range of products and services that qualify as commercial items and exempted commercial items from various procurement laws. In FASA, Congress implemented the Section 800 recommendation regarding the CAS, by exempting from the CAS “any other firm-fixed price contract or subcontract (without cost incentives) for commercial items.” In 1996, Congress enacted the Clinger-Cohen Act of 1996,19 to provide further acquisition reform. As part of the Clinger-Cohen Act, Congress amended the OFPP Act to expressly exempt contracts for commercial items from the CAS requirements. The changes implemented in FASA and the Clinger-Cohen Act were intended to make the government’s acquisition policies for procuring commercial items more similar to those of the private sector. For example, FASA provided that no 18 P.L. 103-355, 108 Stat. 3243 (1994). 19 P.L. 104-106, 110 Stat. 656 (1996). 9 certified cost or pricing data should be required from a contractor for commercial items sold to the government so long as there was adequate price competition. FASA further provided that even without adequate price competition, the agency should attempt to determine price reasonableness without requiring the submission of certified cost or pricing data. Also, the Clinger-Cohen Act removed the requirement that commercial items be sold at “established catalog or market prices” and “in substantial quantities to the public” in order to be exempt from the requirement to submit certified cost or pricing data. The procurement reform initiatives in FASA and the Clinger-Cohen Act authorized and encouraged the exercise of discretion and business judgment by contracting officials. For example, the provision in FASA authorizing the use of simplified acquisition procedures for procurements under $100,000 in value was intended to grant agencies greater discretion when making smaller dollar purchases. Another area where FASA granted increased discretion to contracting agencies was in task and delivery order contracts, where agencies were given broad discretion in establishing procedures for the evaluation and award of individual task orders. Moreover, the commercial item acquisition procedures envisioned that contracting officials would have far more flexibility in exercising their business judgment. Finally, Congress authorized various pilot programs that granted DOD discretion to use innovative acquisition procedures—for example, the Joint Direct Attack Munitions System (JDAMS) and the Joint Primary Aircraft Training System (JPATS). Congress expected this procurement reform legislation to “enable the government to buy goods and services cheaper and faster.”20 The Senate Committee on Governmental Affairs and the Senate Committee on Armed Services, in their reports on FASA, incorporated the views of the Congressional Budget Office (CBO), which stated that FASA would likely reduce the cost that the federal government would incur for goods and services, allowing agencies to make more efficient use of their appropriated funds.21 The CBO stated that savings could be achieved by adjusting “policies that require government contractors to supply data that they do not have to collect or provide in ordinary business dealings” by facilitating the purchase of commercial items and by granting agencies greater discretion when making small dollar purchases. The CBO also stated that “there is good reason to expect that [FASA, which] makes accounting simpler, government-specific products less prevalent, and procurement more efficient[,] would yield budgetary savings.” While there is no consensus on how many billions of dollars in savings have been already realized by the various procurement reform initiatives, there is no doubt 20 Senate Report No. 103-259, May 12, 1994. 21 Senate Report No. 103-258, May 11,1994; Senate Report No. 103-259, May 12,1994. 10 that considerable savings have occurred.22 The JDAMS and JPATS programs have both been reported as acquisition reform success stories that have achieved significant cost savings; for example, DOD states that the JPATS acquisition strategy resulted in original program estimates of $7 billion being reduced to about $4 billion upon contract award. In sum, there has been considerable acquisition reform in recent years to streamline the procurement process and increase the discretion of contracting agencies in making their acquisition decisions. While these reforms have allowed considerable cost savings to be achieved, opportunities for additional savings exist. In the following chapters, the Panel discusses the various government cost rules, the benefits and costs of the CAS, proposed modifications to the existing CAS applicability thresholds, proposed modifications to the CAS Board administrative functions, a proposed review of the existing standards, and proposed restructuring and relocation of the CAS Board. 22 See, for example, Acquisition Reform: Effect on Weapon System Funding (GAO/NSIAD-98-31, Oct. 1997). 11 Chapter 2 THE CAS AND OTHER COST RULES To reduce the risk of the government being overcharged, as well as for other reasons, government contractors are subject to a variety of statutes and regulations governing the allowance, allocation, and negotiation of costs for federal contracts. The cost review and control systems established by these statutes and regulations include the CAS, the FAR cost principles, and TINA. To ensure compliance with these rules, contractors are required to make available for audit their books, records, accounting procedures and practices, and other data. In this chapter, the Panel briefly describes each of these sets of cost rules and discusses the audit oversight available to ensure compliance with them. THE CAS As part of efforts to protect the government from the adverse effects of inconsistent or inaccurate contractor cost accounting, including overpayment, the CAS Board was established more than 25 years ago to achieve greater uniformity and consistency in cost accounting practices used by certain federal contractors. The primary task of the CAS Board is to promulgate and revise standards to achieve (1) an increased degree of uniformity in cost accounting practices among government contractors, and (2) consistency in cost accounting practices by individual government contractors over periods of time. A CAS is a statement formally issued by the Board with regard to the measurement, assignment, and allocation of costs that enunciates a principle or principles to be followed, establishes practices to be applied, or specifies criteria to be employed in selecting from alternative principles and practices in estimating, accumulating, and reporting costs under contracts subject to the rules of the Board. The standards may be stated in terms as general or as specific as the Board considers necessary to accomplish its purpose, and the existing standards are generally not written in such detail as to precisely prescribe methods of accounting for every kind of cost under all the variety of circumstances involved in government contracting. There are currently 19 standards that can be broadly categorized into three groups: (1) standards dealing with overall cost accounting matters; (2) standards dealing with classes, categories, and elements of cost; and (3) standards dealing with pools of indirect costs.23 CAS Applicability In the absence of a specific exemption or waiver, the CAS must be used by all executive agencies and by contractors and subcontractors when estimating, accumulating, and reporting costs in connection with the pricing and 23 The 19 standards are described in further detail in appendix III. 12 administration of, and settlement of disputes concerning, all negotiated contracts and subcontracts in excess of $500,000.24 There are a number of statutory and regulatory exemptions to the CAS requirements. Congress has provided by statute that the CAS requirements do not apply to contracts and subcontracts for the acquisition of commercial items and contracts and subcontracts where the price negotiated is based on prices set by law or regulation. In addition, the CAS Board has broad authority to exempt classes or categories of contracts and subcontracts or contractors and subcontractors from CAS coverage. Under this authority, the CAS Board has promulgated a number of other exemptions from the CAS requirements, including contracts and subcontracts with small businesses as well as firm fixed- price contracts and subcontracts awarded without the submission of any cost data.25 There is also a mechanism for the CAS Board to grant waivers for individual contracts or subcontracts.26 CAS Coverage In 1977, the CAS Board established two levels of compliance—full and modified coverage.27 Full coverage requires that a business unit28 comply with all existing standards at the time of contract award. Currently, full coverage applies to a business unit that receives a single CAS-covered contract of $25 million or more, or received $25 million or more in total CAS contracts during the preceding cost accounting period—if at least one of those contracts exceeded $1 million.29 Once a business unit receives an award subject to full coverage, all of the unit’s subsequent non-exempt contracts are also subject to full coverage. Modified coverage currently requires a business unit to comply only with CAS 401 (consistency in estimating, accumulating, and reporting costs), CAS 402 (consistency in allocating costs incurred for the same purpose), CAS 405 (accounting for unallowable costs), and CAS 406 (cost accounting period).30 Business units that receive CAS-covered contracts, which do not exceed the threshold for full coverage, are subject only to modified coverage. That is, the business units subject to modified coverage include those that received a non- exempt contract of more than $500,000 but did not receive a single CAS-covered contract in excess of $25 million in the current cost accounting period and either 24 Unlike the FAR cost principles and TINA, the CAS generally do not apply to the pricing and costing of modifications of contracts not initially subject to CAS coverage. 25 See appendix IV for a list of all the CAS exemptions. 26 The waiver process is discussed in detail in chapter 4. 27 See appendix V for a CAS applicability and coverage diagram. 28 A “business unit” is defined as “any segment of an organization, or an entire business organization which is not divided into segments.” A “segment” is defined to be “one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office.” 48 C.F.R. 9904.410-30(a)(2), (7). 29 A “CAS-covered contract” is defined as any negotiated contract or subcontract in which a CAS clause is required to be included, that is, non-exempt contracts or subcontracts of $500,000 or more. 48 C.F.R. 9903.301(a). 30 Until 1993, modified coverage only required a business unit to comply with CAS 401 and CAS 402. 13 (1) received less than $25 million in net CAS-covered awards31 in the immediately preceding cost accounting period or (2) received more than $25 million in net CAS-covered awards in the immediately preceding cost accounting period, but no single award in excess of $1 million. Contracts awarded subject to modified coverage remain so throughout the contract life, regardless of changes in the business unit’s CAS status in subsequent cost accounting periods. Once a business unit receives an award subject to modified coverage, all CAS-covered contracts awarded to the business unit during that cost accounting period are also subject to modified coverage unless a contract is awarded that triggers full coverage, which then results in the business unit’s subsequent CAS-covered contracts being subject to full coverage. CAS Disclosure Statements Certain CAS-covered contractors (that is, contractors that have received contracts or subcontracts that are subject to the CAS) are required to disclose their cost accounting practices in writing. The CAS Board has designed a disclosure statement for this purpose. Generally, a disclosure statement must be filed by (1) any business unit receiving a CAS-covered contract or subcontract of $25 million or more or (2) any company which, together with its segments, received net CAS- covered awards totaling more than $25 million in its most recent cost accounting period, provided that at least one award exceeded $1 million. The disclosure statement, which consists of eight parts, requires a contractor to describe in summary fashion its methods and techniques for measuring, assigning, and allocating costs.32 The more important objectives of the disclosure statement include establishing a clear understanding of the cost accounting practices the contractor intends to follow, defining costs charged directly to contracts and disclosing the methods used to make such charges, and delineating the contractor’s methods of distinguishing direct costs from indirect costs as well as the basis for allocating indirect costs to contracts. Once filed, the disclosure statement may be audited to determine whether it adequately describes the contractor’s cost accounting practices and whether those practices are compliant with the CAS.33 The disclosure statement documents a contractor’s established cost accounting practices and is useful in determining if any changes have occurred and, if so, whether the changes comply with the CAS. A contractor that has filed a disclosure statement must amend the statement whenever it changes any of its disclosed accounting practices, and if it deviates 31 "Net awards” is defined in the CAS Board’s regulations to be “the total value of negotiated CAS-covered prime contract and subcontract awards, including the potential value of contract options, received during the reporting period minus cancellations, terminations, and other related credit transactions.” 48 C.F.R. 9903.301. 32 The CAS Board’s general form for disclosure is included in appendix VI. The CAS Board has also designed a specialized disclosure statement for use by educational institutions; this form consists of seven parts and uses terminology specific to colleges and universities. 33 To be considered adequate, according to the Defense Contract Audit Manual, the disclosure statement must be current, accurate, and complete. 14 from its disclosure statement, it may be required to submit a cost impact proposal as described below.34 Cost Impact Process Contractors and subcontractors receiving CAS-covered contracts are required to agree to a contract price adjustment for “any increased costs paid to such contractor or subcontractor” by the government because of a change in the contractor’s or subcontractor’s cost accounting practices or because of the contractor’s or subcontractor’s noncompliance with any applicable standard. In the event of a change in cost accounting practices or noncompliance with a standard, a CAS- covered contractor is generally required to prepare a cost impact proposal to assess any increased costs paid by the government because of the change or noncompliance and to estimate the appropriate adjustments, if any, to contract prices or cost allowances; this is commonly referred to as the cost impact process. Although the CAS Board’s regulations define the circumstances under which a cost impact proposal is necessary for a contractor’s change in cost accounting practices, the regulations do not specify the form and content of the cost impact proposal.35 Rather, the manner and level of detail of the proposal are left to the discretion of the contracting officer in accordance with the FAR.36 OTHER COST RULES Government contractors are subject to a variety of laws governing costs on government contracts and to various reviews to ensure compliance with those laws. While these rules have some overlapping requirements, they each have a discrete role in protecting the government. FAR Cost Principles The currently applicable cost principles are included in FAR Part 31, which enunciates cost principles and procedures for pricing contracts and subcontracts, as well as modifications to them, whenever a cost analysis is performed, and for determining, negotiating, and allowing costs when required by a contract clause.37 These principles and procedures are broadly applied to government contracts, including CAS-covered contracts. The CAS, however, take precedence over FAR with regard to the measurement, assignment, and allocation of costs for CAS- covered contracts. This primacy is assured by the OFPP Act, which provides that 34 Contractors that are not required to file a disclosure statement must also consistently follow their established accounting practices and may be required to submit cost impact proposals if they deviate from these practices. 35 As discussed in chapter 4, the CAS Board has proposed a change in its regulations concerning the cost impact process. 36 FAR 30.602. 37 The FAR also incorporates by reference a number of OMB circulars, which state the principles for cost allowability for other organizations such as educational institutions (Circular A-21), state and local governments (Circular A-87), and nonprofit organizations (Circular A-122). 15 costs subject to CAS requirements are not subject to other regulations that differ with respect to cost measurement, assignment, and allocation. As a general rule, the FAR cost principles provide that costs are allowable to the extent that they are (1) reasonable and allocable; (2) in accord with the CAS (if applicable, otherwise GAAP), with the contract terms, and with any limitation specified in the FAR; and (3) are adequately documented by the contractor.38 The definition of and requirements for each of these criteria are set forth in the FAR. A general allocation rule in the FAR that has not markedly changed since 1959 determines whether or not a cost is allocable.39 That rule states: A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it-- (a) Is incurred specifically for the contract; (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown. The cost principles also state more specific rules for determining the allowability of 48 selected costs, including, for example, compensation for personal services, cost of money, and insurance and indemnification. A number of the FAR cost principles incorporate the CAS measurement, assignment, and allocation rules. These principles limit the measurement and assignment, and therefore allocability, of costs to the amounts determined using these criteria. To the extent that these CAS requirements are incorporated into the cost principles, they apply to all government contracts covered by the FAR. The FAR cost principles incorporate by reference 5 of the 19 standards (including standards concerning deferred compensation, pensions, and cost of money) and duplicate provisions of another 4 standards (including standards concerning consistency in direct/indirect cost charging, segregation of unallowable costs, self-insurance, and independent research and development costs and bid and proposal costs excluding allocation provisions).40 Non-CAS-covered contracts are subject only to those CAS that have been incorporated into the FAR cost principles. The FAR has not incorporated CAS 38 FAR 31.201-2. 39 FAR 31.201-4. 40 See appendix VII for a comparison of the CAS and FAR cost principle requirements. 16 requirements governing consistency (such as, for example, CAS 401, which requires consistency in estimating, accumulating, and reporting costs), asset capitalization and depreciation,41 cost accounting periods, standard costs, specific cost allocation requirements, and material costs. In addition, the FAR has not incorporated the CAS requirement for price adjustments for changes in a contractor’s cost accounting practices. TINA TINA, which is applicable to both military and civilian agencies, generally requires that contractors and subcontractors submit cost or pricing data for contracts or contract pricing actions (such as contract changes or modifications) in excess of $500,000 and certify that the data is accurate, complete, and current.42 There are a number of exceptions to the requirement for the submission of certified cost or pricing data. These include cases where: · The prices agreed upon are based upon adequate price competition; · The prices agreed upon are based upon prices set by law or regulation; or · A commercial item is being acquired. In addition, contracting officials have the authority to waive the requirement for submission of certified cost or pricing data for “exceptional circumstances.” If a contractor submits defective cost or pricing data that was relied upon by the government in negotiating a contract price, the government may seek a contract price adjustment to recover the overstated amount. TINA also provides for civil penalties (equal to the amount of the overpayment) for the knowing submission of defective cost or pricing data and also provides for the payment of interest on overpayments made to the contractor. In addition, the knowing submission of a false certificate of cost or pricing data is subject to the civil and criminal penalties of the False Claims Act and the False Statements Act. AUDIT OVERSIGHT Negotiated government contracts are generally subject to audit oversight throughout the contract cycle, from negotiation to completion and final payment. That is, cost-type contracts are audited during pricing and performance and at final payment, and fixed-priced type contracts are audited during pricing and are subject to post-award audit for defective pricing. An “audit and records” clause included in every negotiated contract provides government auditors, inspector 41 The FAR states that contractors may follow the CAS requirements for capitalization and depreciation but does not require them to do so. 42 10 U.S.C. 2306a, 41 U.S.C. 254b. 17 generals, and GAO with access to a contractor’s books, records, accounting procedures and practices, and other data sufficient to assess costs claimed to have been incurred or anticipated to be incurred in the performance of the contract. Because most CAS-covered contractors are subject to audit by DCAA, the audits it performs are particularly relevant here. DCAA is a component of DOD and is responsible for performing contract audits and providing accounting and financial advisory services to all DOD components. DCAA also provides contract audit services to a number of other government agencies.43 DCAA provides a wide variety of contract-related services, including pre- and post-award contract audits and cyclical system reviews. As part of a pre-award survey, DCAA may audit the adequacy and suitability of a contractor’s accounting system and practices for accumulating costs. DCAA may also be asked to audit a contractor’s cost or price proposal. This could include assessing the adequacy of the contractor’s cost accounting system and practices, compliance of the actual estimating practices with the CAS requirements, and the reasonableness of material and labor cost estimates. DCAA estimates that 25 percent of its workload involves evaluating whether proposed costs are reasonable in pre-award evaluations. DCAA also performs audit reviews of forward pricing agreements. DCAA’s audit services can be as extensive as a full audit of the contractor’s cost accounting system and practices or may be limited to providing rate verification information to contracting officials. DCAA also assesses contractors’ disclosure statements for adequacy and compliance. In the post-award area, DCAA audits CAS-covered contractors’ compliance with the CAS. It also audits termination settlements and contract change proposals. DCAA provides audit support to determine compliance with TINA. It also performs audits of incurred costs, usually on a contractor-wide basis, to determine whether incurred costs are allowable under the FAR. As part of an incurred cost audit, DCAA will assess the adequacy of the contractor’s accounting system for cost determinations that may be required for current or future contracts. DCAA also performs a number of cyclical reviews such as audits of contractors’ internal controls. Periodically, DCAA may audit a contractor’s accounting and management systems (internal controls) that have a significant impact on government contract costs. The purpose of these audits is to assess the adequacy of accounting and management systems for compliance with applicable laws, regulations, and contract terms and to assess control risk to determine the degree of reliance that can be placed upon the contractor’s internal controls as a basis for planning the scope of other related audits. 43 A number of civilian agencies perform their own audit oversight. 18 Chapter 3 CAS APPLICABILITY A significant benefit of the CAS is to lower the government’s risk of accounting, pricing, and costing inaccuracies that may result in the government being mischarged. The government recognizes, however, that the costs of CAS compliance, both to the contractor and the government, may sometimes exceed the benefits the CAS provide, and accordingly not all cost-based contracts are subject to the CAS. That is, the CAS apply only to negotiated contracts in excess of a specified dollar threshold, and certain types of contracts are completely exempt from the CAS requirements.44 Judgments as to the level of risk and costs the government is willing to bear have changed over time. In the context of the CAS, the level of risk to the government can be adjusted by limiting the criteria for CAS applicability or coverage—that is, by modifying thresholds and exemptions. In this chapter, the Panel addresses (1) the benefits and costs of the CAS, (2) the current CAS applicability and coverage thresholds, and (3) firm fixed-price contracts where certified cost or pricing data is not obtained. The discussion and conclusions reflect the Panel’s analysis of the estimated universe of CAS-covered contracts to determine whether opportunities exist for reducing CAS applicability and coverage while still adequately protecting the government’s interests. BENEFITS AND COSTS OF THE CAS Prior to promulgating standards and interpretations of them, the CAS Board is required to take into account the: (i) probable costs of implementation, including inflationary effects, if any, compared to the probable benefits; (ii) advantages, disadvantages, and improvements anticipated in the pricing and administration of, and settlement of disputes concerning, contracts; and (iii) scope of, and alternatives available, to the action proposed to be taken.45 Various studies have shown that it is difficult, and perhaps impossible, to quantify with specificity the benefits and costs of complying with CAS requirements. One study concluded that no objective cost-benefit calculation in aggregate quantitative terms was possible for the CAS as a whole or for any individual standard.46 The study stated that because benefits and costs are distributed over time, they are difficult to trace, and any results would be very subjective. Similarly, the CAS Board stated in its 1992 Statement of Objectives, Policies and 44 As discussed in chapter 2, those cost-based contracts that are not subject to the CAS are still covered by other cost rules that mitigate risk to the government. 45 41 U.S.C. 422(g)(1). 46 Report to the Cost Accounting Standards Board by a Special Group of Consultants to Consider Issues Relating to Comparing Costs with Benefits, November 1978. See also Cost Impact of Cost Accounting Standards, Logistics Management Institute, November 1977. 19 Concepts that quantifying the benefits that accrue to the government and contractors alike from the continued use of the standards would be difficult, if not impossible. Notwithstanding the difficulties in quantification, the Panel’s review confirms that there are benefits and costs associated with the CAS. Benefits The CAS were designed to achieve, among other things, more uniformity and consistency in cost accounting practices and a better understanding by the government of the cost accounting practices that contractors use to estimate costs. Compliance with the CAS was intended to reduce the likelihood of the government being mischarged, reduce misunderstandings between contractors and the government, and increase reliability of contractor cost data.47 The Panel found concrete evidence that the CAS produce direct monetary benefits. For example, DCAA reported that it recovered about $138 million as a result of adjustments to CAS-covered contracts over the 18-month period ending March 1998. The Panel believes that focusing only on the direct monetary benefits substantially understates the benefits produced by the CAS. The existence and enforcement of the standards also generate substantial tangible benefits, even though they cannot be quantified. In fact, the CAS Board reports in its Statement of Objectives, Policies and Concepts that benefits from the CAS include “reductions in the number of time-consuming controversies stemming from unresolved aspects of cost allocability, as well as greater equity to all concerned.” Additional benefits identified by the Board are simplified contract administration, audit, and settlement procedures; the prophylactic effect of reduced opportunities for the manipulation of accounting methods that existed prior to the establishment of the CAS; and the availability of better cost data, which permits improved comparability of offers and facilitates better contract negotiation. At the June 1998 public hearings, many government officials supported the continued use of the CAS and stated that the standards: · deter the misallocation of costs between government and commercial contracts; · serve as an effective means of cost recovery if misallocation does occur; · provide a framework that organizations can use to measure performance; · place the contracting parties on a more equal basis; and · keep the government apprised of contractor cost accounting changes. 47 A list of potential CAS benefits identified in Report on the Feasibility of Applying Uniform Cost-Accounting Standards to Negotiated Defense Contracts, by the Comptroller General of the United States, January 1970, is provided in appendix II. 20 In addition, officials of DCMC, the DOD entity chiefly responsible for the day-to- day administration of the CAS, stated that the standards are an important tool for mitigating risk to the government in a cost-based business environment. These officials contended that the CAS provide the framework and regulatory basis for contracting officers to evaluate contractor cost accounting practices and protect the government against inappropriate measurement, assignment, and allocation of costs. The additional precision and administrative remedies contained in the CAS constitute a valuable tool to ensure equitable allocation of costs under cost- based contracts, the officials contended. A DCAA official testified that the CAS serve both as a deterrent to the misallocation of costs to contracts and an equalizer when costs have been misallocated. Costs The CAS generate costs that can be largely borne by the government. At the June 1998 public hearings, industry officials stated that the CAS present significant administrative costs because the requirements to comply with the CAS are complex and labor intensive. Modifying commercial accounting practices to comply with the CAS, maintaining those systems, and complying with other CAS requirements, such as the filing of disclosure statements, require more staff than is required for commercial accounting systems. This is all added to the overhead expense associated with establishing and maintaining CAS-compliance, expenses that are in turn passed on to the government in part or in whole. In addition, these officials stated that they believe the rigidity of the CAS requirements hamper a company’s ability to react to changing business conditions in order to remain competitive. Recent attempts have been made to estimate the costs of complying with the CAS. One study concluded that government contracting involved an 18-percent cost premium over commercial contracting, including a 0.7-percent cost premium attributable to the CAS.48 While a subsequent GAO analysis of the study concluded that the premium was overstated,49 the Panel notes that, in light of the overall sums involved in cost-based contracting, even a small percentage would be significant in dollar terms. Several commentators believed the premium associated with the CAS to be significant. In this regard, representatives of a number of companies made the following observations: · The CAS create substantial administrative burdens and require changes to accounting practices and systems, increasing the product costs with no commercial advantage or product improvement, and reduce a company’s ability to react to changing market conditions by imposing rigid requirements. 48 The DOD Regulatory Cost Premium: A Quantitative Assessment, Coopers & Lybrand/The Analytic Science Corporation (TASC), December 1994. 49 Acquisition Reform: DOD Faces Challenges in Reducing Oversight Costs (GAO/NSIAD-97-48, Jan. 29, 1997). 21 · Some commercial companies cannot support the accounting overhead and controls called for by the CAS and still remain competitive. · Many smaller companies do not have the resources to deal with the CAS, which can require the maintenance of government-unique accounting practices at considerable cost. In addition to these observations received at the Panel’s public hearings, a survey was sent to a group of the largest government contractors and a select group of predominantly commercial firms in an attempt to estimate the annual costs for creating and maintaining a separate operating segment for government business.50 These firms found it difficult to quantify the costs of complying with the CAS. However, this survey indicated that there are costs associated with the CAS that the government incurs in whole or in part because (1) contractors may segregate their commercial and military segments to comply with the CAS and other government-unique requirements, (2) some predominantly commercial companies refuse to seek government business because of the CAS and other government requirements, and (3) some contractors claimed that they cannot make the best use of innovative cost accounting systems. The following paragraphs address these three areas. As part of acquisition reform, DOD is trying to achieve commercial-military integration—that is, the elimination of the distinction between government and commercial operations such that both commercial and military products are produced on the same production line. According to the Under Secretary of Defense (Acquisition and Technology), this concept is crucial for meeting DOD’s future military, economic, and policy objectives. According to a GAO report,51 DOD demonstrated that the integration has the potential to produce benefits for the government. The report cited a 1994 Air Force pilot program at TRW where selected military-unique parts, once redesigned, were produced at a lower cost on the company’s automated commercial production line than by its segregated military segment. DOD reported that the TRW integration project for the production of military-unique circuit boards for the F-22 aircraft resulted in a 30- to 50-percent savings and produced a product that actually exceeded some of the government’s requirements. Although program officials stated that the TRW pilot project saved money on labor, materials, and overhead, GAO noted that the $21 million cost of the project offset most of the savings. GAO contended that the real “payoff ” will come from applying the lessons learned from the pilot to future Air Force electronics procurements. 50 See appendix VIII for a list of firms surveyed. 51 Acquisition Reform: Military-Commercial Pilot Program Offers Benefits but Faces Challenges (GAO/NSIAD-96-53, Jun. 28, 1996). 22 As a survey of selected firms indicated, the costs of complying with the CAS and other government regulations can contribute to the practice of some companies establishing separate business units for commercial and government operations. These firms contend that it is more costly to operate a government segment than it is to operate a commercial one, although the companies surveyed do not have systems in place to identify those costs.52 They also state that, at the least, separating business units for commercial and government operations deprives the government of savings from integrated commercial/government production processes and products and adds to the cost of complying with the CAS and other government regulations. In addition, the Panel was told that commercial segments at times allocate costs in a manner designed to motivate behavior in a particular accounting period—for example, to achieve cost savings. Such a practice by CAS-covered government segments is hindered by, for example, the submission of cost accounting changes to comply with CAS uniformity and consistency requirements. One panel member pointed out that consistency in accounting is an important principle in both cost and financial accounting and that change should not be made merely to motivate behavior. There are also costs associated with companies refusing to do business with the government because of the CAS and other unique federal requirements. When firms refuse to seek government business, the available contractor base is reduced, and the government may be denied state-of-the-art technological solutions and pay the higher costs of reduced competition. According to a senior DOD official, Hewlett-Packard has refused government work specifically to avoid the application of the CAS. At the June 1998 public hearings, a General Electric official said that several of that firm’s business segments that once did government work now refuse that business because of the costs of complying with the CAS and FAR requirements. That official testified that changing those commercial operating units to become compliant with the CAS and other government-unique requirements was an unjustifiable expenditure of valuable resources. Some predominantly commercial firms, including members of the Integrated Dual- use Commercial Companies (IDCC) association, refuse or limit business with the government rather than become CAS compliant.53 These companies contend that complying with the CAS and other government regulations is costly and burdensome. Because many of these companies produce leading-edge technologies, the government needs access to their commercial research and development efforts. Examples of these technologies include state-of-the-art semi-conductor chips as well as computers that are faster, smaller, and more powerful, which are needed as critical components in government satellites and defense weapon systems. 52 See appendix VIII for a list of firms surveyed. 53 IDCC membership consists of companies that have over $1 billion in annual sales with less than 10 percent of sales from federal government contracts. A list of IDCC members is included in appendix VIII. 23 A questionnaire was sent to IDCC member companies to gain insight into why some predominantly commercial companies limit or avoid government work. Although the impact of eliminating the CAS alone could not be clearly determined, all IDCC respondents stated that some of their operating segments refused to do government business on a cost basis and some specifically cited the costs of CAS compliance and the submission of cost or pricing data among their reasons. Most respondents also stated that some of their operating segments limited cost-based work with the government to remain below CAS thresholds. Some commercial companies have reported that they established separate segments for government work to isolate the added costs imposed by the CAS and other government regulations and procedures. These companies claimed that they cannot pass these added costs on to their commercial products and services because doing so would decrease their overall competitiveness. The Panel was told that contractors and subcontractors receiving cost-based government contracts for the first time can find it difficult to cope with the various federal laws, regulations, and procedures. These new entrants in the government marketplace have generally functioned as predominantly commercial companies that sell a very small percentage of goods and services through cost-based federal contracts. Some new entrants contend that compliance with the CAS requirements is burdensome. Some ultimately decide not to seek additional government business, which may limit the government’s access to innovative technologies these firms may have. Some are ultimately motivated to create separate operating segments for their government business. As discussed earlier, creating and maintaining segregated segments can be costly to both the government and contractors. Some subcontractors also refuse to do business with CAS-covered prime contractors. In a survey of some of the largest government contractors, respondents cited examples where subcontractors refused CAS-covered work. This could cause less competition and higher costs for subcontracted work and may inhibit access to necessary technology or services. Some survey respondents joined other companies that reported instances where non-CAS-covered operating segments within their own companies refused to do business with them. One respondent stated that avoidance of costs associated with government-unique requirements, such as the CAS, is the reason its commercial divisions would not accept work from the government business units. New entrants to federal cost-based contracting, as well as other predominantly commercial companies, contend that the CAS impede the use (or eliminate the advantages) of alternative accounting practices and advanced cost management methods. Some companies are attempting to employ alternative cost accounting systems, such as activity-based costing (ABC),54 to reduce product and service costs in today’s competitive environment. In this regard, a senior DCAA official stated 54 ABC management systems analyze the relationships between activities and the resources they consume to determine the costs of those activities. 24 that contractors, facing strong competition in the global marketplace and a shrinking defense budget, must change not only their production methods but how they conduct their business; this would include embracing advanced cost management systems. DCAA states that it encourages the use of ABC and does not consider the CAS a barrier to the successful implementation of ABC. Some companies believe that the government needs to facilitate the use of alternative accounting practices and advanced cost management methods to reduce costs but that the CAS hinder their use. Encouraging the use of these new methods, however, could ultimately allow both the government and contractors to share the savings associated with reduced costs. DCAA believes that ABC can be used as an adjunct to a CAS-compliant accounting system. Nevertheless, select industry officials have stated that CAS administrative requirements hamper full implementation of advanced cost management methods such as ABC. Of particular concern are requirements for consistency in estimating, accumulating, and reporting costs and for price adjustments due to changes in cost accounting practices. Advanced cost management methods such as ABC allow companies to make rapid adjustments in their organizational and accounting structures to account for market changes. Such adjustments, however, would have to be assessed under the CAS cost impact process, which may result in implementation delays and/or contract price adjustments for voluntary changes. Thus, it appears that there is an inherent tension between the flexibility presented by the optimal use of ABC and certain CAS requirements. Industry officials say that this is the reason that some CAS- covered contractors are reluctant to adopt advanced cost management methods. DCAA states that surveys conducted in 1990, 1995, and 1997 indicate that government contractor interest in, and actual implementation of, ABC accounting systems is declining. The DCAA survey found that the costs of implementing ABC, incompatibility with existing accounting and/or estimating systems, and loss of key personnel who championed ABC were the primary reasons cited for failure to implement ABC. CAS APPLICABILITY AND COVERAGE THRESHOLDS The CAS have never been applied to all contracts and subcontracts. Rather, it has always been recognized that the benefits of CAS compliance must be weighed against its costs. Accordingly, the CAS have been applied only to contracts and subcontracts in excess of a specified dollar threshold. In 1970, Congress, in establishing the CAS Board, provided that the CAS would only be applicable to negotiated contracts and subcontracts that exceeded $100,000. In 1974, the Board, using its exemption authority, created a “trigger” threshold of $500,000.55 The Board believed that this revised threshold rule would exempt about 70 55 39 Fed. Reg. 44,389 (Dec. 24, 1974). Under this revised requirement, once a contractor received a CAS-covered contract exceeding $500,000, all negotiated contracts over $100,000 that were awarded to that contractor were also CAS-covered. 25 percent of previously CAS-covered contracts but would still cover 90 percent of the dollar value of the awards. In 1988, Congress, in reestablishing the CAS Board, raised the CAS applicability threshold to $500,000 for negotiated contracts and subcontracts.56 The CAS Board has also recognized a need to balance the costs of CAS compliance against the benefits to the government. In 1977, the Board established two levels of CAS compliance—full and modified coverage. As explained in chapter 2, full coverage requires that a business unit comply with all existing standards at the time of contract award and for subsequent contracts, whereas modified CAS coverage requires compliance with only four of the standards. Modified coverage was intended to address the problem of the application of the CAS to smaller government contractors as well as the application of the CAS to those contractors for whom government business represented only a relatively small share of total sales volume. The Board stated that the impetus for the creation of modified coverage was the concern that “many small companies with less sophisticated accounting systems and small accounting staffs [could not] comply with the [CAS] requirements without experiencing inordinate difficulty and some cost” and that complying with the CAS requirements may cause some companies to avoid government contracts.57 As explained in chapter 2, as originally promulgated, modified coverage was generally applied to business segments that received less than $10 million in CAS-covered contracts in the immediately preceding cost accounting period; modified coverage required compliance only with CAS 401 and CAS 402. In 1993, the CAS Board increased the threshold for full coverage from $10 million to the current $25 million. In raising the threshold, the Board stated that it was seeking to adjust the threshold to properly reflect the effects of inflation and to protect the interests of the government, while lessening burdens associated with full coverage on contractors. In addition, the Board required business segments with modified coverage to adhere to two additional standards, CAS 405 (accounting for unallowable costs) and CAS 406 (cost accounting period), because of reports suggesting that the government needed to be protected from overcharging due to contractor abuses in these areas.58 While some in government believe that the current applicability and coverage thresholds are needed to protect the government’s interests, others in government as well as in industry expressed a view to the Panel that it is again time to review 56 Although the CAS applicability threshold was raised to $500,000, the new CAS Board did not raise the trigger amount; thus, a contractor would be subject to the CAS as soon as it received any CAS-covered contract, regardless of value. In 1993, the CAS Board applied the trigger contract concept to the two tiers of CAS coverage. It increased the threshold for full coverage from $10 million to the current $25 million by providing that a contractor would be subject to full coverage (rather than modified) if it received at least one contract valued at $1 million or more. 58 Fed. Reg. 58,798 (Nov. 4, 1993). 57 42 Fed. Reg. 45,625 (Mar. 10, 1978). 58 The Board expanded modified coverage to include CAS 405 in response to information that contractors for some civilian agencies were including unallowable costs in their billings to the government. 57 Fed. Reg. 47,438 (Oct. 16, 1992). 26 contract applicability and coverage thresholds. They contend that more contracts and contractors are subject to the burden and expense of the CAS than are necessary to adequately protect the government’s interests against significant risk in this area. In this regard, there are concerns that modified CAS coverage has not satisfied the CAS Board’s stated goal of providing relief to smaller government contractors and contractors for whom government business represents only a relatively small share of total sales volume. They stated that the CAS 401 and CAS 402 requirements for consistency and uniformity, when coupled with the cost impact process, impose a level of rigidity and undue administrative burden that hamper a company’s ability to respond to marketplace changes. In addition, they express concern that commercial accounting systems do not ordinarily track unallowable costs as required by CAS 405 and that ensuring that unallowable costs are not allocated to government contracts could be achieved by less onerous methods. Many believe that the government must be able to enhance its access to commercial items and technologies and do so in a less regulated environment. On this issue, the Panel noted that some government and industry officials believe that the current CAS applicability and full coverage thresholds must be revised to achieve greater commercial sector participation in government procurement. At the public hearings in June 1998, officials from Boeing, General Electric, and 3M testified that consideration should be given to raising the threshold, which now subjects hundreds of business segments to the CAS.59 These officials contend that revising the CAS applicability criteria would reduce the burden the CAS place on industry, promote commercial-military integration, and encourage predominantly commercial companies and new entrants to seek government contracts. Those who do not favor major revisions to the current criteria contend that the benefits of such revisions are uncertain, while the risk the changes would entail for the government is significant. While recognizing these differing views, the Panel found broad agreement that some adjustment in the current CAS applicability criteria was necessary. It was difficult to resolve, since it necessarily involves speculation about how companies will behave and how much risk the government will be exposed to under the changed circumstances of adjusted CAS applicability criteria. Rather than focus on predicting how changes will affect behavior, the Panel searched for solutions that, while excluding a significant percentage of currently CAS-covered contractor segments from the CAS applicability, nonetheless would retain CAS coverage for a very high percentage of contract dollars. Similarly, the Panel focused on the extent to which solutions eliminated the burden associated with the CAS while protecting the government’s interest through other controls such as the FAR cost principles. 59 See appendix IX for a list of individuals who testified. 27 Threshold Analysis In analyzing the data and conducting its analysis, the Panel searched for solutions that would maximize the benefit of changes while limiting the government’s exposure to risk. The Panel considered adjusting the applicability and full coverage thresholds. The Panel also considered the use of a “trigger contract” of at least a certain value as part of the applicability threshold—that is, providing that only non-exempt contracts received after the award of a trigger contract be subject to the CAS. The original CAS Board adopted the trigger contract approach so that a contractor’s contracts would not be subject to CAS coverage (even if above the $100,000 applicability threshold) until the contractor received a “trigger contract” of $500,000, triggering CAS coverage for future contracts the company received that exceeded the $100,000 applicability threshold. Under this approach, contractors with only relatively small contracts, albeit in excess of the contract applicability threshold (that is, contracts between $100,000 and $500,000), would not be subject to the burden and expense of the CAS until they received a trigger contract. The Panel analyzed the contract applicability and full coverage thresholds, including the implications of using a trigger contract approach. To help the Panel assess the appropriateness of the current contract applicability threshold ($500,000) and full coverage threshold ($25 million), DCAA and DCMC reviewed CAS-covered contracts awarded from April 1997 through March 1998.60 Based on this data, DCAA and DCMC found that there were $72 billion in CAS-covered contracts involving 588 contractor segments during this period. Of that number, 280 are currently subject to full coverage and 308 are subject to modified coverage. Figure 3.1 estimates the number of contractor segments and the amount of contract dollars that would be CAS-covered under various possible trigger thresholds. 60 See appendix X for the methodology and supporting documentation used to identify the universe of CAS-covered contracts at various threshold levels and a discussion of the data’s limitations, including that the number of contractor segments subject to modified coverage may be understated. The Panel also collected and analyzed contract data provided by the Federal Procurement Data System (FPDS) to identify cost-based type contract actions over $500,000, excluding an estimate of CAS exemptions, totaling almost $300 billion. The Panel found that the distribution of dollars at various thresholds was similar for the cost-based actions identified using FPDS and for CAS-covered actions identified using DCAA/DCMC data. 28 Figure 3.1: Comparing Current CAS Coverage With Alternative Trigger Contract Amounts and a Full Coverage Threshold of $50 million Dollars in billions 80 $72 $71 $70 70 $69 60 50 40 30 20 10 0 Current coverage $5 million $7.5 million $10 million with a $25,000 full trigger trigger trigger coverage threshold Full coverage Modified coverage Type of Number of Number of Number of Number of Coverage segments segments segments segments Full 280 189 189 185 a Modifed 308 173 94 Total 588 362 279 Note a: DCAA and DCMC were the source of the data used to prepare this analysis. The segments that would be subject to modified coverage under a $7.5 million threshold will be between 173 (those covered with a $5 million trigger) and 94 (those covered with a $10 million trigger.). DCAA, with the assistance of DCMC, is collecting data to better estimate the actual coverage in order to supplement the record. In considering an adjustment to the CAS applicability threshold, the Panel found that if the trigger contract approach were reintroduced, a large number of contractor segments could be removed from CAS applicability, but substantially all CAS-covered contract dollars would remain subject to the CAS. In addition to benefiting small contractors already subject to CAS coverage, this could encourage other small firms to enter the government marketplace where those firms have avoided government contracts because of the potential application of the CAS.61 If, in addition, the full coverage threshold were raised to $50 million, the number of segments subject to full coverage could be reduced. 61 This approach also recognizes the business reality that contractor segments with CAS-covered contracts will use a single CAS-compliant accounting system for all their government contracts. That is, for these segments, the costs for all government contracts, whether CAS-covered or not, would be accounted for under CAS-compliant systems. 29 Specifically, the Panel considered the impact of requiring a trigger contract of between $5 million and $10 million, while retaining the current $500,000 contract applicability threshold. If a $5 million contract were required to trigger the CAS applicability, DCAA and DCMC data shows about 98 percent of CAS- covered dollars included in the survey would continue to be subject to the CAS. The total number of contractor segments with CAS-covered contracts would significantly decrease, as shown in figure 3.1 above. If a $10 million contract were required to trigger CAS applicability, DCAA and DCMC data shows that about 96 percent of CAS-covered dollars included in the survey would be subject to the CAS, and the total number of contractor segments with CAS-covered contracts would again significantly decrease, as shown in figure 3.1 above. Although a trigger contract of $10 million would continue to subject about 96 percent of current CAS-covered dollars to CAS coverage, a number of segments that would have been subject to full coverage (at a $50 million full coverage threshold) would fall completely from CAS coverage because none of these segments had received a contract of $10 million or more. Because of this phenomenon, the Panel explored other trigger contract amounts within the range between $5 million and $10 million and found that with a trigger contract of $7.5 million about 97 percent of current CAS-covered dollars would continue to be subject to the CAS and that no segment that would be subject to full coverage (at the $50 million threshold) would fall completely from CAS coverage. The use of a trigger contract appears to protect the government’s interests better than simply raising the contract applicability threshold, while still relieving a substantial number of contractor segments of the burdens of the CAS. For example, if the individual contract applicability threshold were raised to $5 million, the number of contractor segments subject to the CAS would again significantly decrease, but only about 88 percent of the CAS-covered dollars would continue to be subject to the CAS. Such an alternative does not account for the fact that contractor segments with some CAS-covered contracts will use a single CAS-compliant accounting system for all of their contracts. Thus, the benefit of a large rise in the CAS applicability threshold would be relatively small for contractors that continue to have contracts subject to the CAS because those contractors would continue to be required to maintain a CAS-compliant accounting system. However, if the applicability threshold were so raised, the number of contracts subject to price adjustments through the cost impact process for CAS noncompliance or for changes in a contractor’s disclosed accounting practices would be significantly reduced. Specifically, at a $5 million applicability threshold level, the government would lose the right to seek price adjustments under the cost impact process for about $8 billion in contract value (the difference between current coverage and this alternative); this is in contrast to the use of a $7.5 million trigger contract (while retaining the current $500,000 CAS applicability threshold), under which the government would lose the right to seek price adjustments under the CAS for about $2 billion in contract value. 30 The Panel believes that raising the full coverage threshold and adopting a trigger contract approach, without raising the applicability threshold, would not significantly affect risk to the government. As noted above, not all contracts and subcontracts have been made subject to the CAS. Rather, as it has always been recognized, the benefits of CAS compliance must be weighed against their costs. As a result of its analysis, the Panel concludes that the risk to the government would be low if a $7.5 million contract were required to trigger CAS applicability and the full coverage threshold were increased to $50 million. This would result in about 97 percent of surveyed CAS-covered dollars remaining subject to either full or modified CAS coverage, with the overwhelming majority of the dollars (over 90 percent) being subject to full coverage. With regard to the segments that would no longer be subject to the CAS, the Panel also notes that, whether the CAS apply or not, contractors would still be required to adhere to the FAR cost principles and allocation rules and DCAA would continue to perform audits and reviews of non- CAS-covered contracts where necessary to protect the government’s interests. FIRM FIXED-PRICE CONTRACTS Currently, firm fixed-price contracts and subcontracts that satisfy CAS applicability requirements are subject to CAS coverage if “any cost data” (certified or non- certified) is submitted at the time of award.62 Although the CAS Board has not defined the term “any cost data” with respect to this exemption, in Aydin Corporation v. Widnall,63 it was held that the submission of informal cost data was considered to be “any cost data,” even if such data was obtained to check for mistakes or major omissions in offers and not to negotiate price. Many in industry and government oppose the application of the CAS to firm fixed- price contracts and subcontracts where TINA is not applicable. They note that TINA was revised as part of acquisition reform to ensure that certified cost or pricing data is not obtained where pricing risk to the government is considered low, such as where price is based upon adequate price competition.64 Exempting firm fixed-price contracts and subcontracts that are not subject to TINA from CAS coverage would also be low risk, in their view, because cost data is not the basis for determining the agreed contract price, and the contract price is not subject to adjustment based upon the contractor’s cost experience in performing the contract. In sum, these commentators state that the application of the CAS does not offer sufficient value to the government, for example in the mitigation of risk, to offset the burdens of the CAS. 62 The CAS Board has exempted “[f]irm fixed-price contracts and subcontracts awarded without the submission of any cost data.” 63 61 F.3d 1571 (Fed. Cir. 1995). 64 Prior to FASA, TINA did not require agencies to exempt procurements from cost or pricing data submission requirements when a statutory exemption was applicable. FASA made mandatory the statutory exceptions to obtaining certified cost or pricing data (for example, where there is adequate price competition). 31 The Panel believes that firm fixed-price contracts and subcontracts should be exempt from CAS coverage when the government does not obtain certified cost or pricing data at the time of award. When certified cost or pricing data is not obtained for firm fixed-price contracts and subcontracts, the safeguards provided by the CAS are not necessary. The Panel notes that some of the cost or pricing risks to the government inherent in cost-reimbursement contracts are not present in firm fixed-price contracts and subcontracts. This is so because firm fixed-price contracts do not provide for adjustment of the agreed price based on changes in a contractor’s costs during contract performance. Thus, the actual costs incurred during contract performance do not affect what the government pays under a firm fixed-price contract, and changes in a contractor’s cost accounting practices during contract performance should not affect the final price. Furthermore, TINA, as implemented, generally does not allow the contracting officer to request the submission of certified cost or pricing data where there is adequate price competition, the prices are set by law or regulation, or the acquisition is for commercial items.65 In these situations, the risk to the government in negotiating contract prices is not considered high enough to warrant obtaining certified cost or pricing data. The Panel believes that this risk assessment should be equally applicable to the CAS. That is, where a firm fixed- price can be established without obtaining certified cost or pricing data, the risk to the government of not applying the CAS to these contracts and subcontracts is relatively low.66 Conversely, where it is determined that certified cost or pricing data is required for the negotiation of a firm fixed-price contract, this indicates a higher level of risk to the government and should, within the applicable criteria, trigger the application of the CAS requirements. As discussed above, while the CAS provide significant benefits to the government, they also impose significant burdens on covered contractors and generate costs that are largely borne by the government. For example, contractors may segregate their commercial and military segments to comply with the CAS or refuse to seek government business because of the CAS and other government requirements. The Panel believes that the pricing risks to the government are sufficiently small on firm fixed-priced contracts where no certified cost or pricing data has been obtained. This exemption would seem particularly helpful to firms with fixed-price subcontracts. The survey of 50 DOD prime contractors found, as shown in Figure 3.2, that firm fixed-price subcontracts accounted for 11.8 percent of the total cost-based sales. 65 Moreover, even if a contract does not fall under one of these three exceptions to certified cost or pricing data requirements, there is provision for a waiver of the requirement for certified cost or pricing data in “exceptional circumstances.” 10 U.S.C. 2306a(b)(1)(C), 41 U.S.C. 254b(b)(1)(C). See also House Conference Report No. 105-736, September 22, 1998. 66 Modifications to non-CAS covered contracts are generally not subject to the CAS. However, contracting officers may rely on various provisions of the FAR and TINA to ensure confidence in the pricing. For example, a contracting officer may request certified (for modifications in excess of $500,000 for non-commercial items) or non-certified cost or pricing data when negotiating the price of contract modifications. 32 Figure 3.2: Type of Subcontracts Used by Selected DOD Contractors on Cost-Based Government Contracts 11.8% Firm-fixed price subcontracts 15.7% Cost-based subcontracts 72.5% Prime contractors in house CONCLUSION Reintroducing the trigger contract approach to the applicability criterion, raising the full coverage threshold, and exempting firm fixed-price contracts from CAS coverage unless certified cost or pricing data is obtained would significantly alleviate the burdens the CAS pose to hundreds of companies, while continuing CAS coverage on the vast majority of current CAS-based dollars. The Panel believes that these changes will (1) promote commercial-military integration, which should provide savings to the government; (2) encourage predominantly commercial companies to seek government business, thus increasing government access to leading edge technologies; and (3) remove an industry perceived obstacle to using advanced cost management methods which could lead to shared cost savings with the government. In addition, these changes will reduce the burden on smaller business segments but will retain coverage for large business segments. Conversely, the Panel’s analysis of the potential negative impact of modifying the thresholds shows that requiring the receipt of a trigger contract to activate the application of the CAS and raising the full coverage threshold, as well as exempting firm fixed-price contracts and subcontracts where certified cost or pricing data is not obtained, pose relatively little risk to the government, and that this risk is worth taking in view of the benefits that will be obtained.67 67 As described in chapter 4, the Panel also believes that CAS 405 and CAS 406 should not be included in the definition of modified coverage. 33 RECOMMENDATIONS The Panel recommends that Congress amend the OFPP Act of 1988 to provide that the applicability of the CAS to non-exempt contracts be triggered only by receipt of a contract of $7.5 million or more. The Panel recommends that the current $500,000 contract application threshold remain unchanged. The Panel also recommends that the threshold for full CAS coverage be increased from $25 million to $50 million. The Panel endorses the CAS Board’s desire, as reflected in the Board’s October 17, 1991 minutes and recently confirmed at the Panel’s meeting with the CAS Board, to periodically examine the thresholds for possible adjustment for inflation or marketplace changes. The Panel also recommends that firm fixed-price contracts and subcontracts be exempt from the CAS in those cases where the government does not obtain certified cost or pricing data at the time of award. 34 Chapter 4 THE CAS BOARD’S OPERATIONS AND REVIEW OF THE STANDARDS As detailed in chapter 1, recent reforms have sought to streamline the acquisition process and facilitate contracting with the government. Statutory and regulatory changes have resulted in the lessening of burdens facing government contractors. Contracting officials have been vested with more discretion to allow them to better exercise their business judgment in making contracting decisions. Underlying these reforms is the belief that reducing hurdles to contracting with the government and expanding contracting agencies’ discretion will result in substantial cost savings. In this chapter, the Panel examines the operations of the CAS Board and the CAS for possible changes in light of acquisition reform and the evolution of GAAP and commercial accounting systems. Specifically, the Panel considered whether (1) the Board should continue to maintain as broad a role in contract administration functions associated with the CAS and (2) a review of the CAS and its attendant requirements should be undertaken for possible streamlining. ACCOUNTING RULES VERSUS CONTRACT ADMINISTRATION In establishing and then reestablishing the CAS Board, Congress provided that the Board, in addition to issuing the CAS, would be involved in matters that are traditionally performed by contracting agencies as part of contract administration. For example, the Board was directed to issue regulations for the implementation of the CAS requirements and to require that contractors disclose their cost accounting practices and agree to a contract price adjustment for any increased costs paid to such contractor or subcontractor because of a voluntary change in their cost accounting practices or their failure to comply with the CAS. The legislative history of the original authorizing statute shows that, in setting up the CAS Board, Congress believed that it was important that an independent agency, rather than the contracting agencies, be responsible for establishing and ensuring the implementation of the CAS. This belief was based, in part, upon a lack of confidence that the contracting agencies would properly establish and implement an effective system. Consistent with its statutory authority, the CAS Board promulgated requirements in a number of contract administration areas that have traditionally been the responsibility of contracting agencies. For example, the CAS Board promulgated a CAS clause that contracting agencies are required to include in covered contracts and retained the authority to determine when a waiver from CAS requirements is appropriate in a particular procurement for a particular contractor or subcontractor. Recently, the Board has proposed a rule that details the cost impact process contracting agencies must follow in negotiating claims associated with CAS coverage with their contractors. 35 Nevertheless, the Board recognizes the contracting agencies’ traditional contract administration responsibilities. The Board states in its Statement of Objectives, Policies and Concepts that it is those agencies’ responsibility to receive, review, and approve disclosure statements; to audit covered contractors/subcontractors to ensure compliance with the CAS and their disclosed cost accounting practices; to make appropriate contract price adjustments because of changed accounting practices, failure to follow the existing CAS, or the issuance of new standards; and to ascertain the validity of contractors’ and subcontractors’ exemption claims. As described in chapter 1, one theme of recent acquisition reform has been an increase in the discretion accorded agencies and their contracting officials in carrying out procurements. This is materially different from the situation at the time the CAS Board was first established, when Congress felt it had to closely regulate agency procurement activities. In light of this and the contracting agencies’ traditional role in administering contracts, consideration should be given to separating the CAS Board’s primary responsibility of promulgating and maintaining standards for government contracts from the implementation and administration of those requirements. As a part of its review, the Panel examined the CAS Board’s administration of waiver requests and the proposed regulation governing the cost impact process. These areas were selected because their current administration by the CAS Board has generated controversy. Waivers Congress gave the CAS Board specific authority to exempt categories and classes of contractors and subcontractors and to establish procedures for the waiver of the CAS requirements with respect to individual contracts and subcontracts. 68 Although the law is silent regarding the authority of the Board to delegate its authority, the legislative history indicates that Congress intended that the CAS Board itself could choose to delegate waiver authority to agency heads. Specifically, by consensus amendment, Congress adopted language that simply authorized the CAS Board to establish procedures for the waiver of the CAS requirements. In support of the consensus amendment, the Senate noted that: The Board itself shall determine appropriate procedures for waiver, including the appropriate officials for granting waivers. Waiver of “classes of contracts” may be granted only by the Board itself.69 68 41 U.S.C. 422(f)(3)(B). 69 134 Cong. Rec. S16849-52 (October 19, 1988). 36 The CAS Board rarely delegates its waiver authority. However, in 1995, the Board delegated to executive agencies the authority to waive the application of the CAS to “individual firm fixed-price contracts for the acquisition of commercial items when cost or pricing data is not obtained.” Also, the CAS Board has delegated to agency heads the authority to waive the submission of a required disclosure statement before contract award where it was impractical to secure the statement at that time. In its Statement of Objectives, Policies and Concepts, the Board anticipates that waivers would be granted only in “rare and unusual” cases. This view is confirmed by the stringency of the Board’s waiver procedures, which provide that an agency seeking a waiver must describe the contract or subcontract to be waived and provide the following information: (1) a statement that the contractor/ subcontractor refuses to accept the contract or subcontract containing all or part of the CAS clause and the reason for the refusal; (2) whether the proposed contractor or subcontractor has in the past accepted a contract or subcontract containing the CAS clause; (3) the amount of the proposed award and the sum of all awards by the agency to the contractor and subcontractor in the preceding 3 years; (4) a statement that no other source will satisfy the agency’s needs on a timely basis; (5) the alternative methods considered for filling the agency’s needs; and (6) the steps taken to establish other sources of supply for future contracts for the products or services for which a waiver is being requested. In the 10 years since the CAS Board was reestablished, there have been only 14 requests made to the Board for the waiver of CAS requirements.70 While it appears that the CAS Board promptly considers waiver requests, a number of industry officials claim that the stringent criteria for granting waivers discourage firms from seeking them, even if firms believe that a waiver is appropriate.71 Senior DOD procurement officials also state that the criteria are overly restrictive, thereby greatly inhibiting the waiver process. DOD believes that the current waiver process does not provide adequate flexibility to meet the agencies’ individual procurement needs and that the authority to grant waivers should be delegated to the contracting agencies. For example, DOD states that the CAS requirements hinder efforts to obtain the participation of some advanced technology firms, which will not accept government business that would require compliance with the CAS. Officials from NASA and OPM have agreed with DOD that, with appropriate safeguards, procuring agencies, who are the most knowledgeable about any particular contract 70 In contrast, the original CAS Board received more than 50 requests for waiver of CAS requirements. It should be noted that many of those requests predate exemptions that the Board ultimately adopted and that would appear to be applicable today. For example, many of the requests were from United Kingdom or other foreign contractors or subcontractors that apparently would be performing the contract work outside the United States, which fall under an applicable exemption to the CAS. 71 See appendix XII for information on the waivers granted since 1988. 37 or subcontract, could most efficiently and best protect the public interest by being the ones to decide when and how the CAS requirements should be waived. However, officials from the Department of Transportation and the Environmental Protection Agency believe that the CAS Board should have the sole authority to approve waiver requests because the delegation of such authority to the agencies could result in inconsistent treatment of contractors. In the Panel’s view, the decision to grant or deny a waiver request in a particular procurement is a matter of contract administration and business judgment primarily for consideration by the contracting agency. Although the CAS Board has maintained this authority in the past, procurement rules have evolved in the direction of empowering contracting officials to exercise business judgment. For example, procedures for the acquisition of commercial items and simplified acquisition procedures have streamlined the procurement process and now give contracting officers greater discretion in acquiring products and services. By contrast, the CAS Board’s restrictive criteria for granting waivers (e.g., an unequivocal statement that a contractor refuses to accept a contract with the CAS requirements and that no other source will satisfy the government’s requirements) have basically remained unchanged since their adoption in 1973. The Panel thinks that the value of possible increased uniformity gained by having the CAS Board maintain waiver authority is outweighed by the benefits of having contracting agencies exercise control over their own contract administration (with appropriate oversight and reporting requirements). In addition, the Panel believes that the CAS Board would be able to maintain control over uniformity because the authority to issue class deviations is not delegated to the procurement agencies (the delegated waiver authority is limited to particular contracts or particular standards for a particular contractor). Contracting agencies are in the best position to exercise their business judgment regarding their contractors and subcontractors and to determine whether CAS requirements need to be waived (and, if so, which ones) in order to best satisfy the agency’s acquisition requirements. The Panel notes that contracting agencies are entrusted to waive procurement regulations in unusual cases, where, in their judgment, the waiver serves the government’s interest. For example, under FAR subpart 1.4, deviations from the FAR may be granted by agency heads or their designees when necessary to meet the specific needs of the agency. 72 Given the enhanced discretion that contracting agencies have gained under recent procurement reform initiatives, the Panel believes that contracting agencies themselves should determine whether CAS waivers are appropriate in accordance with criteria to be provided in the FAR.73 72 FAR 1.402 states that “[t]he development and testing of new techniques and methods of acquisition should not be stifled simply because such action would require a FAR waiver.” 73 While there may be some possibility of inconsistent treatment of contractors by individual agencies in considering waiver requests, such a possibility is inherent in any process in which agencies are expected to exercise their business judgment in a reasonable manner. 38 Cost Impact Process The statute establishing the CAS Board directed the Board to issue rules and regulations for the implementation of the CAS promulgated under its authority, including regulations dealing with the cost impact process.74 Contractors and subcontractors are required to agree to contract price adjustments for any increased costs resulting from a change in a contractor’s or subcontractor’s cost accounting practices or because of noncompliance with the CAS. The statute requires that these contract price adjustments be made to the contractor’s CAS- covered contracts. The CAS Board’s regulations require contract price adjustments when CAS- covered contracts are materially affected by a cost accounting practice change or by a CAS noncompliance. The current regulations, however, do not specify the form and content which cost impact proposals must take or the method for recovering the costs; these are left to the contracting agencies to determine in accordance with the FAR. In response to both industry and government concerns about the cost impact process, the CAS Board has proposed a new rule governing the cost impact process and defining more specifically what constitutes a change in cost accounting practice.75 Among other things, the proposed rule details the methodology for determining required contract price or cost accumulation adjustments due to changes in a contractor’s cost accounting practices and specifies the actions to be taken by the contractor and the cognizant federal official (e.g., the contracting officer or other agency official authorized to act in that capacity), including the negotiation of the cost impact settlements on behalf of the government. The proposed rule also provides procedures for handling non-compliance actions. Although the new cost impact process proposed by the Board is more detailed than the one currently provided, the Board’s proposal indicates a belief that the change would result in a more efficient and timely process for the resolution of material cost impacts. Some government and industry commentators, on the other hand, see this proposed rule as intrusive and greatly increasing the expense associated with the cost adjustment process. They believe the CAS Board’s proposed rule, if finalized, would encroach on individual contracting agencies’ traditional contract administration responsibilities. 74 41 U.S.C. 422(h)(1)(B). 75 The CAS Board has stated that, based upon work performed by DCAA, the process for determining and resolving the cost impacts attribut- able to a contractor’s change in a cost accounting practice should be made more explicit in the Board’s regulations. As of the date of this report, a final rule had not been issued. 39 REVIEW OF THE STANDARDS There has been controversy concerning whether some of the CAS unduly incorporate allowability and procurement policy considerations and unnecessarily deviate from GAAP. The Panel believes that a review of the CAS and their attendant requirements is warranted to ascertain whether improvements or streamlining of the standards can be made in light of these concerns. Also, the Panel believes that there is no longer any need to require compliance with CAS 405 and CAS 406 under modified coverage. Allowability and Procurement Policy When it reestablished the CAS Board, Congress made it clear that it intended that the Board limit its authority to cost accounting rules and not expand it to cost “allowability and similar policy issues,” which are regulated by the procuring agencies in the FAR.76 The CAS Board itself recognized this limitation of its authority when it stated in its Statement of Objectives, Policies and Concepts that it does not determine the allowability of categories or individual items of costs; “allowability is a procurement concept affecting contract price and in most cases is established in regulatory or contractual provisions.” The Panel did not conclude from its review that any of the CAS were in effect cost allowability rules. However, the Panel received testimony and presentations from a number of commentators asserting that provisions of CAS 404, 409, 412, and 413 reflect undue concern with procurement policy and recovery of costs rather than establishing appropriate accounting practices. The CAS versus GAAP Generally, the CAS are concerned with cost measurement, assignment, and allocation, while GAAP are concerned with cost measurement and assignment. The Panel found that 6 of the 19 standards govern areas not addressed in GAAP, either in whole or in part. More specifically, GAAP do not have requirements for consistency in allocating costs for the same purpose (CAS 402), allocating direct and indirect costs (including home office and general and administrative costs) (CAS 403, 410, and 418), segregating unallowable costs (CAS 405), or calculating the cost of money for capital assets (CAS 414). In addition, while three of the standards (CAS 401—consistency in bidding and accumulating costs, CAS 407— use of standard costs for direct material and direct labor, and CAS 417—cost of money on constructed assets) have parallel concepts in GAAP, their GAAP counterparts have no practical application to contract costing. 76 Senate Report No. 100-424 at 17 (1988), reprinted in 1988 U.S.C.C.A.N. 5687, 5703. 40 Nevertheless, 10 of the 19 standards have some related GAAP requirements that deal with the measurement and assignment of costs. Two of these standards have requirements similar to GAAP.77 While eight of the standards (asset valuation (CAS 404 and 409), restructuring (CAS 406), pensions (CAS 412 and 413), insurance (CAS 416), deferred compensation (CAS 415), and independent research and development and bid proposal costs (CAS 420)) differ from GAAP in the areas of measurement and assignment to cost accounting periods, they include many provisions that follow GAAP as well as certain provisions that do not.78 Although most of the areas of difference between the CAS and GAAP have not been the subject of criticism, some areas where they differ have been the subjects of controversy, in particular, CAS 404, 412, and 413. The Panel received testimony at the public hearings that criticized some of the CAS as inappropriately deviating from GAAP.79 While it is clear that the CAS cannot be replaced in total by GAAP for the purpose of measuring, assigning, and allocating costs to government contracts, there are significant instances where GAAP principles have requirements similar to a number of the CAS as well as instances where the CAS and GAAP significantly differ. The standards should be reviewed to reflect the knowledge of 20 years of government and industry experience, the evolution of GAAP, and the advent of acquisition reform. Such a review could include revising particular section(s) of a standard, combining section(s) of the same or different standards, eliminating particular section(s) of a standard, or eliminating a particular standard in its entirety, and holds the promise of possibly providing opportunities for streamlining the CAS and allowing for more flexibility for contractors while still ensuring adequate uniformity and consistency. Modified Coverage As discussed in chapter 3, in 1993, the CAS Board, while increasing the threshold for full coverage from $10 million to $25 million, also expanded the definition of modified coverage by requiring business segments subject to modified coverage to adhere to CAS 405 (accounting for unallowable costs)80 and CAS 406 (cost accounting period)81 in addition to CAS 401 and CAS 402. 77 CAS 408 (compensated personnel absences) and CAS 411 (acquisition costs of material) duplicate in part GAAP promulgations. 78 See appendix XIII for a more detailed analysis of the similarities and differences between the CAS and GAAP. 79 See appendix IX. 80 CAS 405 provides for the identification of costs that are not allowable for government contracts and establishes guidelines for the cost accounting treatment to be accorded identified unallowable costs. 81 CAS 406 provides that a contractor must use its fiscal year as its cost accounting period and establishes consistent practices for the accumulation and allocation of costs from one accounting period to the next. 41 In expanding the definition of modified coverage to include adherence to CAS 405, the Board stated that it was concerned that some government contractors, particularly those who work for certain civilian procurement agencies, may be including specifically identifiable unallowable costs in indirect costs pools that are reflected in the billings submitted to, and reimbursements received from, federal government contracting agencies.82 The Board believed that conformance with the requirements of CAS 405 would restrict this practice. The CAS Board added CAS 406 to modified coverage because the Board believed that standard stated a basic requirement with which government contractors engaged in cost-based contracting should be able to comply. Although the Board stated that CAS 406 would provide some protection to the government from the selection of inconsistent cost accounting periods with respect to the costing and pricing of contracts, the Board did not identify this as a particular problem with respect to contractors that were subject to modified coverage. In fact, data provided by DCAA shows that DCAA rarely cites noncompliances under CAS 406. The FAR cost principles also require the identification and segregation of unallowable costs.83 In addition, the FAR provides that no proposal shall be accepted and no agreement made to establish final indirect cost rates until the costs have been certified by the contractor.84 This implements congressional requirements that, since FASA, provide significant penalties for the failure to segregate unallowable indirect costs under government contracts in excess of $500,000.85 Specifically, a contractor that includes unallowable indirect costs in a covered contract may be subject to a penalty of up to two times the amount of the disallowed costs plus interest.86 These penalties are in addition to possible penalties under the False Claims Act and False Statements Act for a contractor’s falsely certifying its indirect cost rates. Since requirements for certifications and the imposition of penalties have been extended to civilian agencies, the Panel concludes that there is no longer a need to include CAS 405 and CAS 406 in the definition of modified coverage.87 The government’s interests in these areas are adequately protected by statute and the FAR. Conversely, not requiring adherence to CAS 405 and CAS 406 as part of modified coverage would greatly benefit new entrants to the government 82 58 Fed. Reg. 58,798 (November 4, 1993). 83 FAR 31.201-6. 84 FAR 42.703-2. 85 FASA, Section 2351, October 24, 1994. Prior to FASA, penalties were only provided for the failure to segregate unallowable costs under defense contracts in excess of $100,000. 86 10 U.S.C. 2324(b), 41 U.S.C. 256(b); see also FAR 42.709-1. 87 The Panel acknowledges that GAO supported the addition of these two standards in 1993; however, additional legislative protection, as discussed above, was enacted subsequent to GAO’s support for adding these two standards to the definition of modified coverage. 42 marketplace and smaller commercial concerns that often rely upon commercial accounting systems that do not ordinarily track unallowable costs. The Panel believes that although contractors that have been subject to full coverage find little difficulty in complying with modified CAS coverage (including CAS 405 and CAS 406), contractors that have not previously been subject to the CAS find even modified CAS coverage to be burdensome and costly. Disclosure Statement The original disclosure statement was developed and promulgated in the early 1970s. No revisions to that document were made until after the Board was reestablished. In 1992, some minor revisions were made, and subsequently a project was initiated to revise and update the disclosure statement. The current disclosure statement became effective February 28, 1996. The CAS Board revised the disclosure statement with the goal of bringing it up to date in light of two decades of experience. The Board believed that the revised disclosure statement would improve the cost accounting practices followed by contractors when estimating, accumulating, and reporting costs deemed allocable to federal contracts. In the Board’s view, adequate disclosure of cost accounting practices is essential to ensure consistency in cost measurement, assignment, and allocation. The CAS Board believed that an updated disclosure statement would facilitate interaction between contractors and government representatives when dealing with contract costing matters. The CAS Board also believed that the introduction of the revised statement would not impose any new burden on contractors, as it merely replaced an existing form that required periodic updating of disclosed practices. To further reduce the possibility of increased costs, the extended dates for the submission of the new disclosure statement were designed to provide an opportunity to delay submission until a time when, in most cases, the contractors would have had to file an updated disclosure form, even if a new disclosure statement had not been introduced. Industry representatives state that the revised disclosure statement is far more burdensome than the previous one and that the additional information requested requires contractors to expend considerable additional time and costs. These representatives question whether the government needs the requested additional information or is obtaining commensurate benefits from this information that offset the costs of completing the revised statement. In justifying the new disclosure statement, the Executive Secretary for the CAS Board estimated in December 1995 that it would take only about 35 hours for a contractor to prepare and submit the revised form (the previous form was estimated to take 40 hours). The Executive Secretary also estimated that the government’s review of the revised statement would take only about 8 hours per statement 43 (review of the previous form took 40 hours). These estimates are disputed, however. One company stated that the Board’s estimate grossly understates the true burden and estimated that it took 2,437 hours to complete only Part VII of the statement. While the new CAS Board did extensive theoretical analysis and obtained comments from industry and government representatives before promulgating the revised disclosure statement, it did not conduct any field testing.88 This is in contrast to the original CAS Board, which conducted extensive field testing before promulgating the first disclosure statement requirements. If the Board had conducted field tests, it could have more accurately determined the time needed to complete the disclosure statement and assessed the need for, or benefit from, specific data requests. If such an analysis were performed in the future, the Panel believes the CAS Board might identify ways to simplify and streamline the disclosure statement. CONCLUSION Although Congress originally directed the CAS Board to involve itself in contract administration matters concerning the CAS, this may no longer be necessary, at least with regard to granting waivers and specifying the cost impact process. Rather, the Panel believes that allowing contracting agencies to handle contract administration functions as part of their traditional role in administering contracts, and thus allowing the CAS Board to focus on maintaining a system of accounting standards, would be more efficient, expeditious, and consistent with the goals of acquisition reform. The Panel also believes that an overall review of the CAS and their attendant requirements is warranted. There are also a number of standards involving procurement policy and funding considerations that some commentators claim to be inappropriate and should be reviewed. There are also areas in which the CAS and GAAP overlap or differ and should be reviewed for possible streamlining. The Panel also found that adherence to CAS 405 and CAS 406 as part of modified coverage is no longer necessary, and that the recently revised disclosure statement may be unnecessarily burdensome. RECOMMENDATIONS The Panel recommends that Congress ensure that contracting agencies, rather than the CAS Board, have primary responsibility for administering individual contracts with respect to applicable CAS requirements. With respect to waiver of 88 In its final rule, the CAS Board stated that it tried to be responsive to suggestions made by commentators and that it undertook a careful reevaluation of Part VII. For example, the Board pointed out that the instructions were revised to make clear that only relevant cost accounting practices and applicable identifying data need be disclosed and that, therefore, submission of numeric data representing accounting estimates is not required. 44 the CAS requirements, the Panel recommends that Congress explicitly provide contracting agencies with the authority to waive those requirements and specify that the FAR establish criteria for the waivers. This authority should reside at a senior policy level within the contracting agency and be exercised only when necessary to meet the needs of the agency. The authority to grant waivers should be limited to (1) the waiver of specific requirements or standards in an individual contract or subcontract or (2) the waiver of a particular standard or part of a standard for an individual contractor. The waivers should not serve as class exemptions to circumvent any specific CAS requirement. The Panel recommends that a public report of grants of waivers be made on an annual basis by contracting agencies to the OFPP Administrator or the CAS Board, so that the number and kinds of waivers being granted can be monitored. The Panel also believes that the current standards and disclosure statement should be reviewed to identify ways to simplify and streamline them in light of acquisition reform and experience. Any such review should consider differences and similarities with GAAP and reevaluate the standards in light of the expressed concerns that the standards might reflect undue consideration of procurement policy issues. The Panel also concludes that there is no longer any need to require compliance with CAS 405 and CAS 406 under modified CAS coverage. 45 Chapter 5 NEED FOR AND ORGANIZATION OF THE CAS BOARD In this chapter, the Panel responds to the congressional request for its views on the need for the CAS and the CAS Board and on whether changes need to be made to the Board’s organization. The Panel strongly believes there is a need for an independent CAS Board to promulgate and amend the CAS as necessary. As discussed below, the Panel recommends changes in the Board’s location, structure, and staffing and other support. CONTINUED NEED FOR A CAS BOARD As indicated in chapter 1, Congress established the CAS Board in part because negotiated cost-based contracts represented the majority of procurement dollars and were likely to be significant in the foreseeable future and because there was a perceived need to protect the government’s interests by establishing accounting rules to uniformly and consistently account for contractors’ costs. The Panel’s review discloses that negotiated cost-based contracts continue to represent the majority of all federal contracting dollars.89 For this reason, the Panel believes that the original purposes of the CAS--principally the need to protect the government from the risk inherent in cost-based contracts and to improve communications between the government and contractors with regard to these contracts--remain. Thus, the Panel reached the firm conclusion that there is a continuing need for standards to govern the measurement, assignment, and allocation of costs. The Panel believes just as strongly that there is also a continuing need for a CAS Board to promulgate, amend, and maintain the CAS. The standards issued by the Board establish a framework for contractors to measure, assign, and allocate costs, whereas other procurement regulations have much broader applications, such as the establishment or implementation of government procurement policy objectives and the determination of the allowability of particular costs. To achieve the overall objectives of uniformity and consistency in accounting for costs, the CAS must take precedence over other procurement regulations. As discussed in chapter 1, during the period when there was no CAS Board, considerable controversy emerged over the interpretation of 9 of the 19 standards, including alleged attempts by DOD to meet procurement policy objectives through that agency’s interpretation and proposed amendment of the CAS. These problems were the primary impetus leading to the reestablishment of the Board, and the Panel believes that similar concerns could reappear in the absence of a Board. Moreover, the CAS Board’s accomplishments since 1990, such as revising the full coverage threshold for the CAS, are indications of the continuing need for such an entity. 89 See appendix XIV. 46 ORGANIZATION OF THE CAS BOARD The original CAS Board was located in the legislative branch, whereas the current Board is located in the executive branch in OFPP, and thus within OMB. (See Table 5.1.) There were five members on the original CAS Board, the same number as on the current CAS Board. The original CAS Board was chaired by the Comptroller General, who appointed all other members, whereas the current Board is chaired by the OFPP Administrator, who appoints two of the other members.90 The majority of the original Board members were from the private sector (including two from the accounting profession), while the majority of the current Board members are government employees.91 The original CAS Board received a separate appropriation, whereas the current’s Board’s funding is supplied in OMB’s appropriation. Finally, the present Board has considerably less staffing support than the original Board. Table 5.1: Structure of Original and Current CAS Boards Original Current Location GAO OFPP/OMB Funding Separate appropriation for Board’s No separate appropriation for Board’s operation. operation. Part of OMB appropriation. Board Chair: Comptroller General Chair: OFPP Administrator. membership of the United States. Membership: One member from Membership: One member each from a federal agency, one from DOD, GSA, industry, and the industry, and two from the accounting profession. accounting profession. Total: three non-government and Total: two non-government two government members. and three government members. Staff Executive Secretary, appointed by Executive Secretary, appointed Comptroller General, and 25-30 by OFPP Administrator, and staff members. three staff members. Location At the June 1998 public hearings, the Panel received several expressions of concern regarding the Board’s placement. Some believe the Board’s current placement in OFPP has led it into procurement policy considerations that are not appropriate accounting concerns. The Panel heard virtually no support for keeping the Board in OFPP. 90 The Secretary of Defense and the Administrator of GSA appoint the other two members of the current CAS Board. 91 Current members include the OFPP Administrator, the Director of DCAA, the Chief Financial Officer of GSA, an industry representative, and an individual “particularly knowledgeable about cost accounting problems and systems.” The original CAS Board consisted of the Comptroller General, the DOD Comptroller, two members from the accounting profession, and one industry representative. 47 While the CAS Board is characterized in its authorizing legislation as an “independent board,” it is subordinate to OFPP and OMB. This affects the ability of the Board to operate as an independent entity. The Administrator of OFPP is the Chair of the CAS Board, and with the concurrence of OMB, the Administrator appoints two of the Board members. OFPP/OMB hires, evaluates, and directs the Board employees and provides the Board’s funding from OMB’s lump sum appropriation. As discussed below, because of the CAS Board’s subordination to OFPP/OMB, constitutional concerns have been raised that its placement and structure may not allow the Board to issue binding regulations. In terms of overall policy considerations, the Panel notes that OMB’s and the CAS Board’s primary missions are significantly different. While the CAS Board establishes accounting rules for government contractors, OMB provides budgetary and other support to the President, often within the scope of the deliberative process and executive privileges.92 To accomplish its primary mission, OMB evaluates the effectiveness of agency programs, policies, and procedures; assesses competing funding demands among agencies; and sets funding priorities. OMB oversees and coordinates the Administration’s procurement, financial management, information, and regulatory policies. Thus, OMB has a special relationship with the President that often does not allow for open discussion of preliminary Administration positions on issues until these positions are finalized. With respect to OFPP, the Panel views as significant that OFPP’s procurement policy mission is much broader than the maintenance of the CAS. OFPP provides high-level direction and leadership of the government procurement system, whereas the CAS Board’s primary mission is to establish and maintain appropriate accounting rules for government contractors. The Board’s placement within the federal government’s primary procurement policy setting organization may have fostered the perception by some observers, discussed in chapter 4, that procurement policy considerations may have unduly influenced certain Board pronouncements. Current CAS Board’s Subordination to OMB/OFPP Because of the CAS Board’s placement within OFPP and OMB, and since OMB subjects the Board to its direction, there are concerns about the Board’s independent authority. Though the Panel found no evidence that OMB has materially changed any CAS Board rulings, OMB’s review and supervision create at least the appearance of undercutting the Board’s independence. While the Board’s authorizing legislation characterizes it as an independent board within OFPP to promulgate, amend, and rescind standards, all Board pronouncements 92 Deliberative process privilege protects pre-decisional opinions, recommendations, and the like from public disclosure before a final decision has been reached. Pre-decisional materials remain privileged even after the decision to which they pertain is made. Executive privilege refers to a judicially recognized privilege flowing from the separation of powers doctrine of the Constitution that permits the President to maintain the confidentiality of official communications with his advisers. The privilege is intended to promote candor in the presidential deliberation and decision-making process. 48 and actions, including standards and public hearing announcements, must be approved by OMB, even though the authorizing legislation does not so provide. In addition, the OFPP Administrator must obtain OMB’s concurrence to appoint Board members, and conflict of interest waivers for proposed non-government Board members and staff are approved by OMB.93 Since the CAS Board does not have a separate appropriation, OMB controls the CAS Board’s funding. As with other OMB components, including OFPP, the Board’s salaries and expenses are rolled up into the budget for OMB’s lump sum appropriation. This makes the Board’s operations subject to OMB’s personnel and budgetary constraints. The requirement for OMB approval of all CAS Board actions is consistent with the position taken by the Department of Justice while the legislation authorizing the CAS Board was pending. At that time, Justice advised Congress that, in order for the Board to promulgate binding rules, the Board must be subject to the OMB Director’s, not the OFPP Administrator’s, control. In addition, the Section of Public Contract Law of the American Bar Association (ABA) has questioned the CAS Board’s ability to issue binding rules and standards on its own in view of its subordination to OMB.94 These analyses conclude that the OFPP Administrator, while appointed by the President and confirmed by Congress, may not be a “principal officer” of the government but rather an “inferior officer” under the supervision and direction of the OMB Director, who is a principal officer.95 This distinction is significant, according to the Public Contract Law Section of the ABA, because inferior officers or employees may not have the authority to issue binding regulations; it may be that only principal officers can do so under the Appointments Clause of the Constitution.96 Thus, it can be argued that neither the Board itself nor its Chair have the requisite authority to issue binding regulations.97 93 Under 18 U.S.C. 208, officers and employees of the United States, including special government employees, are generally prohibited from participating personally and substantially in rendering advice and rulemaking on matters in which the employee or any organization in which the employee is serving as an officer has a financial interest, absent a written determination, referred to as a waiver, by the government official responsible for the appointment that the interest is not so substantial as to be deemed likely to affect the integrity of the services which the government may expect from such officer or employee. 94 See appendix IX. 95 The other CAS Board members likewise are not principal officers, but are either inferior officers or employees. 96 The Appointments Clause, Article II, section 2, clause 2 of the Constitution provides for the appointment of officers and inferior officers of the United States. In Buckley v. Valeo, 424 U.S. 1 (1975), the Supreme Court, in considering the constitutionality of the Federal Elections Commission, discussed the distinction between principal and inferior officers under the Appointments Clause and found that the administra- tive functions of an executive agency which represent the performance of a significant government duty exercised pursuant to a public law, such as rulemaking, can be exercised only by principal officers. 97 Notwithstanding the arguments regarding the CAS Board’s lack of authority to issue binding regulations, OMB’s approval of CAS Board promulgations may make the problem moot, even though such approval is not provided for in the CAS Board’s enabling legislation. Also, it could be argued that the publication of the rules in the FAR may make them binding. See Boeing v. United States, 680 F.2d 132 (Cl.Ct. 1982) (publication of CAS standards in the government’s procurement regulations makes them binding whether or not their issuance by the CAS Board, which at that time was located in GAO, was constitutional). 49 OMB Control of the CAS Board’s Staffing and Support Other concerns regarding the CAS Board’s placement within OFPP and OMB relate to the control and sufficiency of staff and other support for the CAS Board. The CAS Board’s enabling legislation permits the Board an Executive Secretary, two additional senior staff members, and such other staff that the Administrator of OFPP may appoint.98 In fact, the CAS Board employs four permanent staff: the Executive Secretary (an attorney with procurement experience); the Director of Research and a Project Director/Accountant, both of whom are certified public accountants (CPA); and a Management Analyst, who acts as the Administrative Officer to the Board. This staff, as well as a fifth staff member (also a CPA), were employed by OFPP/OMB to work for the Board shortly after it was reestablished.99 Also, at least two employees of other agencies have at times been detailed to the Board.100 In 1994, GAO reported that the CAS Board may be understaffed, a problem that did not allow the Board to make progress in resolving important cost accounting issues.101 The GAO report noted that the original CAS Board employed 25 staff members and that when the CAS Board was reestablished, 7 professional staff were contemplated by the Board’s staffing plan. The suggestion has been made, which the Panel finds has merit, that the Board’s staff would be enhanced by adding individuals with different skills and experience, for example, industry or contract pricing experience. Also, since 1997, the Board has not allowed its members, including the industry representative, to have individual staff support, even if paid by the member’s organization. Instead, the only staff support is that supplied by the permanent CAS Board staff, who are supervised by the OFPP Administrator. Until this change in practice, individual Board members had been allowed to work with their own support staff. Apparently, OMB is unwilling to be subject to possible claims that it has waived its privileges concerning the protection of documents in cases where individuals who are not OMB employees are made privy to the CAS Board’s internal information.102 OMB apparently is also concerned about possible conflicts of interest over the use of non-government staff, and is unwilling to appoint such staff as special government employees, provide funds for them, or accept volunteer staffing support. At least one observer has stated that since actions can be taken to ensure that the deliberative process is protected, OMB’s position regarding the staffing and other support issues is too conservative, especially given the value to the system of allowing each Board member to utilize his or her own staff, instead of relying upon the CAS Board’s permanent staff. 98 41 U.S.C. 422(b), (c). 99 The fifth staff member no longer works for the CAS Board and has not been replaced. 100 The Panel understands that OMB has not recently authorized such detailees. 101 Cost Accounting Standards Board: Little Progress Made in Resolving Important Issues (GAO/AIMD-94-88, May 25, 1994). 102 OMB reportedly directed this change in the CAS Board’s practice after a claimant in an Armed Services Board of Contract Appeals (ASBCA) litigation requested certain documents from the Board, arguing that the requested documents were no longer protected by the deliberative process privilege because the CAS Board or its staff had disclosed the documents to persons outside the government. See Gould Inc., ASBCA No. 46749 (discovery motion to obtain CAS Board records in a claim dispute involving the interpretation of a standard). 50 Moreover, even before 1997, when the Board allowed individual members to have their own staff, the staff were generally barred from attending Board meetings. In contrast, the original CAS Board allowed each member to have one staff person present at Board meetings. Although non-government Board members have expressed a preference for having staff assist them during meetings and feel that their representation could be enhanced with such assistance, the Board has barred all staff, except the permanent CAS Board staff, from attending meetings, apparently again because OMB believes that the presence of other individuals from outside government may create a potential conflict of interest or may constitute a waiver of the deliberative process privilege. The Panel finds merit in the contention that the Board process would be enhanced if members were allowed to have their own staff to assist them. Given the restraints that OMB has imposed on Board members in discussing pending Board actions with persons not employed by OMB, the Panel believes that, because of the absence of staff for individual members, legitimate questions have been raised regarding the fairness and extent of consideration given to the viewpoint of industry or represented agencies in Board determinations. Finally, although the CAS Board’s authorizing legislation expressly allows the use of advisory committees and task forces, the Board has not used advisory committees, reportedly because such committees would be subject to the Federal Advisory Committee Act (FACA), which generally requires open access by the public.103 Apparently, this position flows, in part, from OMB’s concern about allowing public access. The CAS Board has employed informal working groups (not subject to FACA) to assist on Board projects for the revised disclosure statement and for the pending cost accounting changes rule; however, one industry participant stated that because they were prohibited from sharing their work with the rest of the industry, the industry participants were unable to ensure that the industry’s viewpoint was adequately presented. In 1994, a GAO report concluded that restricting the use of advisory committees or task forces when staffing needs exist is likely to further limit progress in resolving pressing cost accounting issues.104 The report stated that with clearly defined safeguards concerning conflicts of interest and with limits on the duration of assignments, detailees, advisory committees, and task forces could be used to provide the Board with needed assistance. In light of all of the reasons set out above, the Panel concludes that it would be best to move the CAS Board out of OFPP/OMB. Although there is logic in placing the Board within the office handling overall procurement policy, the Panel finds persuasive the concerns that placement in OFPP/OMB has unduly constrained the Board’s work and 103 5 U.S.C. App. 2 § 1. FACA provides that meetings of advisory committees shall be open to the public, that timely notice of each meeting must be published in the Federal Register, that documents prepared for or by an advisory committee must be accessible for public inspection, and that minutes of each meeting shall be kept and made available to the public. 104 Cost Accounting Standards Board: Little Progress Made in Resolving Important Issues (GAO/AIMD-94-88, May 25, 1994). 51 lent some credence to the contention that the Board’s pronouncements have been unduly affected by procurement policy considerations. The Panel acknowledges that although several commentators stated that they believe the reestablished CAS Board has functioned well and that its pronouncements have been fair and soundly based, and while recognizing the legitimacy of OMB’s general concerns about protecting internal discussions and documents, the Panel believes that shifting the Board out of OFPP/OMB could reinforce its independence. This removal should facilitate the use of advisory committees, task forces, and staff for individual members, which would improve the CAS Board process and allow for greater acceptance of its pronouncements. Analysis of Alternative CAS Board Structures Before analyzing possible options for the location, structure, and membership of a future CAS Board, the Panel believes that it is important to identify the desirable characteristics of such a Board, irrespective of its placement and membership. The Panel has identified the following characteristics as necessary: (1) The CAS Board should be an independent organization not subject to the control of another agency. In particular, the Board should not be subject to the control of any other government agency that may have conflicting procurement policy/funding concerns which could inhibit the Board’s ability to promulgate standards representing the most appropriate cost accounting practices. (2) The Board’s members should represent both the government and the private sector, but government members should remain the majority because the Board’s underlying purpose is to protect the government’s interests through the establishment and maintenance of cost accounting standards. (3) The Board members should serve on a part-time basis. The Board’s workload has demanded only part-time participation by its members, and the Panel envisions similar circumstances in the future. Alternatively, the Chair of the Board could be a full-time employee and perform many of the functions currently performed by the Executive Secretary. (4) The Board’s regulations should be binding and take precedence over other regulations regarding the allocation, measurement, and assignment of costs. In order to achieve uniformity and consistency in accounting for the costs of CAS-covered contracts, the accounting rules promulgated by the CAS Board to establish a framework for contractors to allocate, measure, and assign costs logically should be given precedence over any other procurement rules in this area. 52 With these characteristics in mind, the Panel reviewed alternative Board structures, considering the characteristics of other selected boards and commissions in an effort to determine a desired structure of the future CAS Board.105 The requirements for a permanent, independent, and balanced Board comprised of government and non-government part-time members authorized to issue binding regulations are rather unique, and the Panel was unable to identify a comparable structure. However, certain characteristics of the statutory authority of the Federal Energy Regulatory Commission (FERC), including one that establishes it as an independent agency, could be adopted to ensure the CAS Board’s independence if it were placed within a host agency as well as to address in part the constitutional concerns raised about the present structure. 106 These provisions state: The Secretary [of Energy] shall provide to the Commission such support and facilities as the Commission determines it needs to carry out its functions.107 In the performance of their functions, the members, employees, or other personnel of the Commission shall not be responsible to or subject to the supervision or direction of any officer, employee, or agent of any other part of the Department.108 The Panel reviewed the possibility of placing the Board in GAO or making the Board an advisory committee within a government agency. These options are not recommended because they would not allow the Board to issue binding regulations, a characteristic which the Panel has determined necessary. If the CAS Board were to become an advisory committee, subject to the provisions of FACA (unless exempted), in order for the Board’s rules and standards to become legally binding, they would have to be adopted by an individual or organization authorized to issue binding regulations (such as the OMB Director or the FAR Secretariat), and such other organizations would have the option of not accepting the recommendations of an advisory board. The necessity of approval by another agency would also inhibit the Board’s independence. Moreover, additional concerns would be raised if the CAS Board were to reside within GAO as an independent agency because of GAO’s placement within the legislative branch.109 105 Appendix XV provides summary information on a number of boards and commissions reviewed by the Panel. 106 The presidentially appointed FERC Commissioners are all considered principal officers, in part because FERC’s authorizing legislation does not subordinate FERC to the Department of Energy. 107 42 U.S.C. 7171(c). 108 42 U.S.C. 7171(d). 109 See Bowsher v. Synar, 478 U.S. 714 (1986) (GAO’s role under the Gramm-Rudman-Hollings Act held to be an executive function, and given GAO’s placement in the legislative branch, GAO’s role under the Act held to violate the doctrine of separation of powers). 53 RECOMMENDED CHANGES Recommended CAS Board Locations and Structure To ensure the CAS Board’s independence and to address the questions raised regarding its rulemaking authority, changes need to be made to the CAS Board’s enabling statute. For the reasons addressed above, the Panel recommends that the CAS Board be removed from OFPP and OMB, and be established as an independent agency (either within or independent of another executive branch agency), operating with autonomy. The Board’s placement must take into consideration its independence and ability to continue to effectively regulate the standards. Maintaining the Board as a separate entity independent of any other government agency is key. If the CAS Board were placed in a host agency, FERC’s enabling legislation would provide a model to follow to ensure that any agency providing administrative support would not control or influence the CAS Board’s process or its members and staff, and to ensure that the regulations issued by the Board would be binding and not subject to constitutional challenge. The CAS Board should employ its own permanent staff, who should not be subject to the direction of any other agency, and should receive a separate appropriation for its operations. Any of the three alternatives discussed below can, in the Panel’s view, achieve these goals. GSA: The first option would place the CAS Board within GSA as an independent agency with separately appropriated funding. As such, the Board would receive administrative support from GSA, including payroll, personnel, legal, and accounting functions, and, with an appropriate structure as discussed above, would not be subject to the control of the host agency. GSA currently provides government-wide support, including administrative support, to various committees, boards, and advisory committees. DOD: The second option would place the CAS Board within DOD as an independent agency with separately appropriated funding. As with the GSA option, the advantages of this option would be that it would maximize Board independence while maintaining a relationship to the host agency (DOD). In addition, it would place the Board in the agency with the majority of all CAS- covered contracts. Placement of the CAS Board in DOD would have some drawbacks, however, including the possible perception that the agency with the most at stake in the CAS could unduly influence the promulgation of the CAS for procurement policy reasons. In this regard, as discussed in chapter 1, DOD absorbed some of the CAS Board functions between 1980-88, and during that time a number of conflicts over the standards emerged. On the other hand, the Panel notes that the ASBCA, which is in DOD, operates with independence. 54 Independent Agency: This option would structure the Board as a totally independent agency. Given the Board’s relatively small size, and to minimize costs, support could be provided under a memorandum of understanding with another agency (such as GSA). The advantages of this model include total independence in appearance and in reality, whereas disadvantages include potentially higher costs to the government due to the location of the CAS Board outside of a host agency. Recommended Board Membership The Panel believes that the current qualification criterion for membership should be retained for the Board members—that is, all members “shall have experience in government contract cost accounting.” In addition, the Panel believes that the Chair should be a government officer of high standing appointed by the President. Other members should include a representative of DOD, which continues to be responsible for the majority of CAS-covered contracts, and a representative of a civilian agency. Consistent with the present make-up, there should also be an industry representative on the CAS Board as well as a member of the accounting profession (not a government employee) particularly knowledgeable about cost accounting problems and systems. Moreover, given the Comptroller General’s independence and particular interest in the CAS, the Panel believes that there is value in adding the Comptroller General as an ex officio, non-voting member of the CAS Board. To address the constitutional concerns regarding the Board’s structure, and because the Panel believes that the CAS Board should be established in a manner that allows a majority of the Board to promulgate binding regulations, the Panel also recommends that all members be the subject of Presidential appointment.110 Recommended Board Staffing The CAS Board and its Chair should employ permanent staff who would not be subject to the direction of any other agency. Alternatively, the Chair could be a full-time employee of the CAS Board, and take on the functions currently performed by the Executive Secretary and hire and supervise the other Board staff. The Panel also believes that the Board’s staff would be enhanced by including individuals with different skill mixes (e.g., individuals with industry or contract pricing experience). The staff could be augmented when necessary by the use of detailees from other government agencies. The Board members should also be permitted their own staff, subject to appropriate safeguards concerning conflicts of interest. In addition, the Board should employ advisory committees 110 Another possible solution would be for the President to appoint only the Chair of the CAS Board to a non-subordinate position to ensure principal officer status, and for the other members to be appointed as they are presently. However, if the Chair were the only principal officer on the Board and were to be outvoted by the other Board members, under the analysis of the Public Contracts Section of the ABA, any resulting rule may be susceptible to challenge on the basis that it was not issued by a principal officer of the United States—unless the Chair could be required to carry out the will of the majority of the Board in issuing rules. 55 and task forces to ensure that all necessary and relevant facts and opinions are fairly and reasonably considered in promulgating or amending standards or other CAS requirements. Moreover, there should be a mechanism that is not subject to the control of another agency for reviewing and approving conflict of interest waivers for individuals employed by the Board—for example, a requirement for financial disclosure or a process for waiving possible conflicts of interest by the Chair of the CAS Board. 56 Appendix I THE CAS BOARD REVIEW PANEL LIST OF PANEL MEMBERS Co-Chairs Dr. Jacques S. Gansler, Under Secretary of Defense for Acquisition and Technology. Dr. Gansler graduated from Yale University (BE), Northwestern University (MSIEE), New School for Social Research (MA/Political Economy) and American University (Ph.D./Economics). He is the author of several books on the defense industry as well as numerous journal papers, articles, and congressional testimony. Mr. Nelson F. Gibbs, Vice President and Controller, Northrop Grumman Corporation. Mr. Gibbs received a BCE from Clarkson University and an MS in industrial management from Purdue. He is a certified public accountant and a member of the California Society of Certified Public Accountants and the Financial Executives Institute. Mr. James F. Hinchman, Principal Assistant Comptroller General, U. S. General Accounting Office. Mr. Hinchman received his AB degree from Harvard College and his JD degree from Harvard Law School. Prior to joining GAO, Mr. Hinchman worked for 15 years in the executive branch in positions of increasing responsibility. Panel Members Mr. Larry L. Grow, Corporate Vice President and Director of Finance, Motorola Systems Solutions Group. Mr. Grow is a graduate of Arizona State University (Accounting) and holds an MBA from the University of Chicago. Mr. Jack M. Hughes. Mr. Hughes has a degree in Economics and Business from Frostburg State University and completed graduate studies in contract/ procurement law. At BTG, Mr. Hughes provided financial management and strategic direction and was responsible for contracting and pricing strategies. Major General Timothy P. Malishenko, USAF, Commander, Defense Contract Management Command, Defense Logistics Agency (DLA). General Malishenko earned a bachelor’s degree in business administration from Ohio State University, a master’s in business from Michigan State University, and a master’s in systems management from the University of Southern California. At DLA, General Malishenko oversees the agency’s procurement operations and worldwide contract administration. Dr. Louis I. Rosen, National Director for Government Contract Services, Ernst & Young LLP. Mr. Rosen earned a BS in Accounting, an MBA in Management, and a DBA in Accounting at the University of Maryland. In addition, he received a JD 57 from that university’s School of Law. He is a CPA and a member of the Bar of the State of Maryland. At Ernst & Young, Dr. Rosen interprets, evaluates, and applies government regulations to specific contract institutions, including claims preparation and resolution of disputes. Mr. Michael J. Thibault, Deputy Director, Defense Contract Audit Agency. Mr. Thibault has a BA in Accounting from Southern Oregon State College and a Master’s Degree in Management and Supervision from Central Michigan University. He is a CPA and an active speaker and panel member of various professional organizations. Rear Admiral Leonard Vincent, USN, Commandant, Defense Systems Management College. Admiral Vincent is a graduate of Southeastern State Teachers College in Oklahoma and received an MBA from the George Washington University. He is the former Commander of the Defense Contract Administration Services Region and the Defense Contract Management Command International. Ms. Karen L. Wilson, Vice President, Government Finance and Process Excellence, AlliedSignal, Inc. Ms. Wilson earned a BS in Philosophy from College of William and Mary and a JD in Corporate Law from the American University. In addition, she received a LLM in Government Contracts from George Washington University. Ms. Wilson has responsibility for acquisition reform, government financial management, and business practices. She leads several joint government/Allied Signal teams to streamline government oversight in various government accounting, contracting, and procurement areas. 58 Appendix II POTENTIAL BENEFITS OF THE CAS AS IDENTIFIED BY THE COMPTROLLER GENERAL IN 1970111 1. Uniform standards supply the guidance, support, and coordination required to better understand cost estimates and subsequent reports of actual costs. 2. Standards facilitate the preparation and reporting of cost information by contractors and its audit and evaluation by the government. 3. Standards provide guidance in helping to ensure that items of costs on a given contract are reported on a consistent basis and are comparable with costs originally proposed or projected. 4. Standards provide guidance in helping to ensure that items of cost on a given contract are reported on a consistent basis with costs in claims for change orders, reimbursement, price redeterminations, and terminations. 5. Standards require that the basis upon which forecasts of costs are predicated be disclosed. 6. Standards for use in government procurement operations improve communications between the government, Congress, industry and the general public. 7. Standards serve to identify for contractors, the type of authoritative support for costs incurred that would be required to be accumulated by them for all contract administration purposes, including audit. 8. Standards establish criteria for the use of alternative methods of cost accounting or narrow the use of alternatives where criteria for their use cannot be established. 9. Standards, together with disclosure by the contractor of its cost accounting practices, promote a common understanding as to the methods of cost determination to be used consistently under the specific circumstances and thereby minimize subsequent controversy in the administration and settlement of the contract. 10. Standards provide underlying criteria for determining when certain overhead cost allocation methods are appropriate and when they are not. 111 Report on the Feasibility of Applying Uniform Cost-Accounting Standards to Negotiated Defense Contracts, January 1970. 59 11. Standards eliminate, to a considerable extent, differences within the government as to interpretations of acceptable cost accounting practices. 12. Standards increase uniformity between contractors, which provides increased comparability between bidders on the same contract. 13. Standards increase consistency, thereby providing comparability between estimated and accumulated costs and safeguards against windfall or increased profits due to changes in cost accounting practices. 60 Appendix III THE CAS The Standards are divided into three categories. Those dealing with (1) overall cost accounting matters, (2) classes, categories, or elements of cost, and (3) pools of indirect costs. Overall cost accounting matters: CAS 401 - Consistency in Estimating, Accumulating, and Reporting Costs. Requires that costs estimated in proposals be developed consistently with the practices used by the contractor in accumulating and reporting costs. CAS 402 - Consistency in Allocating Costs Incurred for Same Purpose. Requires that each type of cost be allocated only once and on one basis to any contract. CAS 405 - Accounting for Unallowable Costs. Requires the identification of specific costs at the time such costs are determined to be unallowable. CAS 406 - Cost Accounting Period. Contract costing will be on the basis of the same fiscal periods for which annual financial statements are prepared. Classes, categories, or elements of cost: CAS 404 - Capitalization of Tangible Assets. Establishes the beginning point for fixed assets accounting. CAS 407 - Use of Standard Costs for Direct Material and Direct Labor. Provides guidance for establishment of direct labor and direct material in standard cost systems. CAS 408 - Accounting for Costs of Compensated Personal Absence. Provides for the assignment of costs to the proper cost accounting period. CAS 409 - Depreciation of Tangible Capital Assets. Provides for consistent use of current methods of depreciation and for reasonable estimates of asset service lives. CAS 411 - Accounting for Acquisition Costs of Material. Provides criteria for allocation of cost of a category of material directly to a cost objective and for the use of inventory costing methods. CAS 412 - Composition and Measurement of Pension Cost. Guidance for determining and measuring the components of pension costs and establishing which costs are to be assigned to a cost accounting period. 61 CAS 413 - Adjustment and Allocation of Pension Cost. Provides guidance for assignment of pension costs to the cost accounting period and criteria for allocation among the segments of the organization. CAS 414 - Cost of Money as an Element of the Cost of Facilities Capital. Provides technique for measuring and allocating to contracts costs based on investment in facilities capital. CAS 415 - Accounting for the Cost of Deferred Compensation. Guidance for the measurement of the cost of deferred compensation and for the assignment of such cost to cost accounting periods. CAS 416 - Accounting for Insurance Costs. Provides criteria for distinguishing between deposits and earned premiums. CAS 417 - Cost of Money as an Element of the Cost of Capital Assets Under Construction. Extension of CAS 414, provides that imputed cost of money be included in the cost of capital assets. Pools of Indirect Costs: CAS 403 - Allocation of Home Office Expenses to Segments. Establishes criteria for allocation of home office expenses directly to the segments of the organization to the maximum extent practical. CAS 410 - Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives. Provides criteria for the allocation of business unit general and administrative expenses to contracts and other work. CAS 418 - Allocation of Direct and Indirect Costs. Requires that costs be consistently classified as direct or indirect and provides criteria for accumulating indirect costs into homogeneous indirect cost pools. CAS 420 - Accounting for Independent Research and Development Costs (IR&D) and Bid and Proposal (B&P) Costs. Provides criteria for the accumulation and allocation of IR&D and B&P costs among defense contractor segments. 62 Appendix IV THE CAS EXEMPTIONS The following categories of contracts and subcontracts are exempt from all the CAS requirements: 1. Sealed bid contracts. 2. Negotiated contracts and subcontracts not in excess of $500,000. 3. Contracts and subcontracts with small businesses. 4. Contracts and subcontracts with foreign governments or their agents. 5. Contracts and subcontracts in which the price is set by law or regulation. 6. Firm fixed-price and fixed-price with economic price adjustment (provided that price adjustment is not based on actual costs incurred) contracts and subcontracts for the acquisition of commercial items. 7. Contracts and subcontracts awarded to a United Kingdom contractor for performance substantially in the United Kingdom, provided that the contractor has filed with the United Kingdom Ministry of Defense a completed Disclosure Statement that adequately describes the contractor’s cost accounting practices. 8. Subcontracts under the NATO PHM Ship program to be performed outside the United States by a foreign concern. 9. Contracts and subcontracts to be executed and performed entirely outside the United States, its territories, and possessions. 10. Firm-fixed-price contracts and subcontracts awarded without submission of any cost data. 63 Appendix V THE CAS APPLICABILITY AND COVERAGE DIAGRAM112 CAS Exemption - 48 CFR 9903.201-1 Start Contracts/subcontracts Contracts/subcontracts Negotiated government with foreign with United Kingdom contract/subcontract governments contractors to be less than $500,000 their agents or performed substantially instrumentalities and in the United Kingdom, except for CAS 401 provided an adequate Sealed bid contract disclosure statement & 402, Foreign Contract/subcontract was filed with the meets one of the United Kingdom Firm-fixed-price listed CAS exemptions contract/subcontract Subcontracts under Ministry Yes awarded without any the NATO PHM Ship of Defense cost data Programs to be No performed outside of Contracts/ the United States subcontracts Contract/subcontract Contract/subcontract execuled and is exempt from CAS price is set by law performed or regulation Firm-fixed-price entirely outside the contracts/subcontracts United States, its for the acquisition of territories, and its Contract/subcontracts commercial items possessions with small business Business unit received a No Business unit recieved $25 million No Contract/subcontract contract/subcontract for $25 million or or more net CAS-covered more, or any CAS-covered awardsduring preceding is subject to modified accounting periodwith at least coverage. contract/subcontract award thereafter in the same year one exceeding $1 million Yes Yes Company together with its segments No received $25 million or more CAS-covered Contract/subcontract awards in most recent accounting is subject to full period with at least one exeeding $1 million CAS coverage Yes Yes Business unit CAS-covered awards during the prior year are less than $10 million and less than 30 percent Business unit of total sales disclosure statement required No Business unit disclosure statement required Home office allocating costs to one or more Home office allocating disclosing segments No disclosure costs to one or more must submit Part VIII statement required disclosing segments must submit Part VIII 112 Defense Contract Audit Manual, January 1999. 64 Appendix VI Sample Disclosure Statement Form 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 Appendix VII COMPARISON OF THE CAS AND FAR COST PRINCIPLES Adjusting the CAS applicability criteria could result in a larger number of contracts being exempt from CAS coverage. Generally, these non-CAS-covered, cost-based contracts would continue to be subject to FAR Part 31 and would still be required to comply with the three standards concerning deferred compensation and pensions, since these standards are incorporated by reference into FAR Part 31. In addition, contractors would still be entitled to recover the cost of money on these non-CAS- covered contracts, since the cost of money standards are also incorporated by reference into FAR Part 31. These non-CAS-covered contracts would also continue to be subject to the basic concepts embodied in four of the standards, including direct/ indirect charging, segregation of unallowable costs, self-insurance, and B&P/IR&D costs. By relying on GAAP, these non-CAS-covered contracts would also continue to be subject to the fundamental concepts embodied in the standards that address compensated personal absence and purchased insurance. In addition, non-CAS-covered contracts of any contract type would not be subject to the specific CAS requirements regarding cost allocations, asset capitalization and depreciation, cost accounting period, standard costs, and material costs. In addition, there would be no price adjustments for non-CAS-covered contracts for changes in accounting practice. Furthermore, the non-CAS-covered fixed-price contracts would not be subject to price adjustment for failure to comply with the FAR Part 31 requirements. The following summary compares the CAS with related FAR provisions. Number of Comparison attribute standards Incorporation by reference (CAS 412, 413, 414, 415, 417) 5 Substantial duplication (CAS 402, 405, 416, 420) 4 Reliance on GAAP (CAS 408) 1 Significant differences with FAR providing only general guidelines 8 (CAS 403, 404, 406, 407, 409, 410, 411, 418) No related FAR Part 31 (CAS 401) 1 The five standards that are incorporated by reference into FAR Part 31 address deferred compensation, pensions, and cost of money. The four standards that have FAR Part 31 provisions that duplicate the requirements contained in the standards address consistency in direct/indirect charging, segregation of unallowable costs, self- insurance, and IR&D/B&P costs excluding allocation provisions. The eight standards for which the FAR Part 31 requirements differ significantly address cost allocation, asset capitalization/depreciation, cost accounting period, standard costs, and material costs. In addition, CAS 401, which addresses consistency in estimating and accumulating costs, has no related FAR Part 31 requirement. 106 The results of the comparison by standard are as follows: CAS Related FAR provision Results of comparison 401 None No related FAR requirements 402 31.202 and 31.203 Substantial duplication 403 31.201-4 and 31.203 FAR provides only general guidelines 404 31.205-11, 31.205-24, and FAR provides general guidelines/ 31.205-52 some duplication 405 31.201-6 Substantial duplication 406 31.203 FAR provides general guidelines 407 31.201-1 FAR provides only general guidelines 408 None Reliance on GAAP 409 31.205-11 and 31.205-16 FAR provides some general guidelines/some duplication 410 31.201-4 and 31.203 FAR provides only general guidelines 411 31.205-26 FAR provides general guidelines 412 31.205-6(j) Incorporation by reference 413 31.205-6(j) Incorporation by reference 414 31.205-10 Incorporation by reference 415 31.205-6(k) Incorporation by reference 416 31.205-19 Reliance on GAAP for purchased insurance/incorporates CAS 416 for self-insurance 417 31.205-10 Incorporation by reference 418 31.201-4 and 31.203 FAR provides only general guidelines 420 31.205-18 Substantial duplication, incorporates CAS 420 for all provisions except 420.50(e)(2) and (f)(2). Where differences exist, FAR provides only general guidelines COMPARISON OF THE CAS AND FAR PART 31.2 CAS 401: Consistency in Estimating, Accumulating, and Reporting Costs: The requirements of this standard are not covered in FAR Part 31.2. CAS 401 requires consistency in the estimating, accumulating, and reporting of costs. FAR Part 31.2 contains no similar or related requirements. 107 CAS 402: Consistency in Allocating Costs Incurred for the Same Purpose: The requirements of CAS 402 are duplicated in FAR 31.202, “Direct Costs,” and FAR 31.203, “Indirect Costs.” CAS 402 requires that each type of cost be allocated only once and on only one basis to each contract. FAR 31.202 and 31.203 provide the same basic requirements. CAS 403: Allocation of Home Office Expenses: The specific requirements of CAS 403 are not addressed. However, general guidelines on allocation principles are provided at FAR 31.201-4, “Determining Allocability,” and FAR 31.203, “Indirect Costs.” CAS 403 establishes criteria for allocating home office expenses to segments. The standard requires that such allocations be made on a beneficial or causal relationship. It also provides a hierarchy of allocation practices: (1) direct identification whenever possible, if not (2) indirect cost pools allocated on a beneficial or causal relationship, and if that is not possible, (3) allocation of residual expenses using a three-factor formula. FAR 31.201-4 states that a cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Under FAR 31.201-4, a cost is allocable to a government contract if it (1) is incurred specifically for the contract, (2) benefits both the contract and other work and can be distributed to them in reasonable proportion to the benefits received, or (3) is necessary for the overall operation of the business. FAR 31.203 requires that indirect costs be grouped in logical cost groupings, that cost groupings be determined so as to distribute costs on the basis of benefits accruing to cost objectives, that the base for allocating these costs not be fragmented by removing individual elements, and that the method of allocating costs be in accordance with GAAP. CAS 404: Capitalization of Tangible Capital Assets: For the most part, the specific requirements of this standard are not addressed in the FAR. However, general guidelines for depreciation are provided at FAR 31.205-11, “Depreciation,” and FAR 31.205-24, “Maintenance and Repair Costs,” requires that expenditures for plant and equipment be capitalized in accordance with GAAP. CAS 404 provides criteria for capitalization. The standard requires capitalization if the asset benefits more than one period and the cost of the asset exceeds the minimum capitalization threshold. The standard also includes a “no step-up, no 108 step-down” rule for establishing values of certain assets acquired in a business combination. FAR 31.205-11 considers contractor capitalization practices to be reasonable if the contractor follows policies and procedures that are (1) consistent with those followed in the same cost center for business other than government, (2) reflected in the contractor’s books of accounts and financial statements, and (3) both used and acceptable for federal income tax purposes. In addition, FAR 31.205-11(m) incorporates CAS 404 for assets acquired under capital leases. FAR 310.205-24 requires capitalization and depreciation of expenditures for plant and equipment according to the contractor’s established policy in conformance with GAAP. In addition, the cost principle requires that extraordinary maintenance and repair be capitalized and assigned to applicable cost accounting periods. The cost principle also provides for a “no step-up, no step-down” rule at FAR 31.205-52, which is substantially the same as that provided for under CAS 404. CAS 405: Accounting for Unallowable Costs: FAR 31.201-6, “Accounting for unallowable costs,” duplicates the requirements of CAS 405 through text and incorporation. CAS 405 and FAR 31.201-6 require contractors to segregate unallowable costs. CAS 406: Accounting Period: The requirements of CAS 406 are addressed generally at FAR 31.203. CAS 406 provides specific criteria on what constitutes an accounting period. The standard defines the fiscal year as the normal accounting period and provides specific instances in which a period other than the fiscal year may be used. CAS 406 also provides guidance on the measurement, assignment, and allocation of restructuring costs. FAR 31.203, “Indirect Costs,” requires that the base period for allocating indirect costs be the contractor’s fiscal year but permits use of a shorter period (1) for contracts in which performance involves only a minor portion of the fiscal year, or (2) when there is general practice in the industry to use a shorter period. CAS 407: Use of Standard Costs for Direct Material and Direct Labor: The specific requirements of this standard are not addressed in the FAR. However, the concept of standard costs is mentioned at FAR 31.201-1, “Composition of Total Cost.” FAR Part 31.201-1 includes a general requirement regarding standard costs, while CAS 407 has detailed criteria. 109 CAS 407 permits use of standard costs if (1) the standard costs are entered into the books of account, (2) the standard costs and related variances are appropriately accounted for at the level of the production unit, and (3) the practices regarding the use of standard costs, revisions to standard costs, and disposition of variances is stated in writing and consistently followed. In addition, CAS 407 requires that variances be allocated to cost objectives at least annually and on the same basis as the standard costs. FAR 31.201-1 permits the use of standard costs in determining the composition of total cost if the standard costs are properly adjusted for applicable variances. CAS 408: Accounting for the Costs of Compensated Personal Absence: FAR Part 31.2 does not specifically address accounting for the costs of compensated personal absences and thus relies on GAAP in this area. As noted in the CAS versus GAAP analysis, the CAS and GAAP have overlap/duplication in this area. CAS 408 requires costs of personal absences to be assigned to the period in which they are earned and to be allocated pro-rata to all final cost objectives of that period. GAAP (Financial Accounting Standards Board (FASB) 43), and thus by default FAR Part 31.2, requires an employer to accrue a liability for employee’s rights to receive compensation for future absences when an obligation exists. For example, GAAP requires a liability to be accrued for vacation benefits that employees have earned but have not yet taken; however, it generally does not require a liability to be accrued for future sick pay benefits, holidays, and similar compensated absences. This requirement is similar to the requirement at CAS 408. CAS 409: Depreciation of Tangible Capital Assets: The specific requirements of this standard are not incorporated in the FAR. However, general guidelines are provided in FAR 31.205-11, “Depreciation.” In addition, there is duplication in the requirements for treatment of gains or losses on disposition of assets at FAR 31.205-16, “Gains and Losses on Disposition or Impairment of Depreciable Property or Capital Assets.” CAS 409 (1) provides specific criteria for determining when an asset is placed in use, (2) requires that expected periods of usefulness be used in determining depreciation periods, (3) requires that the contractor maintain records of past retirement of similar assets used in similar circumstances, (4) requires that the records of past retirement be adequate to show the age at retirement for a sample of assets for each significant category, (5) requires that the depreciation method used for financial accounting also be used for contract costing (unless the method is unacceptable for income tax purposes or does not reasonably reflect the expected consumption of services), (5) limits the direct allocation of costs to those 110 allocated on the basis of usage, and (6) requires that any sale gain/loss be allocated in the same manner as the asset was depreciated. FAR 31.205-11 considers contractor depreciation practices to be reasonable if the contractor follows policies and procedures that are (1) consistent with those followed in the same cost center for business other than government, (2) reflected in the contractor’s books of accounts and financial statements, and (3) both used and acceptable for federal income tax purposes. FAR 31.205-11 also states that depreciation should usually be allocated as an indirect cost (but there is no prohibition against allocating deprecation as a direct cost). In addition, FAR 31.205-16 contains criteria for allocating gains/losses similar to that contained in CAS 409. CAS 410: Allocation of Business Unit General and Administrative Expenses (G&A) to Final Cost Objectives: The specific requirements of CAS 410 are not addressed in the FAR. However, general guidelines on allocation principles are provided at FAR 31.201-4, “Determining Allocability,” and FAR 31.203, “Indirect Costs.” CAS 410 provides criteria for the allocation of business unit G&A to final cost objectives based on their beneficial or causal relationship. This standard requires use of a single business unit G&A pool allocated over a total activity base. The total activity base can be one of three: total cost input, value added, or single element. FAR 31.201-4 states that a cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Under FAR 31.201-4, a cost is allocable to a government contract if it (1) is incurred specifically for the contract, (2) benefits both the contract and other work and can be distributed to them in reasonable proportion to the benefits received, or (3) is necessary for the overall operation of the business. FAR 31.203 requires that indirect costs be grouped in logical cost groupings, that cost groupings be determined so as to distribute costs on the basis of benefits accruing to cost objectives, that the base for allocating these costs not be fragmented by removing individual elements, and that the method of allocating costs be in accordance with GAAP. CAS 411: Accounting for Acquisition Costs of Material: Most of the specific requirements of CAS 411 are not addressed in the FAR. However, general guidelines and a few specific requirements are incorporated at FAR 31.205-26, “Material Costs.” 111 CAS 411 (1) requires consistent contractor policies for accumulating and allocating material costs, (2) permits direct allocation of material costs to cost objectives if the cost objective was specifically identified at the time of purchase or production of the units, (3) states that indirect material not consumed by the end of the period cannot be charged in that period but must instead be established as an asset, and (4) provides for five acceptable inventory costing methods: first-in-first-out (FIFO), moving average, weighted average, standard cost, and last-in-first-out (LIFO). FAR 31.205-26 states that when materials are purchased solely for and are identifiable with a contract, the actual purchase cost of those materials shall be charged directly to that contract. FAR 31.205-26 also states that, for materials issued from stores, any generally recognized method of pricing such material is acceptable if that method is consistently applied and the results are equitable. CAS 412: Composition and Measurement of Pension Costs: FAR 31.205-6(j), “Pension Costs,” incorporates the requirements of CAS 412 by reference, and thus the FAR duplicates the CAS for this issue. CAS 412 and FAR 31.205-6(j) (through incorporation of CAS 412) (1) define the four components of pension cost for defined benefit pension plans, (2) measure defined contribution pension plan costs as the net contribution for the period, (3) require the use of an immediate gain actuarial cost method for measuring defined benefit pension plan costs other than those accounted for on a pay-as-you-go method, (4) provide requirements for determining actuarial assumptions/ estimates, and (5) provide criteria for reassignment of pension costs. CAS 413: Adjustment and Allocation of Pension Costs: FAR 31.205-6(j), “Pension Costs,” incorporates the requirements of CAS 413 by reference, and thus the FAR duplicates the CAS for this issue. CAS 413 and FAR 31.205-6(j) (through incorporation of CAS 412) (1) provide criteria for computing/assigning gains and losses, (2) provide criteria for actuarial assumptions, (3) requires allocation of pension costs to all segments having participants in the pension plan, (4) require segment accounting when certain conditions exist, (5) provide for the concept of an assignable cost deficit, and (6) require an adjustment for segment closings and plan terminations. CAS 414: Cost of Money as an Element of the Cost of Facilities Capital: FAR 31.205-10, “Cost of money,” incorporates the requirements of CAS 414 by reference, thus duplicating the CAS for this issue. 112 CAS 414 and FAR 31.205-10 (through incorporation of CAS 414) provide criteria for the measurement and allocation of the costs of facilities capital. CAS 415: Accounting for the Cost of Deferred Compensation: FAR 31.205-6(k), “Deferred compensation,” incorporates the requirements of CAS 415 by reference, and thus the FAR duplicates the CAS for this issue. CAS 415 and FAR 31.205-6(k) (through incorporation of CAS 415) provide criteria for measuring and assigning the costs of deferred compensation, including (1) requirements that deferred compensation be assigned to the period in which the contractor incurs an obligation to the employee, and (2) that the costs be measured as the present value of the future benefits. CAS 416: Accounting for Insurance Costs: For contractors that establish self-insurance programs, FAR 31.205-19, “Insurance and Indemnification,” incorporates the requirements of CAS 416, and thus the FAR duplicates the CAS for this issue. For purchased insurance, CAS 416 and FAR 31.2 (through the use of GAAP) have similar requirements. For self-insurance charges, CAS 416 (and thus FAR 31.2 for contractors that establish self-insurance programs) requires that (1) insurance costs be assigned to a cost accounting period using a projected average loss, and (2) insurance costs be allocated based on the beneficial and causal relationship between the insurance costs and the benefiting/causing cost objectives. For purchased insurance costs, CAS 416 requires that (1) the premium costs applicable to a given policy term be assigned pro rata among the cost accounting periods covered by the policy term and (2) a refund become an adjustment to the pro rata premium costs for the earliest cost accounting period in which the refund is received. FAR 31.205-19 does not address the treatment of purchased insurance and thus would follow the GAAP requirements. The GAAP requirements for the various types of insurance policies that can be purchased are too numerous to list. However, the general principle that underlies the specific accounting treatment for each of these policies is similar to the CAS 416 requirement, i.e., the premium cost should be assigned among the accounting periods covered by the policy term. CAS 417: Cost of Money as an Element of the Cost of Capital Assets Under Construction: FAR 31.205-10, “Cost of money,” incorporates the requirements of CAS 417 by reference and thus duplicates the CAS for this issue. 113 CAS 417 and FAR 31.205-10 (through incorporation of CAS 417) provide criteria for measuring the cost of money attributable to capital assets under construction, including the requirement that the cost of money applicable to investment in tangible and intangible capital assets being constructed, fabricated, or developed for a contractor’s own use be included in the capitalized acquisition cost of such assets. CAS 418: Allocation of Direct and Indirect Costs: The specific requirements of this standard are not addressed in the FAR. However, general guidelines on allocation principles are provided at FAR 31.201-4, “Determining Allocability,” and FAR 31.203, “Indirect Costs.” CAS 418 requires the contractor to (1) have written policies for classifying costs as direct or indirect, (2) accumulate the indirect costs in homogeneous cost pools, and (3) allocate the cost pools in reasonable proportion to the beneficial or causal relationship. FAR 31.201-4 states that a cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Under FAR 31.201-4, a cost is allocable to a government contract if it (1) is incurred specifically for the contract, (2) benefits both the contract and other work and can be distributed to them in reasonable proportion to the benefits received, or (3) is necessary for the overall operation of the business. FAR 31.203 requires that indirect costs be grouped in logical cost groupings, that cost groupings be determined so as to distribute costs on the basis of benefits accruing to cost objectives, that the base for allocating these costs not be fragmented by removing individual elements, and that the method of allocating costs be in accordance with GAAP. CAS 420: Accounting for IR&D and B&P Costs: FAR 31.205-18, “Independent Research and Development and Bid and Proposal Costs,” incorporates the requirements of CAS 420, except for paragraphs (e)(2) and (f)(2). Thus the FAR duplicates the CAS by reference for most of this area. CAS 420 and FAR 31.205-18 (through incorporation of CAS 420) require that IR&D/B&P costs be (1) accumulated by project, (2) allocated on a beneficial or causal relationship, and (3) assigned only in the period in which they are incurred (except that IR&D costs may be assigned to other periods if permitted by existing laws or regulations). CAS 420, but not FAR 31.205-18, requires that IR&D/B&P costs be allocated among segments by means of the same base used by the company to allocate residual expenses under CAS 403 and that IR&D/B&P costs be allocated to final cost objectives using the same base used to allocate G&A expenses under CAS 410. 114 FAR 31.2 does not incorporate CAS 403 or CAS 410 and thus relies upon the general allocability criteria at FAR 31.201-4 for allocating IR&D/B&P costs. This criteria states that a cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Under FAR 31.201-4, a cost is allocable to a government contract if it (1) is incurred specifically for the contract, (2) benefits both the contract and other work and can be distributed to them in reasonable proportion to the benefits received, or (3) is necessary for the overall operation of the business. 115 Appendix VIII LIST OF SURVEYED CONTRACTORS AND IDCC FIRMS Listing of Department of Defense contractors surveyed: 1. Aerojet General Corporation · GenCorp Aerojet · Aerojet - Sacramento 2. Alegany Teledyne · Brown Engineering · Ryan Aeronautical · Wahchang Albany 3. Alliant Techsystems · Commercial Propellent Segment · Defense Systems · Space and Strategic Systems Group 4. Allied Signal · Technical Services · Electronics and Avionics Systems · Aerospace Equipment Systems 5. Ball Corporation · Ball Aerospace and Technical Corporation 6. BDM · Enterprising Management Systems · Federal Systems 7. Boeing · Boeing Commercial Airplanes Group · Defense & Space Segment · Aircraft & Missiles Segment · C-17 Segment 8. Eaton Corporation · Pressure Sensors Division · Specific Industry Controls Division · Valve Actuator Division 116 9. General Electric Company · GE Aircraft Engines - Evendale · GE Aircraft Engines - Lynn · GE Power Systems 10. Harris Corporation · Information Systems Division · Government Aerospace Systems Division 11. Honeywell · Honeywell Technology Center · Solid State Electronics Center 12. L-3 · Explosive Detection System · Medical Systems 13. Lockheed Martin Corporation · LM Tactical Aircraft Systems · LM Aeronautical Systems · LM Missiles and Space · LM Federal Systems 14. Lockheed Martin Sanders · MED · Telecommunications 15. McDermott Incorporated · Naval Nuclear Fuels Division · Nuclear Equipment Division · Contract Research Division 16. Orbital Sciences Corporation · Space Systems Group · Electronic Sensor Systems Group · Launch Systems Group 17. Scott Technologies · Interstate Electronics Corporation · Scott Aviation 18. Sundstrand · Sundstrand Aerospace Electric Systems · Aerospace Mechanical Systems · Aerospace Power Systems 117 19. Textron, Inc. · Bell Helicopter Textron · Textron Systems Division · Fuel Systems Textron List of IDCC firms: 1. Corning Incorporated 2. Cummins Engine Company 3. Dow Chemical Company 4. Dow Corning Company 5. Eastman Kodak Company 6. Hoechst 7. Honeywell 8. IBM 9. Motorola 10. W. L. Gore and Associates, Inc. 11. 3M Company 118 Appendix IX TESTIMONIES AND OTHER STATEMENTS PERSON AND ORGANIZATION TOPIC Ms. Danielle Brian, Executive Director, Government oversight Project on Government Oversight Mr. Alan Brown, Attorney, McKenna & Staffing support and Cuneo communications with industry Mr. Bert M. Concklin, President, Application of the CAS for the Professional Services Council service industry Mr. Tim Foster, President, TAF, Inc. Vital role of the CAS in government today - with a historical perspective Mr. Stanley Fry, Manager of Contracts for The CAS application for Commercial and Government Systems, predominately Eastman Kodak commercial companies Mr. Stephen W. Gammarino, Senior Vice The CAS application for the President, Federal Employee Program, Blue Cross-Blue Shield Federal Blue Cross-Blue Shield Association; Employee Program Mr. Nelson Shapiro, Consultant; Mr. Bill Preskin, Attorney Mr. Sanders P. Gerson, Deputy Assistant Application of the CAS to the Inspector General for Audits, Office of the Federal Employee Health Care Inspector General, U.S. Office of Personnel Program Mr. Patrick Gnazzo, Vice President of Corporate perspective of the CAS Business Practices, and Mr. Joel Marsh, United Technology Corporation Ms. Helaine Gregory, Compliance Officer, The CAS application to Medicare Government Operations, United contractors Health Care Insurance Company Mr. Alfred King, Chairman, Management Management accounting for Accounting Committee, Institute of government cost accounting Management Accountants purposes 119 Mr. Paul Lindahl, Manager, Government The CAS application for Controllers Department, 3M Corporation predominately commercial companies Mr. John Lordon, Vice President for The CAS application for Business Affairs, Johns Hopkins universities and colleges University Mr. Merritt Marquardt, Chairman, Predominately commercial Integrated Dual-use Commercial Companies companies with small government market Mr. Rodney Mateer, National Partner, The CAS and GAAP: overlap, Deloitte & Touche duplication and conflict Ms. Eileen Morrissey, Director, Advanced The importance of advanced Cost Management, AlliedSignal, Inc. cost and management in today’s Chairperson, Consortium for Advanced complex environment Manufacturing - International Mr. Anthony O’Falt, Resident Auditor, Resident DCAA auditor’s Defense Contract Audit Agency, United perspective on the CAS Technology Corporation Mr. Charles Ream, Executive Corporate perspective on the CAS Vice President for Finance, and Mr. Robert Morales, Director, Government Accounting, The Raytheon Corporation Mr. William Romenius, Assistant Corporate perspective on the CAS Comptroller for Finance, The Boeing Company Mr. Ronald D. Sabado, Resident Auditor, Resident DCAA auditor’s Defense Contract Audit Agency, Boeing perspective on the CAS Corporation Resident Office Mr. Bernard Sacks, President, Sacks Organizational placement of Bonuccelli, Inc., Certified Public the CAS Accountants Mr. Lynn Saylor, Corporate Director of Corporate perspective on the CAS Finance, General Electric Company 120 Mr. Charles Tiefer, Associate Professor, Academic perspective on the CAS University of Baltimore School of Law Mr. Alan Tinti, Defense Corporate Defense Corporate Executive’s Executive, Defense Contract Management perspective on the CAS Command, United Technology Corporation Mr. Frank D. Titus, Assistant Director for The CAS in the Federal Employee Insurance Programs, United States Office Health Care Program of Personnel Management Ms. Margaret Worthington, Partner, Price The CAS and Cost Principles: Waterhouse overlap, duplication and conflict (Statements appear in the order presented) ____________ The following individuals did not appear at the hearing but submitted statements for the record: Mr. Bertold Bodenheimer, Partner, Caldwell Need for the CAS and Bodenheimer, CPA Mr. Dan C. Heinemeier, President, Applicability of the CAS Government Electronics and Information Technology Association Ms. Eleanor Hill, Inspector General, Need for the CAS Department of Defense Mr. Gordon Shillinglaw, Professor of The CAS versus the GAAP Accounting Emeritus, Columbia University, and former member of the Cost Accounting Standards Board Mr. David A. Churchhill, Need for the CAS Chair, Section of Public Contract Laws, American Bar Association 121 Appendix IX Testimonies and Other Statements 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259 260 261 262 263 264 265 266 267 268 269 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 307 308 309 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 346 347 348 349 350 351 352 353 Appendix X METHODOLOGY USED TO IDENTIFY CAS-COVERED CONTRACTS The federal government does not maintain a database of contracts subject to the CAS; therefore, the universe of the CAS-covered contracts is not readily available. The federal government-wide data base for contract actions, FPDS, was used to determine the amount of cost-based actions; however, it has two major limitations for the purpose of using it to identify CAS-covered actions. First, the FPDS does not identify contract actions that are CAS-covered and secondly, it does not collect contract actions by CAS-covered contractor segments. These limitations prohibited the use of the FPDS data to determine alternative threshold or trigger analysis. Therefore, to analyze the impact of alternative CAS applicability thresholds for individual contracts and for full and modified coverage, the Panel used a surrogate CAS universe developed by DCAA and DCMC. DCAA obtained data on the CAS-covered contracts from its defective-pricing database. That database includes contract awards subject to TINA that are also generally subject to the CAS. The data was obtained for a single annual period—April 1997 to March 1998. The defective-pricing universe is created and maintained by each DCAA Field Audit Office113 and includes negotiated prime contracts, subcontracts, and modifications where the government required cost or pricing data. The data source includes the contract and modification numbers, pricing action amount, and the award or definitization data. Since the CAS are also applicable to contracts when TINA does not apply, DCAA requested that field offices report competitively awarded CAS-covered contracts they were aware of and not included in the defective-pricing universe. Using these two sources of data, DCAA and DCMC estimated that the CAS universe includes 588 business segments, totaling approximately $72 billion. DCAA does not audit each contract action and focuses instead on those contracts where the financial risk to the government is highest. Thus, the DCAA CAS universe has limitations because the defective pricing-universe may be incomplete for low dollar cost-type contracts due to the low risk of defective pricing. This limitation may cause underreporting of contractors with cost-type contract awards of less than $100 million and, in turn, affect the analysis concerning contractors with modified CAS coverage. DCAA’s CAS universe may also under-report the CAS-covered contracts where certified cost and pricing data was not obtained and thus may not include CAS-covered firm-fixed-price contracts when cost data (but not certified cost and pricing data) was obtained. 113 DCAA’s field audit offices consist of 18 resident offices and 64 branch offices and are responsible for oversight involving approximately 9,000 active contractors. 354 CAS Coverage Analysis Using Alternative Trigger Concept and Full Coverage Thresholds114 Applicability threshold remains at $500,000 (Dollars in millions) Full coverage Trigger = $500 thousands Trigger = $2 million Trigger = $5 million threshold Number of Percent of Dollars Percent of Number of Percent of Dollars Percent of Number of Percent of Dollars Percent of contractors total contract contractors total contract contractors total contract contractors dollars contractors dollars contractors dollars $25 Million Reductions: Modified to none 0 0% $0 0% 120 20% $261 0% 219 37% $916 1% Full to none 0 0% $0 0% 1 0% $29 0% 7 1% $227 0% Full to modified 0 0% $0 0% 0 0% $0 0% 0 0% $0 0% Remaining: Total Modified 308 52% $2,226 3% 188 32% $1,965 3% 89 15% $1,310 2% Total Full 280 48% $69,811 97% 279 47% $69,782 97% 273 47% $69,584 96% Total Coverage 588 100% $72,037 100% 467 79% $71,747 100% 362 62% $70,894 98% $50 Million Reductions: Modified to none 0 0% $0 0% 120 20% $261 0% 219 37% $916 1% Full to none 0 0% $0 0% 1 0% $29 0% 7 1% $227 0% Full to modified 91 15% $3,315 5% 90 15% $3,286 5% 84 14% $3,088 4% Remaining: Total Modified 399 68% $5,541 8% 278 47% $5,251 7% 173 29% $4,398 6% Total Full 189 32% $66,496 92% 189 32% $66,496 92% 189 32% $66,496 92% Total Coverage 588 100% $72,037 100% 467 79% $71,747 99% 362 61% $70,894 98% $75 million Reductions: Modified to none 0 0% $0 0% 120 20% $261 0% 219 37% $916 1% Full to none 0 0% $0 0% 1 0% $29 0% 7 1% $227 0% Full to modified 127 22% $5,472 8% 126 21% $5,443 8% 120 20% $5,245 7% Remaining: Total Modified 435 74% $7,698 11% 314 53% $7,408 10% 209 36% $6,555 9% Total Full 153 26% $64,339 89% 153 26% $64339 89% 153 26% $64,339 89% Total Coverage 588 100% $72,037 100% 467 79% $71,747 99% 362 62% $70,894 98% Source: Table based on data provided by DCAA and DCMC 114 Data for under $25 million is probably understated due to use of DCAA Defective Pricing database which may not collect all low dollar cost- type contract actions and associated dollars. 355 Full coverage Trigger = $10 million Trigger = $25 million threshold Number of Percent of Dollars Percent of Number of Percent of Dollars Percent of contractors total contract contractors total contract contractors dollars contractors dollars $25 Million Reductions: Modified to none 279 47% $1,700 2% 308 52% $2,226 3% Full to none 30 5% $1,137 2% 88 15% $4,212 6% Full to modified 0 0% $0 0% 0 0% $0 0% Remaining: Total Modified 29 5% $526 1% 0 0 0 0 Total Full 250 42% $68,674 95% 192 33% $65,599 91% Total Coverage 279 47% $69,200 96% 192 33% $65,599 91% $50 Million Reductions: Modified to none 279 47% $1,700 2% 308 52% $2,226 3% Full to none 30 5% $1,137 2% 88 15% $4,212 6% Full to modified 65 11% $2,429 3% 29 5% $1,137 2% Remaining: Total Modified 94 16% $2,955 4% 29 5% $1,137 2% Total Full 185 31% $66,245 92% 163 28% $64,462 89% Total Coverage 279 47% $69,200 96% 192 33% $65,599 91% $75 million Reductions: Modified to none 279 47% $1,700 2% 308 52% $2,226 3% Full to none 30 5% $1,137 2% 88 15% $4,212 6% Full to modified 97 17% $4,334 6% 51 9% $2,408 3% Remaining: Total Modified 126 21% $4,860 7% 51 9% $2,408 3% Total Full 153 26% $64,340 89% 141 24% $63,191 88% Total Coverage 279 47% $69,200 96% 192 33% $65,599 91% Source: Table based on data provided by DCAA and DCMC. 356 Trigger Contract Analysis - Modified Coverage115 CAS Awards 1 April 1997 - 31 March 1998 Applicability = $500,000 Applicability=$500,000, Applicability=$500,000, Trigger=$1 million Trigger=$2 million Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000) Modified 308 981 2,225,923 260 913 2,175,216 188 712 1,964,875 Change to 48 68 50,707 120 269 261,048 no CAS coverage Percent 16% 7% 2% 39% 27% 12% changed to no coverage Applicability=$500,000, Applicability=$500,000, Applicability=$500,000, Trigger=$5 million Trigger=$10 million Trigger=$25 million Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000) Modified 89 324 1,309,560 29 84 526,089 0 0 0 Change to 219 657 916,363 279 897 1,699,834 308 981 2,225,923 no CAS coverage Percent 71% 67% 41% 91% 91% 76% 100% 100% 100% changed to no coverage (Source: DCAA and DCMC.) 115 Data for modified coverage is probably understated due to use of defective pricing database which may not collect all low dollar cost-type contract actions and associated dollar values. 357 Trigger Contract Analysis - Full Coverage CAS Awards 1 April 1997 - 31 March 1998 Applicability = $500,000 Applicability = $500,000, Applicability=$500,000, Threshold Trigger = $1 million Trigger=$2 million (dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000) $25 No 0 0 0 0 0 0 1 29 28,918 Modified 0 0 0 0 0 0 0 0 0 Full 280 5,915 69,810,682 280 5,915 69,810,682 279 5,886 69,781,764 $30 No 0 0 0 0 0 0 1 29 28,918 Modified 24 216 660,991 24 216 660,991 23 187 632,073 Full 256 5,699 69,149,691 256 5,699 69,149,691 256 5,699 69,149,691 $35 No 0 0 0 0 0 0 1 29 28,918 Modified 43 395 1,283,690 43 395 1,283,690 42 366 1,254,772 Full 237 5,520 68,526,992 237 5,520 68,526,992 237 5,520 68,526,992 $40 No 0 0 0 0 0 0 1 29 28,918 Modified 61 565 1,959,856 61 565 1,959,856 60 536 1,930,938 Full 219 5,350 67,850,826 219 5,350 67,850,826 219 5,350 67,850,826 $45 No 0 0 0 0 0 0 1 29 28,918 Modified 74 776 2,510,741 74 776 2,510,741 73 747 2,481,823 Full 206 5,139 67,299,941 206 5,139 67,299,941 206 5,139 67,299,941 $50 No 0 0 0 0 0 0 1 29 28,918 Modified 91 921 3,314,746 91 921 3,314,746 90 892 3,285,828 Full 189 4,994 66,495,936 189 4,994 66,495,936 189 4,994 66,495,936 $55 No 0 0 0 0 0 0 1 29 28,918 Modified 104 1,014 3,992,253 104 1,014 3,992,253 103 985 3,963,335 Full 176 4,901 65,818,429 176 4,901 65,818,429 176 4,901 65,818,429 $60 No 0 0 0 0 0 0 1 29 28,918 Modified 113 1,091 4,508,720 113 1,091 4,508,720 112 1,062 4,479,802 Full 167 4,824 65,301,962 167 4,824 65,301,962 167 4,824 65,301,962 $65 No 0 0 0 0 0 0 1 29 28,918 Modified 115 1,118 4,631,807 115 1,118 4,631,807 114 1,089 4,602,889 Full 165 4,797 65,178,875 165 4,797 65,178,875 165 4,797 65,178,875 $70 No 0 0 0 0 0 0 1 29 28,918 Modified 121 1,197 5,038,549 121 1,197 5,038,549 120 1,168 5,009,631 Full 159 4,718 64,772,133 159 4,718 64,772,133 159 4,718 64,772,133 $75 No 0 0 0 0 0 0 1 29 28,918 Modified 127 1,317 5,471,776 127 1,317 5,471,776 126 1,288 5,442,858 Full 153 4,598 64,338,906 153 4,598 64,338,906 153 4,598 64,338,906 $80 No 0 0 0 0 0 0 1 29 28,918 Modified 131 1,357 5,780,170 131 1,357 5,780,170 130 1,328 5,751,252 Full 149 4,558 64,030,512 149 4,558 64,030,512 149 4,558 64,030,512 $85 No 0 0 0 0 0 0 1 29 28,918 Modified 137 1,419 6,276,986 137 1,419 6,276,986 136 1,390 6,248,068 Full 143 4,496 63,533,696 143 4,496 63,533,696 143 4,496 63,533,696 $90 No 0 0 0 0 0 0 1 29 28,918 Modified 143 1,502 6,803,240 143 1,502 6,803,240 142 1,473 6,774,322 Full 137 4,413 63,007,442 137 4,413 63,007,442 137 4,413 63,007,442 $95 No 0 0 0 0 0 0 1 29 28,918 Modified 151 1,629 7,546,013 151 1,629 7,546,013 150 1,600 7,517,095 Full 129 4,286 62,264,669 129 4,286 62,264,669 129 4,286 62,264,669 $100 No 0 0 0 0 0 0 1 29 28,918 Modified 159 1,808 8,329,850 159 1,808 8,329,850 158 1,779 8,300,932 Full 121 4,107 61,480,832 121 4,107 61,480,832 121 4,107 61,480,832 (Source: DCAA and DCMC.) 358 Trigger Contract Analysis - Full Coverage (continues) Applicability = $500,000 Applicability = $500,000, Applicability=$500,000, Trigger = $5 million Trigger=$10 million Trigger=$25 million Threshold (dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000) $25 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 0 0 0 0 0 0 0 0 0 Full 273 5,745 69,583,969 250 5,304 68,673,248 192 4,458 65,598,261 $30 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 21 161 576,763 14 70 390,851 4 13 110,439 Full 252 5,584 69,007,206 236 5,234 68,282,397 188 4,445 65,487,822 $35 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 38 291 1,137,922 29 168 885,673 11 27 341,581 Full 235 5,454 68,446,047 221 5,136 67,787,575 181 4,431 65,256,680 $40 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 55 436 1,777,172 42 244 1,381,540 15 39 491,336 Full 218 5,309 67,806,797 208 5,060 67,291,708 177 4,419 65,106,925 $45 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 67 606 2,284,028 50 305 1,718,525 19 59 662,274 Full 206 5,139 67,299,941 200 4,999 66,954,723 173 4,399 64,935,987 $50 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 84 751 3,088,033 65 410 2,429,171 29 111 1,136,602 Full 189 4,994 66,495,936\ 185 4,894 66,244,077 163 4,347 64,461,659 $55 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 97 844 3,765,540 77 488 3,056,364 39 147 1,659,402 Full 176 4,901 65,818,429 173 4,816 65,616,884 153 4,311 63,938,859 $60 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 106 921 4,282,007 85 549 3,514,811 45 176 2,000,696 Full 167 4,824 65,301,962 165 4,755 65,158,437 147 4,282 63,597,565 $65 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 108 948 4,405,094 87 576 3,637,898 46 188 2,063,483 Full 165 4,797 65,178,875 163 4,728 65,035,350 146 4,270 63,534,778 $70 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 114 1,027 4,811,836 93 655 4,044,640 49 199 2,264,357 Full 159 4,718 64,772,133 157 4,649 64,628,608 143 4,259 63,333,904 $75 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 120 1,147 5,245,063 97 706 4,334,342 51 211 2,408,361 Full 153 4,598 64,338,906 153 4,598 64,338,906 141 4,247 63,189,900 $80 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 124 1,187 5,553,457 101 746 4,642,736 54 224 2,639,349 Full 149 4,558 64,030,512 149 4,558 64,030,512 138 4,234 62,958,912 $85 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 130 1,249 6,050,273 107 808 5,139,552 60 286 3,136,165 Full 143 4,496 63,533,696 143 4,496 63,533,696 132 4,172 62,462,096 $90 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 136 1,332 6,576,527 113 891 5,665,806 64 324 3,490,676 Full 137 4,413 63,007,442 137 4,413 63,007,442 128 4,134 62,107,585 $95 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 144 1,459 7,319,300 121 1,018 6,408,579 70 370 4,046,990 Full 129 4,286 62,264,669 129 4,286 62,264,669 122 4,088 61,551,271 $100 No 7 170 226,713 30 611 1,137,434 88 1,457 4,212,421 Modified 152 1,638 8,103,137 129 1,197 7,192,416 74 428 4,436,639 Full 121 4,107 61,480,832 121 4,107 61,480,832 118 4,030 61,161,622 (Source: DCAA and DCMC.) 359 Trigger Contract Analysis - Full Coverage (continues) Applicability = $500,000 Applicability = $500,000, Applicability=$500,000, Trigger = $1 million Trigger=$2 million Threshold (dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000) $25 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 0% 0% 0% 0% 0% 0% 0% 0% 0% Full 100% 99% 100% 100% 99% 100% 100% 99% 100% $30 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 9% 4% 1% 9% 4% 1% 8% 3% 1% Full 91% 96% 99% 91% 96% 99% 91% 96% 99% $35 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 15% 7% 2% 15% 7% 2% 15% 6% 2% Full 85% 93% 8% 85% 93% 98% 85% 93% 98% $40 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 22% 9% 3% 22% 9% 3% 21% 9% 3% Full 78% 90% 97% 78% 90% 97% 78% 90% 97% $45 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 26% 13% 4% 26% 13% 4% 26% 13% 4% Full 74% 86% 96% 74% 86% 96% 74% 86% 96% $50 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 33% 15% 5% 33% 15% 5% 32% 15% 5% Full 68% 84% 95% 68% 84% 95% 68% 84% 95% $55 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 37% 17% 6% 37% 17% 6% 37% 17% 6% Full 63% 82% 94% 63% 82% 94% 63% 82% 94% $60 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 40% 18% 6% 40% 18% 6% 40% 18% 6% Full 60% 81% 93% 60% 81% 93% 60% 81% 93% $65 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 41% 19% 7% 41% 19% 7% 41% 18% 7% Full 59% 81% 93% 59% 81% 93% 59% 81% 93% $70 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 43% 20% 7% 43% 20% 7% 43% 20% 7% Full 57% 79% 93% 57% 79% 93% 57% 79% 93% $75 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 45% 22% 8% 45% 22% 8% 45% 22% 8% Full 55% 77% 92% 55% 77% 92% 55% 77% 92% $80 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 47% 23% 8% 47% 23% 8% 46% 22% 8% Full 53% 77% 92% 53% 77% 92% 53% 77% 92% $85 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 49% 24% 9% 49% 24% 9% 49% 23% 9% Full 51% 76% 91% 51% 76% 91% 51% 76% 91% $90 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 51% 25% 10% 51% 25% 10% 51% 25% 10% Full 49% 74% 90% 49% 74% 90% 49% 74% 90% $95 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 54% 27% 11% 54% 27% 11% 54% 27% 11% Full 46% 72% 89% 46% 72% 89% 46% 72% 89% $100 No 0% 0% 0% 0% 0% 0% 0% 0% 0% Modified 57% 30% 12% 57% 30% 12% 56% 30% 12% Full 43% 69% 88% 43% 69% 88% 43% 69% 88% (Source: DCAA and DCMC.) 360 Trigger Contract Analysis - Full Coverage (continues) Applicability = $500,000 Applicability = $500,000, Applicability=$500,000, Trigger = $5 million Trigger=$10 million Trigger=$25 million Threshold (dollars in CAS Number of Pricing Total CAS Number of Pricing Total CAS Number of Pricing Total CAS millions) covered contractors actions awards ($000) contractors actions awards ($000) contractors actions awards ($000) $25 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 0% 0% 0% 0% 0% 0% 0% 0% 0% Full 98% 97% 100% 89% 89% 98% 69% 75% 94% $30 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 8% 3% 1% 5% 1% 1% 1% 0% 0% Full 90% 94% 99% 84% 88% 98% 67% 75% 94% $35 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 14% 5% 2% 10% 3% 1% 4% 0% 0% Full 84% 92% 98% 79% 86% 97% 65% 74% 93% $40 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 20% 7% 3% 15% 4% 2% 5% 1% 1% Full 78% 89% 97% 74% 85% 96% 63% 74% 93% $45 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 24% 10% 3% 18% 5% 2% 7% 1% 1% Full 74% 86% 96% 71% 84% 96% 62% 74% 93% $50 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 30% 13% 4% 23% 7% 3% 10% 2% 2% Full 68% 84% 95% 66% 82% 95% 58% 73% 92% $55 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 35% 14% 5% 28% 8% 4% 14% 2% 2% Full 63% 82% 94% 62% 81% 94% 55% 72% 92% $60 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 38% 15% 6% 30% 9% 5% 16% 3% 3% Full 60% 81% 93% 59% 80% 93% 53% 72% 91% $65 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 39% 16% 6% 31% 10% 5% 16% 3% 3% Full 59% 81% 93% 58% 79% 93% 52% 72% 91% $70 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 41% 17% 7% 33% 11% 6% 18% 3% 3% Full 57% 79% 93% 56% 78% 93% 51% 72% 91% $75 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 43% 19% 8% 35% 12% 6% 18% 4% 3% Full 55% 77% 92% 55% 77% 92% 50% 71% 90% $80 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 44% 20% 8% 36% 13% 7% 19% 4% 4% Full 53% 77% 92% 53% 77% 92% 49% 71% 90% $85 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 46% 21% 9% 38% 14% 7% 21% 5% 4% Full 51% 76% 91% 51% 76% 91% 47% 70% 89% $90 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 49% 22% 9% 40% 15% 8% 23% 5% 5% Full 49% 74% 90% 49% 74% 90% 46% 70% 89% $95 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 51% 25% 10% 43% 17% 9% 25% 6% 6% Full 46% 72% 89% 46% 72% 89% 44% 69% 88% $100 No 3% 3% 0% 11% 10% 2% 31% 24% 6% Modified 54% 28% 12% 46% 20% 10% 26% 7% 6% Full 43% 69% 88% 43% 69% 88% 42% 68% 88% (Source: DCAA and DCMC.) 361 Appendix XI FULL VERSUS MODIFIED COVERAGE RISKS Full CAS coverage requires compliance with all 19 standards, while modified CAS coverage requires compliance with only four. Thus, there are 15 standards that apply to full but not to modified coverage. As a result, there is an inherent risk associated with contractors that move from full to modified coverage. For contracts that are not covered by FAR Part 31 (e.g., fixed-price contracts), the risk to the government would be its loss of the right to a contract price adjustment due to contractor’s failure to comply with the requirements contained in these 15 standards. To the extent that FAR Part 31 incorporates the CAS, cost- reimbursement contracts continue to be subject to the referenced standards. The 15 standards that apply to full but not to modified coverage concern a myriad of subjects, including cost allocation, capitalization and depreciation, standard costs, materials, pensions, cost of money, deferred compensation, insurance, and B&P, and IR&D. FAR Part 31 incorporates by reference 5 of these 15 standards (including standards concerning deferred compensation, pensions, and cost of money) and duplicates another 4 (including standards concerning consistency in allocating costs incurred for the same purpose, unallowable costs, self-insurance, and IR&D costs and B&P costs excluding allocation provisions). Thus, for contracts covered by FAR Part 31, the risk is mitigated to the extent that these CAS provisions are incorporated into the FAR. However, additional risk would exist for the other 6 standards, and for the parts of the 4 standards that are not duplicated in the FAR. The CAS include 4 standards that address in detail cost allocation requirements (CAS 403, 410, 418, and 420). Conversely, FAR Part 31 does not include the detailed cost allocation requirements contained in these 4 standards. Instead, the FAR contains a broad based cost allocation rule that has not markedly changed since 1959. For these 4 standards, the risk to the government may be higher to the extent that broader based allocation requirements could allow an increase in inequitable cost allocations to government contracts. The CAS also include 2 standards that address accounting for tangible capital assets (CAS 404 and CAS 409). These standards include detailed requirements regarding when to capitalize an asset, how long its useful life will be, and what method of depreciation will be used. While FAR Part 31 also addresses the accounting for tangible capital assets, it provides general criteria. Under FAR Part 31, depreciation costs are generally deemed to be reasonable if they are the same as those used in non-government segments, are the same as those included in the contractor’s records and financial statements, and are the same as those used for tax purposes. Thus, the FAR permits more flexibility in asset cost assignment between accounting periods. The risk related to this particular standard exists to the extent contractors may move costs between accounting 362 periods and use this movement as a means of redistributing costs between contracts (due to variations in government cost-type contract participation between accounting periods). CAS 407 contains detailed requirements for use of standard costs, while FAR Part 31 provides general criteria. CAS 407 requires that (1) the standard costs be entered into the books of account, (2) the standard costs and related variances be appropriately accounted for at the level of the production unit, (3) the practices regarding the use of standard costs be stated in writing and consistently followed, and (4) standard cost variances be allocated to contracts at least annually and on the same basis as the standard costs. FAR 31.201-1 has a broader based requirement that requires that standard costs be properly adjusted for applicable variances. The increased risk related to this standard exists to the extent contractors may use the broader FAR criteria to reallocate costs between cost- type government contracts and all other contracts. Such cost reallocation could result from allocating variances less frequently than annually or from not allocating variances on the same basis as the standard costs are allocated. In addition, without the written practices required by the standard, it would be more difficult for the government to cite a contractor for noncompliance with disclosed practices. While CAS 411 and FAR Part 31 both contain accounting requirements for material costs, the CAS 411 requirements are significantly more detailed. CAS 411 (1) requires consistent contractor policies for accumulating and allocating material costs, (2) permits direct allocation of material cost to cost objectives if the cost objective was specifically identified at the time of purchase or production of the units, (3) states that indirect material not consumed by the end of the period cannot be charged in that period but instead must be established as an asset, and (4) provides five acceptable inventory costing methods (FIFO, moving average, weighted average, standard cost, and LIFO). FAR 31.205-26 requires that materials purchased solely for and identifiable to a contract be charged directly to that contract and that the inventory method used be a generally recognized method that is consistently applied and has equitable results. The increased risk related to this standard exists to the extent contractors may use the broader FAR criteria to reallocate costs between cost-type government contracts and all other contracts. This could result from using an inventory method that is not recognized by the CAS or by charging indirect material that is not consumed by the end of the period to a contract or contracts. In addition, without the written practices required by the standard, it would be more difficult for the government to cite a contractor for noncompliance with disclosed practices. 363 Appendix XII ANALYSIS OF THE CAS BOARD WAIVER REQUESTS Date of Days from Company Agency Company The CAS request to submission to request to the Company Agency Board Agency the CAS CAS Board Subject of request request request decision submission Board decision decision (requesting agency) (Col A) (Col B) (Col C) (Col A - Col B) (Col B - Col C) (Col A - Col C) Remarks Agency Requests (1) Waiver for the N/A 2/14/91 2/21/91 N/A 8 N/A The original request was made by purchase of classified the National Security Agency on chips from a company 2/6/91. DOD needed the chips for that was reluctant to do Operation Desert Storm. business with the government (DOD) (2) Waiver for the N/A 9/24/98 10/5/98 N/A 60 N/A The Omnibus Appropriations Act application of the CAS for 1999 stated that the CAS to health insurance would not apply to the Federal carriers under the Employee Health Benefits Federal Employee Program. OPM officials state that Health Benefits this “exemption” is a “waiver” Program (OPM) because appropriation law applies for only one year. (3) Waiver from the N/A 1/10/91 4/8/91 N/A 88 N/A When the CAS Board was period cost assignment 1/10/91 4/10/91 reestablished in 1988, DOD provisions of the CAS requested the review of five open 412.40(c) (DOD) cases. Also, DOD requested waiver authority for the CAS requirements, when appropriate, on an individual contract basis. The CAS Board focused on issues regarding CAS 412. (4) Authority for DOD N/A 11/14/97 6/15/98 N/A 212 N/A The acting CAS Board Chairman to grant certain CAS referred the request to the CAS waivers for firm-fixed Board staff on 2/13/98. The waiver price contracts when was limited to a 2-year period cost or pricing subject to four limitations. information is provided by the prospective contractor (DOD) (5) Exemption from the N/A 8/20/92 4/26/93 N/A 246 N/A Denied. On 12/23/92, DCAA requirements of the CAS supported a DOD 12/3/92 modified for DOD commercial request. A CAS exemption was item acquisitions (DOD) published on 11/4/93. Company Requests (6) Segment accounting 8/17/95 8/28/95 9/12/95 12 14 26 The CAS Board conducted a requirements of CAS detailed analysis of the waiver 413 re: the proposed request. Based on this analysis, it merger of three defined placed a number of conditions on benefit pension plans the approved waiver. (DOD) 364 Date of Days from Company Agency Company The CAS request to submission to request to the Company Agency Board Agency the CAS CAS Board Subject of request request request decision submission Board decision decision (requesting agency) (Col A) (Col B) (Col C) (Col A - Col B) (Col B - Col C) (Col A - Col C) Remarks (7) Waiver of segment 9/26/96 11/25/96 12/5/96 59 11 70 While the CAS Board approved the accounting waiver request, approval was made requirements of CAS contingent on certain conditions 413 for a large defense pertaining to accounting for period merger of two costs and traceability. companies (DOD) (8) Partial waiver 6/6/98 7/14/98 8/19/98 39 35 74 After a university submitted its request re: a letter on 6/6/98, the NASA contractor’s financial Resident Office submitted its letter liability if a to NASA Headquarters on 6/10/98. subcontractor fails to comply with the CAS (NASA) (9) The CAS 2/19/92 3/12/93 6/14/93 24 92 116 Denied. The CAS Board did not requirements for all believe that the contract required DOD contracts awarded the incorporation of the CAS to a contractor for a clause because anticipated specific 5-year period purchases did not meet threshold of time to acquire requirements. needed chemicals (DOD) (10) The CAS 11/2/92 2/1/93 3/4/93 90 33 123 DOE’s Oak Ridge Field Office’s requirements with letter of 1/14/93 provided a respect to a proposed comprehensive explanation subcontract justifying the waiver. (Department of Energy (DOE)) (11) The CAS 5/17/93 9/17/93 10/8/93 120 22 142 The CAS Board approved the requirements for an request. However, the Board urgent subcontract expressed concerns over competi- needed by a company tive sources, basis for contractual to support the Navy’s refusal, and other issues. Trident II Missile Program (DOD) (12) The CAS coverage 8/10/90 3/18/91 3/19/91 218 1 219 This request was also based on of three subcontractors letters sent 12/21/90 and 1/11/91 supporting Navy’s from the Navy’s Director, Strategic Trident II (DOD) Systems Program. The Navy made its request to DOD on 2/28/91. (13) The CAS coverage 1/8/91 9/20/91 10/10/91 253 20 273 After receiving the contractor’s of one contractor letter, the Navy’s Director, supporting the Navy’s Strategic Systems Program, sent Trident II (DOD) his request to DOD on 3/8/91. 365 Date of Days from Company Agency Company The CAS request to submission to request to the Company Agency Board Agency the CAS CAS Board Subject of request request request decision submission Board decision decision (requesting agency) (Col A) (Col B) (Col C) (Col A - Col B) (Col B - Col C) (Col A - Col C) Remarks (14) Partial waiver 2/18/93 9/21/93 11/26/93 213 65 278 While a university submitted its request re: a letter on 2/18/93, the NASA contractor’s financial Resident Office did not submit its liability if a letter to NASA Headquarters until subcontractor fails to 9/16/93. comply with the CAS (NASA) Note: N/A = Not applicable. 366 Appendix XIII COMPARISON OF THE CAS AND GAAP SIMILARITIES BETWEEN THE CAS AND GAAP The meaning of the term GAAP has varied over time. Originally, GAAP referred to accounting policies and procedures that were widely used in practice. As standards setting bodies and professional organizations increasingly became involved in recording practices and recommending preferred practices, the term came to refer to the pronouncements issued by particular accounting bodies such as the Committee on Accounting Procedure and the Accounting Principles Board (APB), both committees of the American Institute of Certified Public Accountants (AICPA), and more recently the FASB. Today, many different series of authoritative literature exist, some are still in effect but are no longer being issued, like APB Opinions and the AICPA Accounting Research Bulletins (ARB). Others—such as FASB Statements and Interpretations—continue to be issued by accounting organizations. To better organize and make clear what is meant by GAAP, the accounting community established what is commonly referred to as the GAAP hierarchy. The purpose of the hierarchy is to instruct financial statement preparers, auditors, and users of financial statements concerning the relative priority of the different sources of GAAP used by auditors to judge the fairness of presentation of financial statements. The following displays the four levels of established principles that are supported by authoritative literature as well as additional sources of GAAP. Hierarchy of GAAP Level A- · Financial Accounting Standards (FAS) · FASB Interpretations · APB Opinions · ARB Level B- · FASB Technical Bulletins (FTB) · AICPA Industry Audit and Accounting guides · AICPA Statements of Position Level C- · Consensus Positions of the Emerging Issues Task Force (EITF) · AICPA Practice Bulletins 367 Level D- · AICPA Accounting Interpretations · FASB Implementation Guides Other accounting literature · FASB Concepts Statements · APB Statements · AICPA Issue Papers · International Accounting Standards Committee Statements · GASB Statements, Interpretations, and Technical Bulletins · Pronouncements of other professional associations and regulatory bodies · AICPA Technical Practice Aids · Accounting textbooks, handbooks, and articles Five of the 19 standards (CAS 401, 407, 408, 411, 417) do not significantly differ from GAAP. The Related CAS GAAP Observation 401 FASB Concept The CAS address consistency between estimating and accumulating contract Statement 2, costs. GAAP address consistency in reporting financial performance between APS 4 and periods. CAS are concerned with consistency in proposing and recording APB 20 contract costs, while GAAP are concerned with consistency in reporting financial performance. 407 ARB 43 For financial accounting purposes, GAAP contain a footnote with regard to the use of standard costs. The CAS Board did not believe that this was sufficient for contract costing purposes. 408 FASB 43 FASB 43 and CAS 408 are substantially the same. CAS 408 has not been reviewed to determine if and how FASB 43 could be used to streamline the standard. 411 ARB 43 Both CAS 411 and GAAP provide criteria for acceptable inventory costing methods but the GAAP criteria are general while the CAS list specific costing methods that may be used. 417 FASB 34 GAAP require the capitalization of actual interest costs incurred with the construction of capital assets, while the CAS require the capitalization of an imputed cost of money value. 368 DIFFERENCES BETWEEN THE CAS AND GAAP Eight of the 19 standards (CAS 404, 406, 409, 412, 413, 415, 416, and 420) differ from related GAAP requirements as shown below: The Related CAS GAAP Observation 404 FASB Concept GAAP permit step-up/step-down of assets while the CAS do not. The CAS Board Statement 6, believed that the government should share in gains or losses subsequent to asset APB 16 revaluation but developing equitable procedures would be complex and costly. Therefore, the Board concluded that the most acceptable solution would be to retain the original asset acquisition cost as a base for calculating contract costs. 406 APB The CAS provide specific instances in which a period other than the fiscal year may Statement 4 be used, while GAAP do not provide specific instances in which a period other than EITF 94-3 one year may or may not be used as an accounting period. For assignment of EITF 95-3 restructuring costs to accounting periods, the CAS provide flexibility to expense or defer such costs, while GAAP require certain restructuring costs to be expensed in the current period. 409 APB Statement 4 GAAP permit step-up/step-down of assets while the CAS do not. The CAS Board APB 16 believed that the government should share in gains or losses subsequent to asset revaluation but developing equitable procedures would be complex and costly. Therefore, the Board concluded that the most acceptable solution would be to retain the original asset acquisition cost as a base for calculating contract costs. 412 FASB 87 The CAS require funding of the pension liability while GAAP do not. The CAS Board included a funding requirement to allocate pension costs to the current period. The Board determined that it was necessary to link the period assignment of costs to current period funding to ensure the verifiability of the accrued amounts. This was due to the magnitude of the liability and the extended delay between the accrual of the cost and the settlement of the liability. 413 FASB 87and 88 The CAS address final accounting for segment closings, while GAAP do not. The CAS require that actuarial gains and losses using an immediate-gain actuarial cost method be amortized over 15 years, while GAAP require immediate recognition of certain actuarial gains and losses and different amortization requirements for others. 415 Numerous A substantial amount of GAAP were formulated after the CAS were issued (e.g., post- retirement benefits); other GAAP were formulated before the CAS promulgation but have changed significantly since the CAS were promulgated (e.g., employee stock ownership plans and stock based compensation). 416 FASB 5 The CAS recognize self-insurance while GAAP do not. The CAS Board staff decided FAS 106 to depart from the GAAP because government procurement regulations in existence at the time the CAS Board was debating this issue already allowed a charge for self- insurance. In addition, the CAS require funding for retiree insurance benefits to measure insurance cost in a particular cost accounting period. This conflicts with GAAP, which do not include a requirement. The original CAS Board believed that if the contractor wished to recognize a cost in the current period when the actual payment would not take place until an indefinite time in the future, such an obligation should be evidenced by funding. 420 FAS 2 GAAP do not permit assignment of IR&D costs to future periods; the CAS permit assignment of IR&D costs to future periods but only if specifically permitted by procurement regulations. The CAS Board stated that FAS 2 was not determinative for contract costing and pricing purposes. The Board stated that it would undertake research on a project to determine the feasibility of a standard for the accounting treatment of deferred development costs. In the interim, the Board wrote the standard so that the procurement agencies could continue to use their existing procurement rules for assigning IR&D costs to accounting periods. 369 Appendix XIV DOD’s COST-BASED CONTRACTING In percent 100 90 80 70 60 50 40 30 20 10 0 1977 1982 1987 1992 1997 Fiscal year Dollars Actions Note: Negotiated cost based awards include cost type contracts, flexible-price fixed type contracts and firm fixed-type contracts, where certified cost and pricing data was obtained or progress payment were made based on incurred costs. Negotiated cost-based awards do not include non-negotiated awards, firm fixed priced awards where certified cost and pricing data was not obtained, or where progress payments were not made. 370 Appendix XV SUMMARY INFORMATION ON SELECTED BOARDS Board/ Commissions Principal characteristics FASB The Board consists of seven members appointed by the Financial Accounting Foundation for 5-year terms, who are eligible for reappointment to one additional 5-year term. Members serve full-time and are required to sever all connections with the firms or institutions they served prior to joining the Board. The Board is assisted by a staff of about 40 professionals from public accounting, industry, academia, and government, plus support personnel. This is a not a government agency. Government The Board consists of seven members appointed by the Financial Accounting Foundation. The Accounting Chairman serves full-time; other members serve on a part-time basis and may be in the employ of Standards Board other organizations. The Board is assisted by a staff of about 10 professionals from public account- ing, academia, and government, plus support personnel. This is not a government agency. Federal Established in 1990 by the Secretary of the Treasury, the Director of OMB, and the Comptroller Accounting General (known as the principals), the Board is an advisory committee recommending accounting Standards standards to the principals to promulgate. The Board is comprised of nine part-time members Advisory Board selected from government entities and the private sector. Treasury, OMB, GAO, and CBO select their own members. The principals select the remaining five members. The principals select the Board’s Chairperson from among the three non-federal members. FERC An independent regulatory commission within DOE, the Commission is composed of five members appointed by the President for a term of 5 years, who can be removed only by the President. All of the members are considered principal officers. Members may not engage in any other business, vocation, or employment while serving on the Commission. In the performance of their functions, the members, employees, or other personnel of the Commission may not be responsible to or subject to the supervision or direction of any officer, employee, or agent of any other part of the Department. In each annual authorization and appropriation request, the Secretary of Energy identifies the portion thereof intended for the support of the Commission and includes a statement by the Commission showing the amount requested by it. ASBCA The ASBCA is an independent tribunal to hear and decide contract disputes between government contractors and DOD. The Board consists of attorneys who have been qualified in the manner prescribed by the Contract Disputes Act of 1978. The Under Secretary of Defense (Research and Engineering) and the Assistant Secretaries of the Military Departments responsible for procure- ment appoint the Chairman and Vice-chairman and other members of the Board. The Department of the Army provides administrative support to the Board. The Departments of the Army, the Navy, the Air Force, and the Office of the Secretary of Defense share the Board’s cost on an equal basis and to the extent determined by the Assistant Secretary of Defense (Comptroller). Railroad Established in 1980 as part of the legislative branch, Congress charged the Board with developing Accounting a set of cost accounting principles for rail carriers subject to the jurisdiction of the Interstate Principles Board Commerce Commission (ICC). The Board had seven members (five non-government and two (RAPB) government) and was chaired by the Comptroller General. The Board’s authorizing legislation called for the Board to cease to exist 3 years after its effective date and for the accounting principles it developed to be adopted by ICC. The principles adopted by the ICC are still binding on all carriers. Surface An independent agency administratively housed within the Department of Transportation, the Transportation Board is responsible for the economic regulation of interstate surface transportation to ensure that Board (STB) competitive and efficient transportation services are provided to meet the needs of shippers, receivers, and consumers. Created in 1996 as a successor agency to the ICC, the STB ensures that the cost accounting principles developed by RAPB are followed. The STB is an independent, bipartisan, adjudicatory body. It consists of three members appointed by the President with the advice and consent of the Senate for 5-year terms. The President designates the Board’s Chair- man from among the members. Federal The Board was established as an independent agency by the Federal Employees’ Retirement Retirement Thrift System Act of 1986, 5 U.S.C. 8472, and is composed of five members. Three are appointed by the Investment Board President, who designates one of them the Chairman. The other two members are also appointed by the President: one taking into consideration the recommendation made by the majority leader of the Senate, and the other taking into consideration the views of the Speaker of the House. The Board establishes policies for the investment and management of the Thrift Savings Fund. The Board’s members are not full-time government employees. 371 Board/ Commissions Principal characteristics Municipal The Board is a self-regulatory organization that is subject to oversight by the Securities and Ex- Securities change Commission. It regulates dealers who deal in municipal bonds, municipal notes, and other Rulemaking municipal securities. The Board consists of 15 members—5 of bank dealers, 5 of securities firms, and Board 5 public members not associated with any bank dealer or securities firm. Board members serve staggered 3-year terms. The Board members elect a chairman and vice-chairman who serve one-year terms. All Board operations are financed by fees and assessments paid by the dealer community. The Board has broad rulemaking authority over municipal securities dealers’ activities. 372
Future Role of the Cost Accounting Standards Board
Published by the Government Accountability Office on 1999-04-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)