CAS 418 and the concept of homogeneous indirect pools also applies to the question of having one or separate indirect rates applied to high and low dollar material, subcontract and consulting (MSC) costs. The obvious question is whether it is appropriate to apply different rates (G&A versus subcontract handling) to seemingly similar costs, differing only in dollar value.

The support costs for MSC activity is not a linear function. That is, each MSC expenditure requires approximately the same level of administrative and supervisory effort no matter what the dollar value of the purchase is. For example, approximately the same level of G&A effort related to subcontract administration, accounting, contracts, establishing technical specifications, purchasing, etc. are required on each subcontract, no matter what the dollar value of the subcontract is. However, applying the same pool of indirect costs to the dollar value of MSCs would result in a disproportionate allocation to higher dollar value MSCs which does not reflect the equal administrative effort required on each MSC purchase.

Allocation of G&A to all other direct costs including low value MSCs is proper, meeting the criteria of homogeneity. However, application of G&A to all MSCs including high dollar ones results in a disproportionate allocation of G&A to those high value MSCs not to mention the fact most contracting officers would not allow a high markup to large ODCs. This disproportionate allocation, which translates into an inequitable allocation of costs to contracts with high dollar MSCs, would render the G&A pool non-homogeneous. The same disproportionate allocation would exist if all MSCs were included in a separate rate – support costs would be disproportionately allocated to higher dollar MSCs. To eliminate this allocation distortion, Contractor has created a separate indirect cost rate for large MSC costs only. This solution significantly reduces the disproportionate allocation of G&A or MSCs support costs to large subcontract costs.

DCAA’s position on CAS 418 provides further justification for continuing the practice Contractor has been following. DCAA calls homogeneity of indirect costs pools a "significant requirement of the standard." It states that a pool may be considered homogeneous if the separate allocation of costs of dissimilar activities would not result in a materially different allocation of costs to cost objectives. Logically, the opposite would also hold – a pool would be considered not homogeneous if the costs of similar activities would result in a materially different allocation of costs to cost objectives.

However, once Contractor becomes CAS covered, there can be a problem with CAS 410. CAS 410 prescribes three acceptable bases of allocating G&A costs – single element, value added (total costs minus material/subcontracts/consulting) and total cost input. Utilization of a $50,000 threshold represents a modified value added base. When a CAS covered contractor wants to use a base different than the three bases used, it must obtain the approval of the contracting officer. The rationale discussed above would constitute a strong argument for obtaining CO approval of the modified base but keep in mind that a written justification and quantitative cost impact analysis would likely need to be made when Contractor does become CAS covered.

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