Q. We have ten employees who we would like to be able to access your current and prior newsletters as well as use your Ask the Experts service. Do we have to have ten subscriptions or can we work out a deal?

A. We are receiving these types of requests from about 20% of our subscribers so we are working out deals on a case-by-case basis. Call or email us if you are interested.

Q. I read your last issue with great interest where you discussed moving certain expenses previously considered to be G&A to overhead. I would not consider them to be “changes to an accounting practice” for purposes of divulging changes because they do not meet the definition of an accounting practice – “any disclosed or established accounting method or technique which is used for allocation of cost to cost objectives, assignment of cost accounting periods or measurement of cost.” I would argue an accounting practice centers on defining a cost as direct or indirect, establishing cost pools, eliminating or adding pools, determining the period it is considered to be incurred and changing the allocation base for a particular indirect cost pool. Charging a cost at one time to G&A and another as overhead does not represent a change to me. What do you think?

A. I think you make a good case for the change not to be considered a change to an accounting practice. Unfortunately, DCAA will normally not agree – they have always insisted that the type of transfer of costs we describe in the article should be considered an accounting change and we have not had occasion to fight the issue. We took a look at one of our favorite texts – Accounting for Government Contracts, Cost Accounting Standards edited by Lane Anderson – and could not find any examples of accounting changes cited in the Cost Accounting Standards, DCAA guidance or the text that included the switch of costs from G&A to overhead being considered an accounting change which would tend to lend support to your position.

However in another section of the text, it points to six possible areas related to the allocation piece of an accounting practice: (1) size and number of cost objectives (2) size of cost pools (3) content or composition of the cost pools (4) size of allocation base (5) type of allocation base and (6) content or composition of allocation base. An important Court case – Martin Marietta Corp (ASBCA Nos. 38920, 41565) rejected items (1) (2) and (4) as being cost accounting practices leaving the remaining three items, including (3), as defining cost accounting practices. So this certainly hurts your argument.

Q. In the past, auditors conducting a Contract Purchasing System Review (CPSR) applied a 30% factor to assess competitiveness between two proposals to determine whether two bids were indeed in the “competitive range”. We are looking at two bids $550K and $740K (40% more) where both bidders meet the minimum technical requirements and are qualified to manufacture the product and the lower bid was within the anticipated “should cost” range. So, is any additional price analysis required (cost analysis is not since it is under $650K)?

A. Though I’m quite familiar with CPSRs (conducted them as a DCAA auditor and helped numerous clients get through them) I’m not aware of this specific 30% requirement you mention. The regulations applicable to both COs seeking prime contractors and requirements for contractors seeking subcontractors are quite general where they leave it up to contractors to formulate their own thresholds (most don’t). The team conducting the CPSR will often use their own judgment, which varies widely, as to adequacy of the policy and thresholds if they are established.

As for your specific competition, let me put my CSPR audit hat on, assuming this situation surfaces during a transaction sample. First, they would be familiar with your procedures and would ensure your purchase decision was conducted in accordance with them, including any internal thresholds. As long as both bidders are technically capable and the $550K was in the “should cost” range, I don’t see the need for additional analysis to justify selecting the lowest bidder. However, if you selected the higher one, your policies should address best value determinations for it and your documentation for this purchase should show why you selected the higher priced bidder with a quantification of the non-cost benefits e.g. quality, reliability, meeting schedule requirements, quantifying the price premium against best value criteria, etc. If price reasonableness cannot be determined, you may still ask for cost data which is a new emphasis these days, even if it is below the $650K amount (that applies to only certified cost or pricing data).

Q. I have a question about CAS 403, home office allocations. In reading this standard, my understanding is that for the exception of line management cost allocation, using a value-added base (representing total activity) would not be acceptable for any grouping of costs other than residual expenses. Is my understanding correct and if not, would it be an acceptable practice to classify non-line management home office expenses as homogeneous pools and allocate them using value-added base.

A. Unlike residual expenses over the threshold that requires use of the three factor formula I’m not aware of any particular allocation bases that are required for homogenous pools. Though there are lots of examples GCA REPORTwith suggested bases provided there is no absolute requirements so value-added could be used if you can demonstrate that base is appropriate alluded to a good “causal beneficial relationship” with the final cost objectives.

Q. We are most likely going to engage an outside firm to do a business valuation of our company. The purposes are internal where they are to assist us in business planning, including business succession planning. Is this sort of cost likely to be treatable as an allowable indirect cost? I have not found where it is expressly unallowable, but I have not researched this at all carefully at this point

A. Seems to be OK. If the transaction is spotted by DCAA they will likely inquire about it so you’ll want to make sure you can document the purpose of the evaluation for reasons you cite as opposed to a merger or divestment or long term financing (in which case the evaluation expenses would be unallowable).

Q. I currently have an issue with a DCAA audit. In 2006 we were going to lease a vehicle for a cost type contract. The lease cost was $19K for the remaining 24 months of the contract. We decided to purchase the vehicle for an additional $15K for a total cost of $34K. The $19K was charged, in agreement with the CO, as an up-front direct expense in 2006, because funds were available. The $15K was then depreciated over three years where the depreciated amounts were included in G&A. The auditor says we cannot charge direct and indirect for the same vehicle. My position is that only the appropriate amounts were charged. What do you think?

A. DCAA is apparently making the point that like costs incurred under like circumstances must be treated consistently as either direct (no matter whether the contract pays for it) or indirect in accordance with CAS 402 or FAR equivalent. You need to demonstrate why these are either unlike costs (not true) or unlike circumstances (likely true). You can demonstrate this by first indicating in your disclosed practices that auto or auto lease costs are sometimes direct and sometimes indirect where conditions are specified. Short of that, you need to demonstrate that though such costs are usually indirect (probably your best argument) the lease costs were charged direct in this case because they were needed only for that one contract and there was an agreement to treat them direct. Your best bet is to show there was some documentation about there being an agreement. Check out the example of security guards in CAS 402 where though normally charged indirect guards hired to protect one building dedicated to one contract can be charged direct.

Q. Historically, we have used our firm’s tax depreciation entry as the basis for our incurred cost submittal and it never was challenged in an audit. My CPAs conducted an analysis of tax versus GAAP method and found an immaterial difference. This makes sense since under GAAP we would have capitalized additional asset purchases related to the original assets while for tax reporting we simply expensed them in the years purchased. Now they are questioning our method.

A. For non-CAS covered contractors, the GAAP method is the preferred, default method of charging depreciation. However, if you can demonstrate a different method, including tax, provides a better way to reflect the amortized cost of the asset you may use that method (e.g. a shorter period of useful life than that used for GAAP purposes, accelerated depreciation more appropriate than straight line used for GAAP). The burden is on you to show a different method is better. The fact that the tax versus GAAP method results in an insignificant difference should help your position.

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