The standard requires a special allocation of G&A expenses if a particular cost objective would receive a disproportionate allocation of G&A expenses as a result of using the contractor’s normal cost input base. Also, the special allocation from the G&A expense pool must be “commensurate with the benefits received.” The provisions related to special allocations must be applicable to a particular FCO that is an exception to the contractor’s normal operation rather than to classes of contracts or FCOs. When computing a special allocation, the amounts attributable to the FCO must be removed from the company’s G&A pool and allocation base.
The standard provides an illustration. Where the normal production activity of a company is construction of operating facilities for others the company agrees on one new contract to acquire a large group of trucks and other mobile equipment to equip the facility where its other contracts have no such requirements. The cost of the equipment constitutes a significant part of the contract costs so a special allocation may be needed if the parties agree that the contract as a whole receives substantially less benefit from the G&A expense pool than that which would occur if the contract costs were included in the company’s total cost input base. DCAA also provides an illustration of a special allocation where a number of contracts have large amounts of subcontract costs and the contractor is seeking a special allocation for these contracts because it does not believe the subcontracts benefit from all of the G&A pool expenses in the same relationship as the other base costs. In this case, a special allocation would not be appropriate because such an arrangement should apply only to a particular contract not a class of contracts.
Interdivisional Transfers
Though the standard dos not specifically address interdivisional transfers, the DCAA Contract Audit Manual provides the only official guidance where it states interdivisional transfers may be excluded from the receiving segment’s G&A base only when (1) circumstances warrant the use of a base whose parts do not include material such as either a value added or single element base or (2) the interdivisional transfers are not significant. However, interdivisional transfers are to be included in the G&A base of the segment performing the work that is transferred.
Unallowable Costs in the Base
FAR 31.203(c) states that all items included in an indirect cost base should bear a pro-rata share of indirect costs irrespective of their acceptance as government contract costs. For example, when a cost input base is used to allocate G&A expenses, all items in the base, whether allowable or unallowable, should be included in the base and receive a pro-rata share of G&A costs. CAS 410 follows this requirement.
IR&D and B&P Costs in the Allocation Base
All cost elements not included in the G&A cost pool or a combined pool of G&A and other expenses are part of the G&A input base. This would imply that IR&D and B&P costs that are accumulated in a separate cost pool must be in included in the G&A allocation base. However, CAS 420 states that IR&D and B&P identified with a specific business unit shall be allocated to all FCOs using the same base as that used to allocate G&A costs. Therefore IR&D/B&P costs need to be allocated on the same basis as G&A expenses (e.g. included in the G&A pool) and not treated as an element of the G&A base.
Disproportionate Ratios of Materials and Subcontracts Among Programs
A DCAA illustration sheds light. The contractor used a single element allocation base (direct labor) because of (1) the existence of disproportionate ratios of materials among various contracts and (2) the unusual aspects of a Navy program where there were drop shipments and directed subcontracts. DCAA cited the contractor for noncompliance with CAS 410 stating it has consistently been the government’s position that the existence of disproportionate ratios of material and subcontracts among different contracts does not, in itself, constitute distortion reasoning that production of goods and services requires material, labor, overhead and other direct costs in varying amounts and any occurrence of disproportionate ratios of material and subcontracts merely reflects a variance in activity involved, not a distortion in the relationships between costs and activity. Since the question is whether inclusion of materials and subcontracts in the G&A base will distort allocation of G&A costs, DCAA argues that CAS 410.50(d) makes the appropriate base value added if there was a significant distortion, not single element. The single element would represent total activity only when either (1) there are no other significant costs elements or (2) all significant elements vary in the same proportion as the singe element to the total costs.
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