As we mentioned above, Contractor’s use of a special overhead rate provides an excellent opportunity to offer low bids on highly price-sensitive work. We have discussed the possibility of applying the special overhead rate to other price sensitive work where there is a high level of labor utilization. However, CAS 402 requires consistent treatment of like costs incurred under like circumstances. After discussing the issue with a couple of colleagues, we doubt whether the high labor utilization factor in itself constitutes a justifiable basis (e.g. unlike costs) to create a separate overhead rate.

To counter CAS 402 challenges, other factors need to be put forward. For example, if a contract is expected to utilize a significantly lower level of asset utilization as well as labor utilization then a more plausible justification can be made because unlike circumstances exists. Most persuasively, if the special overhead rate is used on future programs, you need to attempt to ascertain whether the nature of the work is "unlike circumstances." Examples of unlike circumstances might include a different type of service (e.g. technically, less challenging) or different labor categories performing work (e.g. technicians rather than engineers). Though it could be problematic to justify a separate rate based on the fact the contract is performed at a dedicated facility – auditors can assert that separate locations are not a basis for other work or maybe you should create location-based overhead rates – the separate location on some of the jobs using the special rate could represent additional evidence of "unlike circumstances. As you know, justifying allocation decisions are not based on solid scientific criteria – it is a matter of citing evidence to justify your decision and one of auditor judgment which can vary significantly among different auditors.

The essential requirements of CAS 402 are duplicated in FAR. Consequently, DCAA has had ample time and regulatory justification for challenging use of the special overhead rate, whether or not Contractor was CAS covered. The fact they have not done so provides some optimism that Contractor’s practices will not be challenged when the company becomes CAS covered. However, Contractor needs to be careful on future acquisitions to not utilize the special overhead rate excessively in order to minimize the careful scrutiny of this unique, useful rate.

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