CAS 405, Accounting for Unallowable Costs - Identification and Exclusion of Unallowable Costs
CAS 405 requires contractors to identify all unallowable costs for all categories of costs and for the first two categories, to exclude them from billings, claims or proposals. Direct associated costs are subject to the same requirements as the unallowable costs they are associated with.
Identification. The visibility factor of this requirement can be satisfied by any form of identification. Acceptable methods include: (a) use of separate accounts for unallowable costs maintained as part of the regular books of account (b) separate records or workpapers or (c) less formal techniques that permit verification. As a practical matter, the records should be maintained in sufficient detail to satisfy auditors that unallowable costs have been captured and removed from rates, standard costs and estimates. There is no one acceptable method and techniques for identifying incurred costs may differ from those used for estimated costs.
Exclusion. Cost in the third category—designated by a CO's decision--are not subject to the exclusion rule. They only need to be identified. But what happens after they are identified? The Standard does not address this but in practice, it will depend on the types of contracts worked on.
Cost Type. If the disputed cost is indirect, the contractor would probably exclude the cost from billing rates and include it in its final indirect rate proposal. If the dispute is not resolved before the final rates are ready for settlement, an appropriate "savings" or "reopener" clause is advised.
Fixed Type. If not included in forward pricing rates, there is no standard contract vehicle to recoup the costs unless there is a saving or reopener clause. This is quite cumbersome and the Government is usually unwilling to agree. If the cost is included in forward pricing rates, what is the risk? If the cost was "expressly unallowable" or "mutually agreed to be unallowable", it must be identified and excluded. If the costs falls into one of these categories and was not identified and excluded, then the contractor is in non-compliance with CAS 405 and the price of all affected contracts (CAS covered fixed and cost type) would be subject to an adjustment. In contrast, if costs not meeting any of the two definitions above are later determined to be unallowable, the contractor will have complied with CAS 405 and only cost type contracts will be subject to the adjustment.
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