Avoiding Common Pitfalls of CAS Transition

Posted by Guest Author on April 30, 2021

Avoiding Common Pitfalls of CAS Transition

By Geoff Merritt, Director Industry Specialty Services - Government Contracts, BDO

If your organization is just entering the federal marketspace, or is a smaller government contractor that is experiencing growth in receipt of cost-based contracts (i.e., subject to FAR Part 31), you may be looking to understand what additional compliance requirements likely come with increased volume and higher dollar value awards. Cost accounting standards (CAS) are something that you should be aware of to ensure your organization is able to properly prepare and transition to compliance with a more restrictive set of criteria associated with pricing and accounting for contracts. In the considerations below, identified are common concerns, questions and best practices for monitoring CAS applicability and the transition to performing CAS-covered contracts.

What are the Exemptions to CAS Coverage?

CAS coverage does not apply to any contract or subcontract that meets the exceptions listed at 48 Code of Federal Regulations (CFR) 9903.201(b). If you receive a contract award that does not meet any of the exemptions listed and is greater than the $7.5 million threshold, CAS will be “triggered.” The three most common exemptions seen for contracts above this threshold are:

  • Contracts or subcontracts with a small business
  • Firm fixed price (FFP), time and material (T&M), or labor hour (LH) contracts or subcontracts for the acquisition of commercial items
  • FFP contracts or subcontracts awarded on the basis of adequate price competition and exempt from the submission of certified cost and pricing data.

Generally speaking, an award that is not subject to The Truthful Cost or Pricing Data statute (TINA) should meet one of the CAS exemptions, including all awards below the current TINA threshold of $2 million.


 

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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.


About the Author

Geoff Merritt is a Director in the Industry Specialty Services Group at BDO with a focus on Government Contracts. He has more than 15 years of professional finance experience with focus on government finance and compliance in the aerospace and defense sectors. Geoff brings extensive hands-on experience with compliance matters relating to Federal Acquisition Regulations (FAR), Cost Accounting Standards (CAS), Truth in Negotiations Act (TINA), and government business system controls. He has extensive experience in corporate restructuring focusing on government contracting aspects, including disclosure statement development, cost accounting changes and external restructuring proposal development.