Cost Accounting Standards for Government Contractors
Government contracting exists in a world of its own. The federal government even has its own set of accounting rules, known as Cost Accounting Standards (CAS).
Nineteen different standards set by the Cost Accounting Standards Board (CASB) dictate how government contractors measure, accumulate, allocate and assign costs. These differ in important ways from commercial rules and generally accepted accounting practices (GAAP).
For the most part, the standards apply only to contracts over $7.5 million.
No matter the size of your business, however, CAS can have implications for your accounting systems and processes – especially if you have a cost-plus or time-and-materials contract. The best accounting system will allow you to track and output cost data quickly and accurately so you can obtain reimbursement.
Purpose of the Cost Accounting Standards
Public Law 100-679 (41 U.S.C. 422) requires certain contractors and subcontractors to comply with Cost Accounting Standards (CAS) and to disclose in writing and follow consistently their cost accounting practices.
CAS Requirements
CAS requires contractors with CAS-covered contracts to:
- Agree to equitable adjustment if contractor changes a practice
- Agree to adjustment if contractor fails to comply with CAS
- Consistently follow written practices
- Comply with all CAS
- Disclose practices in writing which includes maintaining disclosure statement and submitting amendments or revisions as necessary
- Flowdown requirements to include in subcontracts and to monitor subcontractor compliance
Cost Accounting Standards
The purpose of this standard is to:
Achieve consistency in the cost accounting practices used by a contractor in estimating costs for its proposals with those practices used in accumulating and reporting costs during contract performance, and
Provide a basis for comparing such costs.
Includes consistency in the structure and level of detail in accumulating and estimating costs.
The purpose of this standard is to ensure that each type of cost is allocated only once and on only one basis to any contract or other cost objective. The fundamental requirement is that all costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives.
Once a cost is determined to be either direct or indirect, it is always treated the same way even if later determined to be unallowable or unbillable. See also CAS 418.
The purpose of this standard is to establish criteria for allocation of home office expenses to the segments of the organization on the basis of a beneficial or causal [not “casual”] relationship.
Each segment (division, location, etc) bears its fair share of home office expenses.
This standard establishes criteria for determining the acquisition costs of tangible assets that are to be capitalized. CAS 404 does not cover depreciation or disposition of fixed assets, which is covered by CAS 409.
Written capitalization policy with set dollar amount that aligns with the size and complexity of the organization. Note IRS safe harbor for expense vs capitalization of $2,500 to $5,000.
The purpose of this standard is to facilitate the negotiation, audit, administration, and settlement of contracts. It contains guidelines on:
- Identification of costs specifically described as unallowable, at the time such costs first become defined or authoritatively designated as unallowable, and
- The cost accounting treatment to be accorded such identified unallowable costs to promote the consistent application of sound cost accounting principles covering all incurred costs.
The standard does not govern the allowability of costs, which is a function of the appropriate acquisition or reviewing authority [FAR 31 and DFARS 231].
Unallowable costs must be segregated and removed from billings or claims.
The purpose of this standard is to provide criteria for selecting the time periods to be used as cost accounting periods for contract cost estimating, accumulating, and reporting. It will reduce the effects of variations in the flow of costs within each cost accounting period. It will also enhance objectivity, consistency, and verifiability and promote uniformity and comparability in contract cost measurements.
The cost accounting period must be the fiscal year (calendar or otherwise) or another annual period agreed to by the Government
Sounds like GAAP Time Period Principle.
The purpose of this standard is to provide criteria:
- Under which standard costs may be used for estimating, accumulating, and reporting costs of direct material and direct labor, and
- Relating to the establishment of standards, accumulation of standard costs, and accumulation and disposition of variances from standard costs.
Contractors need to have a logical practice for the establishment of standards that includes periodic review and update. Variances must be reviewed and resolved.
Related to 401, if you use standard costs for estimating, you must use them for accumulation and reporting. Variances must be accounted for at the same level of detail.
The purpose of this standard is to establish criteria for measuring and allocating the costs of compensated personal absences to final cost objectives. These costs include compensation paid by contractors to their employees for such benefits as vacation, sick leave, holiday, military leave, etc.
Expense must be assigned to period in which it is earned. If employees earn PTO each pay period, then expense must be in the same period, not when PTO is used.
This standard provides criteria for assigning costs of tangible capital assets to cost accounting periods and should enhance objectivity and consistency in their allocation.
Estimated residual values and service lives (based on experience) must be determined for all fixed assets.
This standard provides criteria for the allocation of general and administrative (G&A) expenses to final cost objectives and furnishes guidelines for the type of expense that should be included in the G&A expense pool. It also establishes that G&A expense shall be allocated on a cost input base that represents total activity.
G&A expenses must be incurred for managing and administering the whole business unit and must be grouped in a separate cost pool and allocated only to final cost objectives.
FAR 31.203(d) requires G&A expenses be allocated to final cost objectives through a base that contains unallowable costs.
This standard provides criteria for the accounting of acquisition costs of material, provides guidance on using inventory costing methods, and improves the measurement and assignment of costs to cost objectives.
CAS 411 further states that written policies and procedures are required, direct items must be clearly identified, and insignificant items may be treated as indirect.
This standard establishes the composition of pension costs, the basis of measurement, and the criteria for assigning pension costs to cost accounting periods. CAS 413 addresses the accounting treatment of actuarial gains and losses and the allocation of pension costs to segments of an organization.
Think primarily defined benefit plans which require complex actuarial calculations for sufficient funding of benefits. While ERISA deals primarily with the funding aspect, CAS 412 deals with the cost accounting treatment.
FAR 31.205-6(j)(1) makes CAS 412 applicable to all contracts, even contracts which are not CAS-covered or subject only to modified CAS-coverage. Auditors should ensure that proposed or claimed pension costs, where significant, are in compliance with the provisions of CAS 412.
This standard establishes criteria for:
- Assigning actuarial gains and losses to cost accounting periods,
- Valuing pension fund assets, and
- Allocating pension costs to segments.
Provisions in the standard are somewhat more stringent than ERISA requirements, concerning frequency of actuarial valuations and methods of valuing pension fund assets. Consequently, some accounting changes may be required for
compliance with the standard in addition to those previously made to comply with ERISA.
FAR 31.205-6(j)(1) makes CAS 413 applicable to all contracts, even contracts which are not CAS-covered or are subject only to modified CAS-coverage. Auditors should ensure that proposed or claimed pension costs, where significant, are in compliance with the provisions of CAS 413.
The standard recognizes the cost of facilities capital as a contract cost. It provides criteria for measuring and allocating an appropriate share of the cost of money which can be identified with the facilities employed in a business.
Only applies to facilities that are being depreciated, not to those allocated based on usage.
The cost of money is an imputed cost, which is identified with the total facilities capital associated with each indirect cost pool, and is allocated to contracts over the same base used to allocate the other expenses included in the cost pool.
Check out our Cost of Money Calculator.
The purpose of this standard is to provide criteria for measuring deferred compensation costs and assigning those costs to cost accounting periods. It applies to all deferred compensation costs except for compensated absences and pension costs covered in CAS 408 and CAS 412.
Deferred compensation costs are measured by the present value of future benefits to be paid and are assigned to the cost accounting period in which the contractor becomes obligated to compensate the employee.
Think stock options or similar plans typically found in more complex organizations.
FAR 31.205-6(k) makes CAS 415 applicable to all contracts, even contracts which are not CAS-covered or subject only to modified CAS-coverage. Auditors should ensure that proposed or claimed deferred compensation costs, where significant, are in compliance with the provisions of CAS 415.
This standard provides criteria for the measurement of insurance costs, the assignment of such costs to cost accounting periods, and their allocation to cost objectives.
CAS 416 covers accounting for purchased insurance, self-insurance, and payments to a trustee of an insurance fund.
FAR 31.205-19 makes the self-insurance provisions of CAS 416 applicable to all contracts, even contracts that are not CAS-covered or subject only to modified CAS coverage. Auditors should ensure that proposed or claimed insurance costs, where significant, comply with the provisions of CAS 416.
Think primarily self-insurance costs which involve estimates and the reconciliation of actual losses, dividends, etc.
This standard establishes criteria for the measurement of the cost of money attributable to capital assets under construction, fabrication, or development as an element of the cost of those assets.
The standard’s fundamental requirement provides that the cost of money applicable to the investment in tangible and intangible capital assets being constructed, fabricated, or developed for a contractor’s own use, shall be included in the capitalized acquisition cost of such assets.
FAR 31.205-10 makes CAS 417 applicable to all contracts, even contracts that are not CAS-covered or subject only to modified CAS-coverage. Auditors should ensure that proposed or claimed cost of money costs, where significant, comply with the provisions of CAS 417.
This standard requires the consistent classification of costs as direct or indirect, establishes criteria for accumulating indirect costs in indirect cost pools, and provides guidance on allocating indirect cost pools.
Requires homogenous pools (only the same type of costs) and a logical causal-beneficial relationship between pool and base.
Note: this is where we struggle with AASHTO audit guidelines for A/E firms to use only direct labor as the base for Fringe and a single General Overhead.
This standard provides criteria for the accumulation of IR&D/B&P costs and for the allocation of such costs to cost objectives.
IR&D and B&P costs should be accumulated by project: separate charge code for each effort.
FAR 31.205-18 makes CAS 420 partially applicable to all contracts, even contracts that are not CAS-covered or subject only to modified CAS-coverage. Auditors should ensure that proposed or claimed IR&D/B&P costs, where significant, are in compliance with the provisions of CAS 420.
CAS Applicability
Types of CAS Coverage
Full
Full coverage requires that the business unit comply with all of the CAS specified in part 9904 that are in effect on the date of the contract award and with any CAS that become applicable because of later award of a CAS-covered contract. Full coverage applies to contractor business units that:
1. Receive a single CAS-covered contract award of $50 million or more; or
2. Received $50 million or more in net CAS-covered awards during its preceding cost accounting period.
Modified
Modified CAS coverage requires only that the contractor comply with
- 401 Consistency in Estimating, Accumulating, and Reporting Costs
- 402 Consistency in Allocating Costs Incurred for the Same Purpose
- 405 Accounting for Unallowable Costs
- 406 Cost Accounting Standard—Cost Accounting Period
Modified CAS coverage may be applied to a covered contract of less than $50 million awarded to a business unit that received less than $50 million in net CAS-covered awards in the immediately preceding cost accounting period.
If any one contract is awarded with modified CAS coverage, all CAS-covered contracts awarded to that business unit during that cost accounting period must also have modified coverage with the following exception: if the business unit receives a single CAS-covered contract award of $50 million or more, that contract must be subject to full CAS coverage. Thereafter, any covered contract awarded in the same cost accounting period must also be subject to full CAS coverage.
A contract awarded with modified CAS coverage shall remain subject to such coverage throughout its life regardless of changes in the business unit’s CAS status during subsequent cost accounting periods.
Educational Institutions
Coverage for educational institutions requires that the business unit comply with all of the CAS specified in part 9905 that are in effect on the date of the contract award and with any CAS that become applicable because of later award of a CAS-covered contract. This coverage applies to business units that receive negotiated contracts in excess of the Truthful Cost or Pricing Data Act (TCPD, formerly TINA) threshold, as adjusted for inflation, except for CAS-covered contracts awarded to Federally Funded Research and Development Centers (FFRDCs) operated operated by an educational institution.
CAS Exemptions
- Commercial items
- Contracts or subcontracts of less than $7.5 million, provided that, at the time of award, the business unit of the contractor or subcontractor is not currently performing any CAS-covered contracts or subcontracts valued at $7.5 million or greater
- Firm-fixed-price contracts or subcontracts awarded on the basis of adequate price competition without submission of certified cost or pricing data.
- Foreign governments
- Subcontractors under the NATO PHM Ship program to be performed outside the United States by a foreign concern
- Price set by law or regulation
CAS Disclosure
General requirements for submission of a Disclosure Statement are:
1. Any business unit that is selected to receive a CAS-covered contract or subcontract of $50 million or more, including option amounts.
2. Any company which, together with its segments received net CAS-covered awards totaling more than $50 million in its most recent cost accounting period.
3. When required, a separate Disclosure Statement must be submitted for each segment having more than the Truthful Cost or Pricing Data (TCPD) threshold of costs included in the total price of any CAS-covered contract or subcontract.
Additional details and exceptions may apply.
CAS Decision Tree
CAS Best Practices
We recommend CAS compliance to all contractors even if a formal disclosure statement is not required. Why:
1. CAS generally aligns with GAAP and prudent accounting principles.
2. Auditors will use CAS as a guidelines in many audits even if a contract is not CAS covered.
3. Some CAS apply to all contractors, even those without CAS covered contracts, when such costs are significant (412, 413, 415, 416, 417, 420).
4. Contractors usually trip the modified CAS coverage before full CAS, so you might as well get a head start.
How We Can Help
Our government contracting experts design accounting systems and procedures to maximize opportunity, minimize risk and enhance profitability of federal contracts. Call on us to:
- Advise on the best accounting systems and standards to support your contracts.
- Answer your questions about CAS compliance.
- Design and implement accounting systems that comply with FAR, CAS, DCAA, DCMA and other federal regulations.
- Help your business prepare for and defend against government audits.
- Review your contracts and accounting systems to determine compliance requirements.
Ready to get more information?
Contact us now or schedule one-on-one time to further discuss CAS and how the standards apply to your contact.