Avoiding Common Pitfalls of CAS Transition

How to Tell if a Contract or Subcontract is Subject to Modified or Full CAS Coverage?

CAS coverage begins with the sometimes feared “trigger contract,” which is a contract or subcontract with an award value of $7.5 million or more that does not meet an exemption discussed above. If this trigger award is less than $50 million, the contract will be subject to modified CAS coverage, requiring compliance with four of the 19 standards (401, 402, 405 and 406). Full CAS coverage subjects a contract or subcontract to all 19 standards and will be applicable to a single award of $50 million or greater that doesn’t meet an exemption. Additionally, full coverage applies when a contractor receives a total of $50 million in net CAS covered awards in a preceding cost accounting period. As long as a contractor is performing a CAS-covered contract, any contract or subcontract without an exemption that is greater than the current TINA threshold of $2 million will be subject to CAS. Referencing the “CAS Coverage Flow Chart” found in chapter 8 of the Defense Contract Audit Agency (DCAA) Contract Audit Manual is a helpful way to validate whether or not an impending award will be subject to CAS, and if so, some or all of the standards.

Making Changes to Current Cost Accounting Practices?

Many of the standards are, at least in part, already incorporated into the Federal Acquisition Regulation (FAR) cost principles. Therefore, if your organization has already been engaged in cost-based contracting with the government, you may not have many adjustments to make in anticipation of receipt of a contract or subcontract subject to CAS. Some standards require compliance immediately upon award, while others provide some leeway for application (i.e., beginning with the contractor’s next full fiscal year after contract receipt). However, once CAS is applicable to your contract, any changes to cost accounting practices require notification in advance of the change and the government will not pay for any cost increase associated with any changes. In addition, cost impacts related to non-compliance or failure to follow disclosed practices may result in retroactive contract price adjustments.

Does a Disclosure Statement Need to be Submitted?

Disclosure statements define existing cost accounting practices and set the baseline for both internal and external users. A disclosure statement will be required if full CAS coverage applies. In some cases, modified coverage may require a disclosure statement submission if your organization meets certain sales thresholds and there are other CAS segments in your organizational tree. A well written disclosure statement can mitigate potential disputes with auditors when practices are described sufficiently. Even if a disclosure statement is not required, organizations should consider completing one for internal use and reference.

Managing and Tracking CAS Coverage

One of the simplest warnings signs of a resulting contact being subject to CAS will come with the solicitation. If the provision at FAR 52.230-1 is included in your solicitation, be ready to certify to your applicable exemptions, eligibility for modified coverage, or the appropriate disclosure obligations. Ensure that your certification is consistent with your history of past awards. A beneficial best practice is to actively track the value of your contracts at time of award. The award value timeline can be especially difficult to compile retrospectively. Establishing this tracking will provide you the ability to determine if monetary thresholds are exceeded (i.e., $2 million, $7.5 million and $50 million), as well as track any other specific exemptions that would apply.

To protect your organization against negative repercussions of CAS coverage, be sure to know your organization’s cost accounting practices as of the date of coverage. At a minimum, organizations should establish policies that describe:

• The types of costs considered to be direct, indirect and sometimes direct/indirect
• The function and cost elements included in indirect rates
• Allocation methods and bases for indirect rates.

Furthermore, make sure to review practices, at least annually, to ensure they are consistent with the policies established and utilize a communication workflow or approval processes with the appropriate stakeholders to assess potential changes before they are implemented.

More About CAS-Covered Contracts

The webinar CAS Compliance Strategies for Government Contractors features fundamentals to help build a plan and reviews what oversight agencies are most likely looking for when a CAS component is included.