Cost Accounting Standards

Cost Accounting Standards2023-10-06T10:07:50-07:00

Standards for Government Contractors

Are you struggling to stay on top of the rules and regulations of government contracting? Cost Accounting Standards (CAS) are a complex set of 19 standards set by the Cost Accounting Standards Board (CASB) that dictate how contractors measure, accumulate, allocate and assign costs. Meeting these standards is often a challenge—especially for contracts over $7.5 million—but crucial to ensuring proper cost reimbursement and avoiding violations of government regulations.

At Left Brain Professionals, we understand the challenges of government contracting and have the expertise to help you navigate them. We can offer you our assistance to ensure that you comply with the Cost Accounting Standards and improve your bottom line. Get in touch with us for a consultation at no charge!

Purpose of the Cost Accounting Standards

Contractors and subcontractors need to ensure that their cost accounting practices are consistent in order to accurately estimate costs for proposals.

Without consistency, it can be difficult to compare the estimated costs of a proposal with the actual performance costs of a contract. This makes it hard for businesses to have financial control over their contracts and hold parties accountable for any discrepancies.

Cost Accounting Standards (CAS) help contractors and subcontractors maintain consistency in their cost accounting practices, allowing them to reliably estimate costs for proposals and accurately compare them with performance costs during contract execution. This ensures better financial control over contracts and improved estimating capabilities.

The Cost Accounting Standards (CAS) was originally addressed in Public Law 100-679 (41 U.S.C. 422), which requires that certain contractors and subcontractors disclose their cost accounting practices in writing and consistently follow them when performing on a contract or subcontract over $7.5 million. This law also establishes an independent board — the Cost Accounting Standards Board — responsible for promulgating rules that govern cost accounting practices across different industries and organizations, as well as ensuring compliance with CAS requirements in federal contracting situations such as mergers, acquisitions, etc.

The Cost Accounting Standards Board has set nineteen separate standards that cover a range of topics from labor tracking to overhead allocations to financial disclosures, each designed to ensure consistent cost assignment throughout all contracts and sub-contracts that fall within the scope of CAS requirements. In terms of compliance, failure to comply with any one or more of these standards can result in a company incurring significant fines or even being barred from future contracts with the federal government if fraud is found during an audit process. Therefore it is important for companies to understand how these standards apply to them and take measures to ensure they are meeting these requirements fully and consistently on all applicable contracts or subcontracts they enter into.

CAS Requirements

  • Agree to equitable adjustment if contractor changes a practice: Contractors must agree to an equitable adjustment if their cost accounting practices change, and this has an effect on the contract price. This is intended to ensure contractors are not over- or under-reimbursed for costs incurred.
  • Agree to adjustment if the contractor fails to comply with CAS: In cases where the contractor fails to comply with Cost Accounting Standards, they must agree to an appropriate adjustment in order to remain compliant. This may include any necessary refunds, additional costs, or other adjustments as required by CAS.
  • Consistently follow written practices: It is important for contractors and subcontractors to consistently follow written cost accounting practices in order to remain compliant with CAS. This includes maintaining disclosure statements and submitting amendments or revisions as necessary.
  • Comply with all CAS: Contractors must comply with all Cost Accounting Standards in order for their contracts to be approved and funded by the government.
  • Disclose practices in writing which include maintaining disclosure statements and submitting amendments or revisions as necessary: Under Cost Accounting Standards, contractors are required to disclose their cost accounting practices in writing, including maintaining disclosure statements and submitting amendments or revisions as needed. This ensures that all parties understand how costs associated with a contract are being handled and that any changes made during the course of a contract are properly documented.
  • Flow down requirements to include in subcontracts and to monitor subcontractor compliance: Contractors must flow down requirements specified by Cost Accounting Standards into each subcontract, including monitoring subcontractor compliance with those standards throughout the life of the contract. This ensures that all parties involved in a government contract remain compliant with applicable regulations and protect against potential violations of CAS rules.

Cost Accounting Standards

CAS 401 | CONSISTENCY IN ESTIMATING, ACCUMULATING AND REPORTING COSTS2023-10-05T10:51:03-07:00

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.

CAS 402 | CONSISTENCY IN ALLOCATING COSTS INCURRED FOR THE SAME PURPOSE2023-10-05T10:51:28-07:00

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.

CAS 403 | ALLOCATION OF HOME OFFICE EXPENSES TO SEGMENTS2023-10-05T10:52:17-07:00

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.

CAS 404 | CAPITALIZATION OF TANGIBLE ASSETS2023-07-21T16:56:49-07:00

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.

CAS 405 | ACCOUNTING FOR UNALLOWABLE COSTS2023-07-15T16:29:54-07:00

The purpose of this standard is to:

Facilitate the negotiation, audit, administration, and settlement of contracts. It contains guidelines on:

  1. Identification of costs specifically described as unallowable, at the time such costs first become defined or authoritatively designated as unallowable, and
  2. 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.

CAS 406 | COST ACCOUNTING PERIOD2023-07-21T16:57:23-07:00

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.

CAS 407 | USE OF STANDARD COSTS FOR DIRECT MATERIAL AND DIRECT LABOR2023-10-05T10:53:07-07:00

The purpose of this standard is to provide criteria:

  1. Under which standard costs may be used for estimating, accumulating, and reporting costs of direct material and direct labor, and
  2. 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.

CAS 408 | ACCOUNTING FOR COSTS OF COMPENSATED PERSONAL ABSENCE2023-10-05T10:53:44-07:00

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.

CAS 409 | DEPRECIATION OF TANGLIBLE CAPITAL ASSETS2023-10-05T10:54:13-07:00

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.

CAS 410 | ALLOCATION OF BUSINESS UNIT GENERAL AND ADMINISTRATIVE EXPENSES TO FINAL COST OBJECTIVES2023-10-05T10:54:41-07:00

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.

CAS 411 | ACCOUNTING FOR ACQUISTION COSTS OF MATERIAL2023-10-05T10:55:06-07:00

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 412 | COMPOSITION AND MEASUREMENT OF PENSION COSTS2023-11-07T13:39:46-08:00

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.

CAS 413 | ADJUSTMENT AND ALLOCATION OF PENSION COST2023-11-07T13:41:09-08:00

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.

CAS 414 | COST OF MONEY AS AN ELEMENT OF THE COST OF FACILITIES CAPITAL2023-10-05T10:56:36-07:00

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.

CAS 415 | ACCOUNTING FOR THE COST OF DEFERRED COMPENSATION2023-11-07T13:44:43-08:00

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.

CAS 416 | ACCOUNTING FOR INSURANCE COST2023-11-07T13:47:58-08:00

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.

CAS 417 | COST OF MONEY AS AN ELEMENT OF THE COST OF CAPITAL ASSETS UNDER CONSTRUCTION2023-11-07T13:50:51-08:00

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.

CAS 418 | ALLOCATION OF DIRECT AND INDIRECT COSTS2023-10-05T10:58:20-07:00

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.

CAS 419 | RESERVED2023-07-12T16:27:25-07:00
CAS 420 | ACCOUNTING FOR INDEPENDENT RESEARCH AND DEVELOPMENT COSTS AND BID AND PROPOSAL COSTS (IR&D) AND (B&P)2023-11-07T13:54:32-08:00

This standard provides criteria for the accumulation of IR&D/B&P costs and for the allocation of such costs to cost objectives.

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.

Demystifying CAS Applicability for Government Contractors

As a government contractor, understanding Cost Accounting Standards (CAS) applicability is crucial for proper compliance and avoiding pitfalls. This guide breaks down the types of CAS coverage and what they mean for your business.

Types of CAS Coverage for Government Contractors

Full CAS Coverage

If your business unit receives a single CAS-covered contract of $50 million or more or received $50 million or more in cumulative CAS-covered contracts during your preceding accounting period, you fall under full CAS coverage.

This requires complying with all CAS standards under 9904 in effect at contract award. It also includes any new CAS that becomes applicable later due to another CAS-covered contract award.

Full CAS coverage means rigorously adhering to standards for consistency, allowability, allocability, and more. It creates an intricate web of requirements but is crucial for major government contractors to understand.

Modified CAS Coverage

For CAS-covered contracts under $50 million, you may qualify for modified CAS coverage. This offers more flexibility, requiring compliance with only four standards:

  • 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
  • CAS 406 – Cost Accounting Period

The exception is if you receive any single contract of $50 million+ during the period, which requires full CAS coverage. Modified coverage contracts remain that way for their entire lifespan.

CAS Coverage for Educational Institutions

The Truthful Cost and Pricing statute (10 U.S.C. chapter 271 and 41 U.S.C. chapter 35), formerly known as TINA, requires offerors to submit certified cost or pricing data if a procurement exceeds the Truthful Cost and Pricing threshold, which as of 2022, is at $2 million for most contracts.

Educational institutions receiving negotiated government contracts over the inflation-adjusted threshold must comply with all CAS standards under part 9905. This includes any new relevant CAS introduced after the contract award.

The only exception is CAS-covered contracts awarded to Federally Funded Research and Development Centers (FFRDCs) operated by the educational institution.

In summary, schools and universities contracting above the TINA threshold must follow applicable CAS standards under part 9905. Contracts with FFRDCs operated by the school are exempt.

Exemptions from CAS Coverage

Certain types of contracts are exempt from CAS coverage requirements:

  • Commercial item contracts: Acquisition of commercial items, as defined in FAR Part 2, are exempt from CAS requirements. This includes COTS (commercial off-the-shelf) products and other commercial services/supplies.
  • Small-dollar value contracts: Contracts or subcontracts valued under $7.5 million are exempt as long as the contractor does not currently have any CAS-covered contracts valued at $7.5 million or greater. This dollar threshold is adjusted periodically.
  • Adequate price competition: Firm-fixed price contracts awarded based on adequate price competition are exempt. This applies when offers are solicited from at least two responsible offerors, and there is no submission of certified cost or pricing data. The exemption does not apply if certified cost data was submitted.
  • Foreign contracts: Contracts with foreign governments or to be performed outside the U.S. by foreign contractors are generally exempt. There is a narrow exemption for certain foreign subcontractors under the NATO PHM Ship program.
  • Price set by law or regulation: If the price of a contract is set by law or regulation, CAS requirements do not apply. This includes things like postal service rates.

In summary, CAS coverage exemptions exist for commercial acquisitions, smaller dollar values, fixed-price competition contracts, foreign entities, and prices set by statute – provided certain conditions are met. Review FAR Part 30 and CAS exemptions closely when determining applicability.

CAS Disclosure

The main requirements for submission of a CAS Disclosure Statement are:

  1. Any business unit that is selected to receive a CAS-covered contract or subcontract valued at $50 million or more, including option amounts, must submit a Disclosure Statement before the award. A business unit means any segment of an organization or an entire business organization that is not divided into segments. The $50 million threshold includes the value of the CAS-covered contract or subcontract itself as well as the aggregate value of all CAS-covered contracts and subcontracts awarded to the business unit.
    Source: FAR 30.202-6(a), FAR 9903.201-2
  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 must submit a Disclosure Statement before the award of its next CAS-covered contract. A company is a business organization consisting of one or more business units. Net CAS-covered awards refer to the aggregate value of negotiated CAS-covered prime contracts and subcontract awards, less CAS-covered contracts and subcontracts that have been completed. The cost accounting period is the company’s annual accounting period for financial reporting purposes.
    Source: FAR 30.202-6(b), FAR 9903.201-2
  3. When required, a separate Disclosure Statement must be submitted for each segment of a company that receives more than $750,000 in costs on a CAS-covered contract or subcontract. A segment is defined as one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office. The $750,000 represents the Truth in Negotiations Act (TINA) threshold.
    Source: FAR 30.202-6(c), FAR 9903.201-2, FAR 15.403-4

CAS Decision Tree

DCAA CAM Chapter 8

CAS Decision Tree 1

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