(Editor’s Note.  The Cost Accounting Standards seek to prescribe the methods contractors should and should not use to allocate costs to government contracts.  The standards apply, formally, to  CAS covered contractors and informally, to non-CAS covered contractors through incorporation of many CAS provisions in the Federal Acquisition Regulation as well as general understanding that CAS defines appropriate cost accounting practices for government contract cost and pricing purposes.  Changes in practices can significantly alter how current contracts are billed and future contracts are priced so the CAS Board has expended a great deal of effort defining just what is a change in accounting practice.)

As we have reported in prior issues, the CAS Board has put forth several proposals on what constitutes an accounting change which a broad consensus of contractors and government officials have agreed are largely unworkable.  The government, led by the Office of the Director of Defense Procurement, and industry, represented by the National Contract Management Association met several times in December and early January to hammer out the details of a workable "compromise" proposal that will be presented to the CAS Board as an agreed to approach between the Defense Department and industry.  The following are the highlights of that compromise:

The 12 page proposal differs significantly from the CAS Board’s 42 page proposal.  The CAS Board’s proposal presents its fundamental opinion that changes made by a contractor that alters the flow of costs to cost objectives for ongoing functions are changes to cost accounting practices.  Consistent with that view, the Board’s proposal makes  it clear that changes in the methods or techniques for cost accumulation – specifically cost combinations, split-outs or transfers of function between pools – are cost accounting practice changes.  

The DOD alternative rejects this categorical view.  Though cost accumulation may be the result of applying a method or technique it is not, itself, a method or technique and hence, DOD proposes to eliminate cost accumulation as a “method or technique” for purposes of defining a “cost accounting practice”.  Instead, DOD proposes that the definition of an accounting practice should focus on how a cost is allocated to cost objectives, that is “the methods or techniques used to define the beneficial or causal relationship between costs and benefiting cost objectives.”  A cost accounting practice will be defined as the method or technique used to determine (1) direct or indirect allocation of cost to an intermediate or final cost objective (2) composition of cost pools (defined in terms of functions or groups of functions such as line inspection, material handling, warehousing, etc.) (3) composition of the allocation base which is defined in terms of the activities being managed or resources being consumed where cited examples include assembly, fabrication and materials and consumable resources include computer services, security and facilities and (4) the selection of the allocation base such as direct labor dollars, hours or material dollars while allocation bases for consumable resources might be computer time, headcount and square footage.  Once an accounting practice is defined then a “change to an accounting practice” would mean simply an alteration to a cost accounting practice.

With respect to the CAS Boards insistence about cost pool split outs, combinations and transfers of functions, the DOD proposal states such actions are not a change if (1) the functions of the resulting cost pools are the same or similar (2) the activities of the new bases are the same or similar (3) the base selected to measure the activities does not change and (4) the transfer of a function from one pool to another would not be a change if the pool to which it is being transferred is the same or similar to those being transferred.  The DOD proposal provides extensive illustrations of situations where an accounting practice does and does not change.
 
The CAS Board proposed to exempt cost accounting practice changes from the price adjustment process that resulted from certain restructuring activities.  The DOD proposal developed a limited exemption applicable solely to pool split outs, combinations and transfers that resulted from management actions to reduce costs that were reflected in forward pricing rates for a period not to exceed five years.  Details on the exemption need to be worked out.

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