Cost Accounting Standards Board; Changes In Cost Accounting Practices

SUMMARY: The Cost Accounting Standards Board (CASB) invites public

comments on proposed amendments to the regulatory provisions contained

in Chapter 99 of Title 48. The proposed amendments would, when issued

as a final rule, revise the current definitions, exceptions and

illustrations governing changes in cost accounting practices; exempt

certain changes in compliant cost accounting practices from the CASB's

contract price and cost adjustment requirements, and add a new Subpart

9903.4, Contractor Cost Accounting Practice Changes and Noncompliances.

The proposed subpart would establish contractor notification

requirements for changes in compliant cost accounting practices and

delineate the process for determining and resolving the cost impact due

to a compliant change in cost accounting practice or a noncompliant

practice on CAS-covered contract and subcontract prices and/or costs.

The proposed subpart also includes unique applicability and agency

waiver provisions for educational institutions.

DATES: Comments must be in writing and should be received by December

2, 1996.

ADDRESSES: Comments should be addressed to Mr. Rudolph J. Schuhbauer,

Project Director, Cost Accounting Standards Board, Office of Federal

Procurement Policy, 725 17th Street, NW., Room 9001, Washington, DC

20503. Attn: CASB Docket No. 93-01N. To facilitate the CASB's review of

your submitted comments, please furnish a three point five inch (3.5'')

computer diskette copy of your comments in a format that is compatible

with WordPerfect 6.1 or 5.1.

FOR FURTHER INFORMATION CONTACT: Rudolph J. Schuhbauer, Project

Director, Cost Accounting Standards Board (telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process

The CASB's rules, regulations and Standards are codified at 48 CFR

Chapter 99. Section 26(g)(1) of the Office of Federal Procurement

Policy Act, 41 U.S.C. Sec. 422(g), requires that the Board, prior to

the establishment of any new or revised Cost Accounting Standard (CAS),

complete a prescribed rulemaking process. The process generally

consists of the following four steps:

(1) Consult with interested persons concerning the advantages,

disadvantages and improvements anticipated in the pricing and

administration of Government contracts as a result of the adoption of a

proposed Standard (e.g., promulgation of a Staff Discussion Paper).

(2) Promulgate an Advance Notice of Proposed Rulemaking.

(3) Promulgate a Notice of Proposed Rulemaking.

(4) Promulgate a Final Rule.

This proposal is step three of the four step process.

B. Background

Prior Promulgations

Many commenters have identified the Board's regulatory coverage on

``changes in cost accounting practice'' as a matter requiring

clarification and/or further coverage. On April 9, 1993, the CASB

published a Notice in the Federal Register, 58 FR 18428, requesting

public comments from interested parties concerning a Staff Discussion

Paper on that topic. After consideration of the public comments

received in response to the Staff Discussion Paper, the CASB published

an Advance Notice of Proposed Rulemaking (ANPRM) on April 25, 1995 (60

FR 20252) which proposed certain amendments to Chapter 99 of Title 48

that, when issued as a final rule, would revise the current definitions

and illustrations governing changes in cost accounting practices. The

ANPRM also included (1) proposed revisions regarding the language

contained in the contract clauses for ``Full'' and ``Modified''

coverage, Federal agency responsibilities, and desirable change

determinations; and (2) the proposed addition of a new Subpart that

would establish contractor notification requirements for changes in a

contractor's cost accounting practices and set forth the process for

determining and resolving the cost impact on covered contract prices

and/or contract costs when a contractor makes a change to a compliant

cost accounting practice or follows a noncompliant practice.

Public Comments

Twenty-two sets of public comments were received in a timely manner

from contractors, professional associations, Federal agencies,

accounting organizations, and other individuals. A number of commenters

supported the proposed amendments contained in the ANPRM. Some did not.

The more significant comments and concerns expressed by commenters

are summarized below.

--The proposed definitions are too broad.

Several contractors and contractor industry associations opined

that the proposed ANPRM definitions of the terms ``cost accounting

practice'' and a ``change to a cost accounting practice'' are too

broad. They believed that if the proposed definitions were adopted, the

number of cost impact submissions would increase significantly in

comparison to current levels. This, in turn, would dramatically

increase administrative costs for contractors and the Government.

--No consensus on an acceptable definition.

Some commenters in the contractor community recommended retention

of the existing definitions. Others acknowledged that a change in cost

accounting practice occurs when existing pools and bases that contain

different functions are combined but that an accounting change would

not occur if two pools that contained similar functions were combined.

Such contractors argued that an accounting change occurs only if

ongoing functions are combined with dissimilar ongoing functions.

On the other hand, Federal commenters agreed with and supported the

CASB's proposed amendments which specified that pool combinations, pool

split-outs and transfers of functions were cost accounting practice

changes.

--Cost impact process.

Both the contractor community and the Government agency

representatives generally supported the Board's proposal to establish a

new Subpart to delineate the notification and cost impact process.

The various comments, as well as the concerns, expressed by the

commenters are discussed in greater detail under Section E, Public

Comments. The Board Members and the CASB staff express their

appreciation for the divergent views and constructive suggestions

provided by the commenters. Their expressed concerns and suggestions

aided the CASB's deliberations and formed the basis for the development

of the new and/or revised proposed amendments which the Board has

included in the Notice of Proposed Rulemaking (NPRM) being promulgated

today.

[[Page 49197]]

Conclusion

After consideration of the public comments timely received, the

Board concluded that contractors and Federal officials continue to

interpret the Board's rules and regulations governing changes in cost

accounting practice under CAS-covered contracts differently. There

appears to be general support for the proposed cost impact process.

However, even with the proposed promulgation of a more explicit and

flexible cost impact process, some commenters remain concerned that the

administrative costs associated with that process may still deter CAS-

covered entities from initiating organizational changes that could

result in more efficient and effective operations. They believed that

if an organizational change were to also result in a change in cost

accounting practice, the administrative costs that would still be

required to initiate and conclude contract price and/or cost

adjustments for existing contracts and subcontracts could negate the

anticipated cost savings. Thus, it is argued, some contractors may not

make the changes. The higher cost levels being experienced would

continue to be passed on to their Federal customers in the form of

higher proposed costs for future contracts.

As further explained in Section E, Public Comments, the Board

proposes to resolve the described issues and concerns by amending

Chapter 99 as follows:

--Definitions: Revise the definitions and illustrations governing cost

accounting practice changes, for purposes of making it explicit that a

change in the manner in which ongoing costs are accumulated in cost

pools for allocation to final cost objectives constitutes a change in

cost accounting practice, including the combination of existing pools,

the split-out of an existing pool, or the transfer of an existing

function from one pool to one or more different cost pools.

--Exceptions: Retain, with certain modifications, the existing

exceptions for circumstances that are not considered to be a change in

cost accounting practice, and, by adding a new exception for the

transfer of an existing function to a different pool when the costs of

that function are directly allocated back to the original pool for

reallocation to final cost objectives.

--Exemptions: Establish new exemptions from the Board's contract price

and cost adjustment requirements and cost impact process for changes in

cost accounting practices that result from:

(i) Organizational changes involving changes in cost accumulation

practices that result due to the transfer of functions or merger of

cost pools which are undertaken for improved management efficiencies

and effectiveness and which involve the physical realignment or

reduction of facilities or personnel.

(ii) The consolidation of existing pools or the expansion of an

existing pool into two or more pools when the merged or split-out pools

accumulated pooled costs and the respective pools' accumulated

allocation base activity amounts involve similar proportional and

homogeneous relationships, before and after the change.

--Cost Impact Process: Add a new Subpart 9903.4 to establish the

notification process to be followed by a contractor making compliant

changes in cost accounting practices, the process for the submission of

cost impact data for complaint changes and noncompliances, and the

contract price and cost adjustment process for resolving the resulting

cost impacts on individual CAS-covered contracts and subcontracts due

to changes in compliant cost accounting practices and noncompliant

practices.

Benefits

In the Board's judgment, regulatory guidance is needed to encourage

consistency in the treatment of cost accounting practice changes and to

reduce the amount of time required to resolve these actions. The Board

believes that the application of the proposed provisions, as set forth

in this NPRM, will clarify what constitutes a change in cost accounting

practice and facilitate the notification, cost impact and contract

price and cost adjustment processes attributable to changes in

compliant cost accounting practices and noncompliant practices.

Consequently, the potential for disagreements over what constitutes

a change in cost accounting practices will be significantly reduced.

Although the added rules and regulations proposed for Subpart

9903.4 are detailed and extensive, the Board remains convinced that

they are necessary to promote consistency, equity and timeliness in the

handling of cost impact proposal actions related to changes in

accounting practices and noncompliances. The Board's proposal is

expected to result in the reduction of administrative costs currently

being experienced by contractors and Federal officials when contractor

changes in cost accounting practices and noncompliances are processed.

Significant administrative cost savings should also evolve from the

Board's proposal to exempt from the current contract price and cost

adjustment requirements, changes in cost accounting practices that

result from organizational changes made by management to attain more

efficient and effective operations. This exemption should encourage,

not discourage, such organizational changes in the future. Also, the

proposed exemption for routine cost pool combinations or split-outs of

ongoing functions that are not undertaken to primarily improve the

economies and efficiencies of existing operations but meet the Board's

proposed similarity criteria should further mitigate the administrative

cost concerns expressed by commenters. As a result, these proposed

regulatory amendments should generally further the goal of acquisition

streamlining and reform, and should lead to much greater simplification

of the contract administration process as related to the administration

of the Cost Accounting Standards. These goals have been endorsed by the

so-called ``Section 800'' Panel (Report of the Acquisition Law Advisory

Panel to the United States Congress, January 1993).

Proposed Amendments

A brief description of the proposed amendments follows:

Part 9903, Contract Coverage

Changes in Cost Accounting Practices. In Subpart 9903.3, CAS Rules

and Regulations, Section 9903.301 is amended to incorporate definitions

for the terms ``Function'' and ``Intermediate cost objective.'' In

Section 9903.302-1, Cost Accounting Practice, the definition is amended

to incorporate proposed language changes and to add clarifying

guidance. Section 9903.302-2, Change to a cost accounting practice, is

revised to make explicit the types of changes that are a change in cost

accounting practice, a new exception from the definition of a change in

cost accounting practice is added and new exemptions from the contract

price or cost adjustment provisions of CAS-covered contracts and the

cost impact process for certain specified changes in cost accounting

practices are added. The illustration of a change in cost accounting

practice at 9903.302-3(c)(3) is replaced by a new illustration. In

9903.302-3(c) and in 9903.302-4, several illustrations are proposed to

provide additional guidance regarding the revised definitions of the

terms

[[Page 49198]]

``cost accounting practice'' and ``change in cost accounting

practice.''

Contract Price and Cost Adjustments. In Subpart 9903.2, CAS Program

Requirements, Subsection 9903.201-4 is amended to conform certain

language in the ``Full'' and ``Modified'' contract clauses and to

clarify the provisions governing changes made to a contractor's

established cost accounting practices and changes made to correct

noncompliant practices. Subsection 9903.201-6 is amended to establish

criteria on when the Government can determine that a contractor

proposed change in cost accounting practice is desirable and not

detrimental. Section 9903.201-7 is revised to further clarify cognizant

Federal agency responsibilities for administering CAS-covered contracts

and subcontracts. A new Subpart 9903.4 is added to establish the

notification and cost impact resolution process to be followed by a

contractor and the cognizant Federal negotiator when a CAS-covered

contractor or subcontractor changes a compliant cost accounting

practice, fails to comply with an applicable Standard or fails to

consistently follow its established cost accounting practices.

Summary Description of Proposed CAS Coverage

Changes in Cost Accounting Practices. Proposed for inclusion in

9903.301, are two definitions to clarify the terms ``Function'' and

``Intermediate cost objective'' as used in Part 9903. The proposed

amendments to 9903.302-1(c), allocation of cost to cost objectives,

specify that the systematic manner in which the costs of specific

activities are accumulated and distributed to intermediate and final

cost objectives constitutes a cost accounting practice. Additional

subparagraphs are proposed to precisely set forth and amend the

existing examples of cost accounting practices and to clarify what is

meant by the selection and composition of the pools and the allocation

bases.

The proposed amendments to 9903.302-2 expand the existing coverage

by specifying that as used in Part 9903 and the applicable contract

clauses, changes in cost accounting practices include pool

combinations, pool split-outs and transfers of existing ongoing

functions. The existing cost accounting practice exceptions cited in

9903.302-2 (a) and (b) are restated and modified in new subparagraphs.

The transfer of an existing ongoing function from an existing indirect

cost pool to a different pool when the costs are directly allocated

back to the original pool for reallocation to final cost objectives and

the costs of the function continue to be separately identified and

accumulated in the original pool is proposed to be added as a new

exception. A new subparagraph is added to exempt from the contract

price or cost adjustment provisions of CAS-covered contracts and the

cost impact process those changes in cost accounting practices that

result from (1) organizational changes that involve improved management

efficiencies and economies, and the physical realignment or reductions

of facilities or personnel and (2) overhead and general and

administrative (G&A) expense pool combinations or split-outs that meet

proposed ``similarity'' criteria.

Within 9903.302-3, an introductory paragraph is added regarding the

use of the illustrations provided, and introductory paragraphs (a), (b)

and (c) are revised to clarify that the illustrations involve ``cost

accounting practices'' that have changed. The illustration at 9903.302-

3(c)(3) is proposed to be replaced by new illustrations depicting

changes in cost accounting practice, consistent with the revised

definitions. One illustrating the use of a different base for the

allocation of indirect costs to final cost objectives. Additional

illustrations are proposed to be added to 9903.302-3(c) and 9903.302-4

to depict various changes which do and do not result in changes in cost

accounting practices when a contractor combines, eliminates or splits-

out pools, transfers functions or when business combinations due to

mergers and acquisitions occur.

Contract Price and Cost Adjustments. The proposed amendments, when

promulgated as a final rule, will:

Contract Clause Provisions. Conform the contract clause language

for ``Full'' and ``Modified'' coverage. The contract clause provisions

are also revised to clarify the actions required when a contractor or a

subcontractor is required to change a cost accounting practice or

elects to replace an established practice with another compliant cost

accounting practice and the corrective actions required if a

contractor's estimated cost proposal was based on a noncompliant

practice and/or actual contract cost accumulations were based on a

noncompliant practice.

Desirable Changes. Provide criteria for determining when a

contractor proposed change in cost accounting practice can be

determined to be a desirable change that is not detrimental to the

Government.

Cognizant Federal Agency Responsibilities. Require Federal agencies

to:

--Establish internal policies and procedures for administering CAS-

covered contracts when the agency is and is not the cognizant Federal

agency for contractors performing agency contracts,

--Designate the agency official responsible for administering each CAS-

covered contract and subcontract performing under agency awards,

--Delegate contracting authority to designated agency officials, as

required, for the negotiation of cost impact settlements and associated

contract price or cost accumulation adjustments, under the agency's

CAS-covered awards.

--Concurrently settle, on a Government-wide basis, the cost impacts on

all CAS-covered contracts and subcontracts affected by a contractor's

or subcontractor's change in cost accounting practice or noncompliant

practice.

Cost Impact Process. Establish a new Subpart 9903.4, Contractor

Cost Accounting Practice Changes and Noncompliances, that details the

methodology for determining required contract price or cost

accumulation adjustments due to changes in a contractor's cost

accounting practices and specifies the actions to be taken by the

contractor and the cognizant Federal official (e.g., the contracting

officer, administrative contracting officer (ACO) or other agency

official authorized to act in that capacity), including the negotiation

of cost impact settlements on behalf of the Government. The proposed

Subpart provides coverage on the applicability and purpose of the

Subpart, materiality considerations, definitions of terms related to

the Subpart, procedures for changes in compliant cost accounting

practices, and procedures for noncompliance actions. An illustrations

section is also added to clarify the procedures set forth in Subpart

9903.4.

Proposed section 9903.405, Changes in Cost Accounting Practices,

includes subsections on the following areas: notification on changes in

cost accounting practices; determinations of adequacy and compliance;

contractor cost impact submissions; and negotiation and resolution of

the cost impact action.

Section 9903.405 includes required and suggested time frames by

which the various actions in the cost impact resolution process should

be completed. It provides a streamlined process which does not require

submissions of cost impact estimates or contract price adjustments for

every CAS-covered contract affected by a change in accounting practice.

It provides flexibility to the cognizant Federal agency official in

determining the level

[[Page 49199]]

of detail required for a cost impact proposal and materiality

thresholds for required contract price and cost adjustments. To this

end, it creates a two-step process to include (1) a general dollar

magnitude estimate of the accounting change by contract type along with

a cost impact settlement proposal, and if required, (2) a detailed cost

impact proposal for contracts exceeding Government determined

materiality thresholds. The proposed procedure encourages settlement of

the cost impact process based on the cost impact settlement proposal to

the maximum extent possible, without having to resort to a detailed

cost impact proposal. It also provides for contract price adjustment on

individual contracts only when the cost impact amount is material.

The Board has included clarifying rules for the use of the offset

process. It allows for the use of the offset process to reduce the

number of contract price and cost adjustments required as a result of a

change in cost accounting practice, while still providing for

adjustments of individual contracts when the cost impact amount is

material. The rules clarify that offsets of increased costs against

decreased costs should only be made within the same contract type.

Section 9903.405 also explains when and what action needs to be

taken to preclude increased costs paid as a result of a voluntary

change in cost accounting practice. It clarifies how increased costs

are measured on firm fixed-price contracts as a result of a change in

accounting practice. It also makes clear that action must be taken to

preclude increased costs from being paid when the estimated aggregate

higher allocation of costs on flexibly-priced contracts subject to

adjustment exceeds the estimated aggregate lower allocation of costs of

firm fixed-price contracts subject to adjustment as a result of a

voluntary change in accounting practice.

Proposed section 9903.406, Noncompliances, provides detailed rules

and regulations for handling noncompliant actions. It outlines

procedures for when the parties agree and disagree on whether a

noncompliant condition exists. The Board has added separate sections on

estimating practice noncompliances and cost accumulation practice

noncompliances to clarify the actions, particularly to recover

increased costs, that need to be taken under these different

noncompliant conditions. It also provides procedures to be followed

when the noncompliant condition does not result in material increased

costs paid.

C. Paperwork Reduction Act

The Paperwork Reduction Act, Public Law 96-511, does not apply to

this proposal because this proposal would impose no paperwork burden on

offerors, affected contractors and subcontractors, or members of the

public which require the approval of OMB under 44 U.S.C. Sec. 3501, et

seq. The purpose of this proposal is to decrease the current burdens

(including current paperwork burdens) associated with the

administration of the Cost Accounting Standards by covered Government

contractors and subcontractors.

D. Executive Order 12866 and the Regulatory Flexibility Act

This proposal would serve to clarify the Board's requirements and

eliminate burdens associated with the administration of the Cost

Accounting Standards by covered Government contractors and

subcontractors. The economic impact on contractors and subcontractors

is therefore expected to be minor. As a result, the Board has

determined that this NPRM will not result in the promulgation of a

``major rule'' under the provisions of Executive Order 12866, and that

a regulatory impact analysis will not be required. Furthermore, this

proposal will not have a significant effect on a substantial number of

small entities because small businesses are exempt from the application

of the Cost Accounting Standards. Therefore, this proposed rule does

not require a regulatory flexibility analysis under the Regulatory

Flexibility Act of 1980.

E. Public Comments

This NPRM is based upon proposed amendments to the CASB's rules and

regulations that were made available for public comment through the

Board's ANPRM that was published in the Federal Register on April 25,

1995, 60 FR 20252, wherein public comments were invited. The comments

received and the Board's actions taken in response thereto are

summarized in the paragraphs that follow:

Cost Accounting Practice Definitions, Exceptions, Exemptions

Comment: Changes in make or buy decisions do not equate to changes

in cost accounting practice changes.

Response: Changes in make or buy decisions are not a change in cost

accounting practice. This response presumes that the segment

responsible for administering and performing the covered contract

affected by a make or buy change will accumulate and report the actual

costs of contract performance for in-house production and for goods and

services acquired from other sources consistently in accordance with

the performing segment's established and/or disclosed cost accounting

practices. Changes in make or buy decisions are not subject to the

CASB's rules, they are subject to applicable procurement regulations.

Comment: Changes in the place of contract performance do not equate

to changes in cost accounting practice.

Response: The CASB's rules and regulations pertain to the

performing contractor's or segment's established and, if required,

disclosed cost accounting practices. The Board's rules and regulations

presume that the proposed contract (or subcontract) work will be

performed by the segment (or segments) identified in the contractor's

cost proposal as the performing segment and that the costs of contract

performance will be estimated, accumulated and reported by that

proposed segment in accordance with that segments' established and, if

required, disclosed cost accounting practices. Any change in a

compliant cost accounting practice, failure to comply with an

applicable CAS or failure to consistently follow established cost

accounting practices, experienced by that performing segment may result

in contract price or cost adjustments under the Board's rules and

regulations.

When the proposed segment and performing segment are different

because the contractor transfers the responsibility for administering

and performing a covered contract to a different segment, the

commenters are correct in that neither segment's cost accounting

practices may have changed. However, the cost accounting practices used

by the original segment to estimate, accumulate and report the costs of

contract performance before the transfer will not necessarily be the

same as the practices used by the different performing segment after

the transfer. Of more importance is the fact that the specific costs

being allocated to the transferred contract will be different.

Such changes in the place of contract performance are subject to

applicable procurement regulations which may require consideration and/

or Government approval for such transfers. Where the Government

negotiates the conditions for and approves the complete transfer of

responsibility for performing a covered contract from one segment to

another segment, any contractor submission of estimated costs to

complete the transferred contract or the subsequent submission of costs

[[Page 49200]]

incurred to complete the transferred contract would be estimated,

accumulated and reported in accordance with the applicable performing

segments' compliant cost accounting practices. In such cases, the

contract price and cost adjustment provisions of the CAS contract

clause contained in the transferred contract would not apply. Rather,

the Board believes that the contracting parties must resolve the cost

implications of such changes in the place of contract performance in

accordance with applicable procurement regulations.

Comment: The Board's proposal should be treated as a rule change,

not as a ``clarification.''

Response: The proposed amendments contained in this NPRM, when

promulgated as a final rule, would apply prospectively to covered

contracts and subcontracts awarded after promulgation of the final

rule. However, the Board is also proposing that Subpart 9903.4 be

applied to preexisting CAS-covered contracts and subcontracts if the

contractor or subcontractor receives a CAS-covered contract or

subcontract after Subpart 9903.4 becomes effective. Then, for compliant

changes in cost accounting practices or noncompliant practices that

occur after Subpart 9903.4 becomes effective, Subpart 9903.4 would

apply to such preexisting contracts. The proposed coverage is intended

to facilitate the resolution of the cost impact of compliant and

noncompliant cost accounting practice changes affecting CAS-covered

contracts awarded after the proposed Subpart 9903.4 is in effect. Where

such changes in cost accounting practices and/or noncompliances also

affect covered contracts awarded prior to the promulgation of Subpart

9903.4 as a final rule, the Board does not expect the contracting

parties to comply with two separate cost impact processes for changes

that occur after the effective date of the Board's anticipated final

rule. Where changes in cost accounting practices and/or noncompliances

do not become subject to Subpart 9903.4, the contracting parties would

normally continue to follow the ``cost impact process'' incorporated in

the preexisting covered contracts and subcontracts unless the

contracting parties mutually agree to follow the Subpart 9903.4

procedures.

Comment: A number of commenters suggested that the terms

``function'' and ``intermediate cost objective'' be modified.

Response: The ANPRM definitions have been revised.

Comment: A number of commenters recommended that the proposed

amendments to the introductory paragraph at 9903.301-1 be revised or

deleted.

Response: The proposed ANPRM language has been deleted.

Comment: Several commenters suggested revision or deletion of the

ANPRM proposed amendments to 9903.301-1(c) that would have changed the

paragraph heading and content to highlight the importance of the term

accumulation of cost. One commenter advocating that the basic

definition not be revised stated:

* * * The triumvirate of measurement, assignment and allocation have

served * * * well over the years. If changes are needed make them in

the subparagraphs that follow.

Response: The proposed ANPRM language changes have been deleted.

The proposed amendments being promulgated in the NPRM retain the

traditional term ``allocation of cost to cost objectives'' in 9903.301-

1(c). However, the Board continues to hold the opinion that the manner

in which costs are accumulated is an essential cost accounting practice

that is integral to the concept of cost allocation. Therefore, the

Board is proposing certain modifications to make explicit that cost

accumulation and the selection of pools used to accumulate specific

costs are cost accounting practices. Additional subparagraphs are

proposed to further explain what is meant by the selection and

composition of the pools and bases.

Comment: Federal and industry commenters disagreed on whether the

combination of existing pools or the transfer of an existing function

from one pool to a different new or existing pool did or did not

constitute a change in cost accounting practice. Several industry

commenters acknowledged that a change in cost accounting practice

occurs when existing pools and bases that contain different functions

are combined but that an accounting change would not occur if two pools

with similar functions were combined.

Such contractors argued that an accounting change occurs only if

ongoing functions are combined with dissimilar functions.

Response: Although some industry commenters appeared to agree that

a cost accounting practice change may occur when dissimilar functions

are combined, the reason why a change in cost accounting practice

occurred was not attributed to change in how specific costs were

accumulated for subsequent allocation to specific final cost

objectives. Assuming overhead Pool A accumulated the costs of two

functions and overhead Pool B accumulated the cost of two other but

relatively very similar types of functions, the commenters reasoned

that there would be no change in a contractor's cost accounting

practices if the two pools were combined. A corollary assumption was

that the costs accumulated in both pools were allocated to final cost

objectives by use of the same type of base activity accumulated at the

two locations. Since the disclosure statement descriptions of the two

pools before the change and the one pool after the change would be

``identical,'' the commenters appeared to infer that there was no

change in cost accounting practice.

The arguments presented appear centered more on the commenters'

limited interpretations of the Board's existing regulatory language

which is used for determining when contract price or cost adjustments

are required due to a change in a contractor's cost accounting

practices rather than on the actual manner by which contractors

accumulate specific costs in individual pools for their subsequent

allocation to the specific final cost objectives included in the pools

respective allocation bases.

The commenters did not acknowledge that the use of two pools would

result in the allocation of the specific costs accumulated in each pool

to only the specific final cost objectives included in each of the

separate allocation bases that were applicable to each pool. Pool A

costs would be allocated to only those individual final cost objectives

that pass through Pool A's allocation base. After the pools are

combined, the specific costs originally included in the two cost pools

will now be allocated to different groupings of final cost objectives.

Consequently, the specific costs would be allocated differently to

individual final cost objectives. The specific indirect costs

originally included in Pool A would be allocated proportionately to

both the final cost objectives that would have been included in the

allocation base for Pool A as well as to all of the final cost

objectives that would have been included in the allocation base for

Pool B. Pool B costs would experience the same type of change in cost

allocation. It is the Board's opinion that the described type of change

in cost accumulation (the use of one pool instead of two) is a cost

accounting practice change because the method used to accumulate cost

for the ``allocation of cost to cost objectives'' has changed. The

change is that the specific ongoing costs that would previously have

been accumulated and included in Pool A and allocated only

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to the individual final cost objectives included in the Pool A

allocation base would now be allocated to all of the individual final

cost objectives that previously would have been included in the

allocation base for Pools A and B. The specific costs that would

previously have been accumulated and included in Pool B would

experience the same type of change.

Furthermore, the commenters' concepts of ``similar'' and/or

``identical'' functions would prove difficult to establish and

administer. To be similar, must the functional operations be identical?

Must the product being fabricated or the service being performed be

identical? How would disparate levels of cost incurred by separate

functions be considered? If the costs accumulated in the original pools

were not proportionally similar to the amounts of activity accumulated

in their respective allocation bases would the functions being combined

still be judged similar? Would the combination of the pools and their

respective allocation bases be considered compliant under applicable

Standards (e.g., under the homogeneity requirements of CAS 9903.418)?

The Board continues to believe that the combining of pools, whether

they contain similar or dissimilar functions, constitutes a change in

cost accounting practice. To avoid potential disputes and endless

debate on what constitutes ``similar'' functions and when a change in

cost accounting practice should require the adjustment of contract

prices or costs, the Board, in the NPRM being promulgated today,

proposes to resolve this matter by establishing definitions, exceptions

and exemptions as follow:

1. Definitions. Amend the definitions of a cost accounting practice

and a change to a cost accounting practice to state that the

combination or split-out of an existing pool and/or the transfer of an

existing function from one pool to a different pool, constitutes a

change in cost accounting practice.

2. Exceptions. Retain the existing exceptions to a change in cost

accounting practice but add a modification to indicate that different

segments may apply different cost accounting practices when the same

type of cost is incurred for the first time at each location. Add a new

exception indicating the transfer of an existing function when the cost

of that function is directly allocated back to the original pool for

cost accumulation and reallocation to final cost objectives is not a

change in cost accounting practice.

3. Exemptions. Add two exemptions from contract price and cost

adjustments, for cost accounting practice changes resulting from:

(i) Functional combinations and transfers resulting from

significant organizational changes made to achieve economies and

efficiencies. This provision is proposed to provide a clear distinction

between changes in operations and changes in cost accounting practices.

It also responds to commenters' concerns that the Board's rules and

regulations governing contract price and cost adjustments are viewed by

some as an impediment to the implementation of more efficient and

economical operations.

Where significantly lower levels of operating costs resulting from

the physical realignment or reduction in facilities or personnel are

reasonably expected to occur due to operational changes, attendant

savings will normally be experienced in the long run under all of a

contractor's work affected by the change, including existing and future

CAS-covered contracts. Accordingly, the Board is considering the

establishment of the proposed exemption based on the concept that if a

cost accounting practice change results in such circumstances, it may

not be necessary to require contract cost or price adjustments under

existing CAS-covered contracts that are immediately affected by such

operational changes. Whether specific operational changes qualify for

this proposed exemption would be determined on a case-by-case basis by

the cognizant Federal agency official.

The Board's existing requirements for contract price and cost

adjustment would continue to be applied when there is no significant

physical change in the contractor's ongoing operations and/or

production activities but a change is made to the contractor's

established cost accounting practices. In such cases, while a

contractor's actual operations and overall total cost levels for those

ongoing operations are not expected to change appreciably, the Board's

rules and regulations would continue to require the adjustment of

individual contracts for any significant greater or lesser allocation

of cost to individual covered contracts that may occur due to the

change in cost accounting practice.

Because changes resulting in improved economies and efficiencies

would be exempt from the contract price and cost adjustment, the Board

has deleted from this NPRM proposal, the ANPRM provision proposed for

desirable changes involving changes made to improve the economy and

efficiency of operations.

Public comments on this proposed exemption would be particularly

helpful (see proposed 9903.302-2(c)(1)).

(ii) Overhead or G&A pool combinations where the cost variability

between the original pools and the resultant pool or pools is

relatively similar so that resulting cost allocations to individual

final cost objectives will not be significantly affected by the change.

Pools would be considered similar if certain proposed criteria are met.

When met, this exemption would obviate the need for contractor

preparation and submission of the cost impact documents required under

Subpart 9903.4.

Comment: A commenter recommended the addition of an introductory

provision to clarify that the illustrations in 9903.302-3 and 9903.302-

4 are not all inclusive.

Response: Clarifying provisions have been added.

Contract Clauses

Comment: A commenter recommended that the definition of a cost

accounting practice at 9903.302-1 be incorporated by reference into

paragraph (a)(2) of the clause.

Response: To clarify that Part 9903 is incorporated in its

entirety, including all of the definitions in Part 9903, paragraph (a)

was revised to incorporate by reference the definitions and

requirements of Part 9903. Paragraph (a)(4)(ii) was also revised to

conform with the definition of the term ``increased cost'' contained in

Subpart 9903.4.

Comment: A commenter recommended that paragraph (a)(3) should

require the contractor to maintain a system for identifying all CAS-

covered contracts and subcontracts by their periods of performance.

Response: The proposed requirement at 9903.401-1(b) for identifying

covered contracts and subcontracts is incorporated into proposed

paragraphs (a), (a)(4) and (a)(5) of the applicable contract clauses.

Comment: Revise paragraph (a)(4) to reference disclosed as well as

established cost accounting practices and use the term ``cognizant

Federal agency official'' in lieu of ``Contracting Officer.''

Response: The suggestions were adopted.

Comment: A commenter suggested that paragraph (c), access to

records, be updated to include modern record storage mediums.

Response: The suggestion was adopted.

Comment: One commenter supported the proposed contract clause

provisions

[[Page 49202]]

in paragraphs (a)(4) of the proposed contract clauses, requiring a

Contractor to agree to price adjustments if CAS-covered subcontractors

make required, voluntary or desirable changes to their cost accounting

practices pursuant to the subcontracts' terms and conditions. One

commenter felt there was no need to extend a contractor's liability for

subcontractor changes. The commenter argued that prime contractors have

no control over a subcontractor's cost accounting practices.

Response: Under CAS-covered contracts, prime contractors are

responsible for inserting CAS flow down provisions into their

subcontracts and for administering the covered subcontracts. If a

subcontractor claims proprietary data is involved, the prime contractor

can obtain the necessary data in summary form through the cognizant

Federal agency official. However, the proposed provision provides for

the adjustment of the prime contract price and/or higher-tier

subcontract price if affected due to a lower-tier subcontractor's

compliant change in cost accounting practice and/or noncompliance. The

referenced provision was retained.

Desirable Changes

Comment: Several commenters recommended that the Board include as

desirable changes, accounting changes required by law or regulation, as

well as accounting changes required for conformity with changes in

generally accepted accounting principles (GAAP) promulgated by the

Financial Accounting Standards Board.

Response: The Board disagrees with the commenters. The original

CASB concluded that all contractor proposed changes in cost accounting

``* * * for any reason * * *'' should be considered for contract

adjustment and that if major changes in cost accounting practice were

required in order for contractors to comply with an express provision

of law, the Board would appropriately modify its Standards (Preamble J,

Changes compelled by law or regulation (43 FR 9775, March 10, 1978)).

Accounting procedures required to conform with laws, regulations or

GAAP are generally not mandated for Federal contract cost accounting

purposes. While a contractor must comply with such requirements for tax

reporting purposes or financial statement reporting purposes to

stockholders, such requirements are not per se a required cost

accounting practices for Federal contracting purposes. Hence, any

contractor desired change to an established cost accounting practice

used to estimate, accumulate and report the costs of performing CAS-

covered contracts and subcontracts remains subject to the Board's

Standards, rules and regulations, including the CAS contract clause

adjustment provisions, governing changes in cost accounting practices.

Accordingly, each contractor change in cost accounting practice made

for any reason must be considered on a case-by-case basis in order to

determine whether the change is or is not desirable.

Comment: One commenter suggested that the proposed provision

requiring the cognizant Federal agency official to determine that a

change in cost accounting practice made to remain in compliance with a

Standard to be a ``desirable'' change be deleted and treated instead as

a ``required'' change.

Response: The contract clause provision referred to as a

``required'' change only pertains to a change in cost accounting

practice that is made in order to comply with a new Standard,

modification or interpretation thereto when it first becomes applicable

to an existing covered contract through the award of a subsequent CAS-

covered contract or subcontract. It does not apply to changes in cost

accounting practices made subsequently by a contractor due to changed

circumstances in order to remain in compliance with an existing

Standard already applicable to an existing contract. By treating such

subsequent changes as a ``desirable'' change, the contracting parties

can negotiate equitable adjustments for covered contracts and/or

subcontracts materially affected by subsequent changes that the

cognizant Federal agency official has determined, on a case-by-case

basis, were necessary in order for the contractor to remain in

compliance with an applicable Standard. To distinguish subsequent

changes from first time ``required'' changes, the proposed word

``required'' has been changed to ``necessary'' in the proposed

provision.

Comment: Some contractors advocated that a change in cost

accounting practice recommended by the cognizant Federal agency

official and implemented by the contractor be considered a desirable

change. A Federal agency recommended deletion of the proposed provision

because in their view this provision would rarely be used and it would

avoid contractor interpretations of discussions held with Federal

officials as representing recommended changes.

Response: The word ``should'' has been changed to ``shall'' and a

requirement for a written recommendation has been added.

Cognizant Federal Agency Responsibilities

Comment: A Federal agency recommended editorial changes to

paragraph (a) and deletion of proposed paragraphs (b), (c) and (d) at

9903.201-7. The primary concerns were that the proposed amendments were

already addressed by the Federal Acquisition Regulation (FAR), at FAR

30.6 and 42.3., and that the proposed responsibilities for obtaining

funding may go beyond the control of the cognizant Federal agency

official.

Response: The Board recognizes that the responsibility for

administering CAS resides with the various Federal agencies, including

the civilian agencies that are subject to CASB's rules and regulations.

The Board, in reviewing the CAS cost impact process at a number of

contractor locations, concluded that this process was generally not

being accomplished in a timely or efficient manner. One contributing

factor was that neither the Board's rules nor applicable agency

regulations clearly set forth the complete process to be followed or

actions to be taken. The Board is taking action today by proposing a

precise yet flexible approach for the submission of cost impact data

due to changes in cost accounting practices and noncompliances and for

determining the resultant contract price or cost adjustments required

under the Board's rules and regulations. The Board believes such

specificity will facilitate the CAS administrative process, reduce

administrative costs and improve timeliness. This proposal represents a

first step toward the improvement of the process. Without more explicit

implementing agency policies and procedures, however, the Board remains

concerned that the timeliness of the contract price and cost adjustment

process may not improve significantly and that the administrative costs

associated with the cost impact process will not be curtailed.

Funding availability and the process for obtaining funds needed to

effect CAS contract price adjustments is an example of where agency

regulations for administering CAS should be made explicit. A recurring

contractor concern with the Board's cost impact adjustment process was

that contractors believe that the funds required to effect the

necessary CAS contract price adjustments are generally not made

available to the administering official. Contractors also believe that

the lack of funding often was the determining factor in why a compliant

change in cost accounting practice was not considered

[[Page 49203]]

to be a ``desirable'' change subject to equitable adjustment under the

Board's rules.

The Board is fully aware that contract obligations can not be made

in violation of applicable appropriations law and that funding

availability is governed by each agency's administrative control of

funds requirements. The proposed agency responsibilities are designed

to permit each agency, in accordance with its funding systems, to

establish appropriate internal procedures that are to be followed by

programmatic, financial and procurement officials when additional

funding is required to effect CAS contract price adjustments. While

contract funds can be deobligated immediately, for equity's sake, under

the Board's proposal, contract price increases and decreases due to a

change in cost accounting or a noncompliance would be processed

concurrently. The cognizant Federal agency official would not effect

deobligations until the funding needed to increase contract prices

under other contracts affected by the same change are made available

for obligation by the affected agencies.

The Board believes the proposed amendments address the areas that

need to be clarified by implementing agency regulations and that the

proposed concurrent processing requirement does not go beyond the

control of the cognizant Federal agency official. Accordingly, the

proposed provisions have been retained. The ANPRM language in 9903.201-

7 (a) and (d)(2)(iii) was revised based on the commenter's editorial

suggestions and expressed concerns on funding.

Cost Impact Process

Comment: A number of commenters expressed the view that proposed

rules for the cost impact process were too rigid and did not allow

sufficient flexibility. Others feared that existing local agreements on

cost impact methodology could not continue once the proposed rule

becomes a final rule.

Response: The intent of the ANPRM was to place emphasis on

materiality and to allow alternative methods with regard to resolving a

cost impact due to changes in accounting practices. The Board believes

that the frequent use of the concept of materiality throughout the

proposed 9903.4; the allowance for use of ``other suitable techniques''

in 9903.405-5(c)(3) and 9903.405-5(d)(5); the flexibility in

establishing appropriate materiality thresholds; and the allowance for

alternative formats for the General Dollar Magnitude (GDM) and Cost

Impact Settlement Proposal; provide sufficient latitude to the

contracting parties to resolve a cost impact and does not constitute a

``rigid'' process.

Comment: Several commenters suggested that the GDM and Cost Impact

Settlement Proposal formats included in the ANPRM be deleted since they

may be construed to be required ``forms'' or the only acceptable

formats by some cognizant Federal agency officials.

Response: The illustrated formats are not to be considered required

``forms'' or the only acceptable formats. They are included as an

example of one acceptable presentation of a GDM and Cost Impact

Settlement proposal. Inclusion of an acceptable format aids those

cognizant Federal agency officials, as well as contractors, that have

little experience with the cost impact process, particularly in the

civilian agencies. To further emphasize that other formats may be used,

the Board has added a clarifying sentence at 9903.405-4(a)(4) and

substituted the word ``acceptable'' for ``suggested'' prior to the

display of the illustrated formats.

Comment: One commenter suggested deletion of various provisions

included in the ANPRM based on the view that they represented opinion

or detailed instructions and do not belong in the Board's rule or

regulation.

Response: The Board agrees in part and has deleted some, but not

all, of the provisions suggested by the commenter.

Comment: A number of contractor respondent's requested that

specific timing requirements be included in 9903.4 for the actions to

be taken by the cognizant Federal agency official. They saw an inequity

in specifying timing requirements for contractors, but not for

Government officials.

Response: The Board expects that the various Federal agencies will

establish appropriate regulations to implement the procedures and

suggested time frames included in proposed Subpart 9903.4, and believes

that such agency regulations are the appropriate place to detail

specific administrative timing requirements for cognizant Federal

agency officials. The Board encourages the Federal agencies to place

appropriate emphasis on timeliness in completing the cost accounting

change cost impact process in order to avoid the inefficiency problems

caused by delays in the process which have been experienced in the

past.

Comment: Other industry respondents requested a provision which

would provide for an irrevocable presumption of adequacy and compliance

of an accounting practice change in the event that the cognizant

Federal agency fails to make a formal determination within the

suggested 60 day period included at 9903.405(c)(i) in the ANPRM.

Response: The Board disagrees. A contractor's cost accounting

practices must comply with applicable Cost Accounting Standards.

Failure by Federal officials to act in a timely manner does not create

a waiver from the Board's rules and regulations. As previously

mentioned, the Board encourages timely action by all responsible

parties, including Federal agencies. For this reason, the Board has

retained, in the NPRM being promulgated today, suggested time frames

for when actions are to be taken by the cognizant Federal agency

official.

Comment: One commenter objected to the requirement precluding use

of planned changes in cost accounting practices in price proposal

estimates, claiming that contractor's can use changed practices for

estimating immediately.

Response: The Board, in researching this issue, learned that a lack

of consistency exists when contractors begin using a changed cost

accounting practice to estimate costs in price proposals. Some used

immediate implementation, while others waited until the cognizant

Federal agency official made a determination of adequacy and

compliance. The Board believes that a consistent and uniform approach

is desirable and that waiting for an adequacy and compliance

determination is the preferable method. Obtaining an adequacy and

compliance determination prior to implementation will avoid the

potential implementation of a noncompliant cost accounting practice

when estimating costs in price proposals. The Board notes that the

proposed period of delay in implementation of the new practice in only

a maximum of 60 days. To make this requirement equitable and to prevent

potential financial harm to contractors, the Board is also proposing to

establish a new exemption from the voluntary change increased cost

preclusion provisions for contracts negotiated between the notification

date and effective date of a planned change in cost accounting

practice. This new exemption appears at 9903.405-2(f) and 9903.405-

5(d)(7).

Comment: Several commenters opined that requiring advance

notification of a change in accounting practices made to comply with a

new or revised Standard that would become applicable to existing

covered contracts only through the subsequent award of a covered

contract, i.e., a required change, was unreasonable, if not impossible.

They suggested that notification be made sometime after the award of

the contract which made the new or revised Standard applicable to a

CAS-covered

[[Page 49204]]

contractor, rather than 60 days prior to the effective date of the new

or revised Standard.

Response: The Board agrees that notification prior to the effective

date of the Standard may not always be required or practical, but

disagrees that notification should be delayed until after award of the

contract which made the new or revised Standard applicable. The

effective date of a new or revised Standard is the Standard's specified

effective date after which a CAS-covered contractor must comply with

the new or revised Standard when estimating costs for a contemplated

contract, that if awarded, will make the Standard applicable to the

contractor. Therefore, if a contractor's current practice does not

comply with the new or revised Standard, the contractor must use a

compliant practice in the first such price proposal submitted after the

Standard's effective date. A decision to make this required change

obviously must be done some time before the submission of the proposal.

Clearly, if a contractor has used a compliant practice for estimating

purposes which is different than an established practice due to a

required change, it is not unreasonable to expect that the contractor

will disclose this to the cognizant Federal agency official. Therefore,

the Board proposes to require that advance notification of such

required changes in cost accounting practice shall occur no later than

60 days prior to the submission of the price proposal in which the

contractor must first use the required change to estimate costs for a

potential CAS-covered contract, or other date to which both parties

mutually agree.

Comment: Several commenters took exception to the requirement to

use estimates-to-complete in lieu of original cost estimates for

computing the cost impact due to a compliant change in cost accounting

practices on individual contracts. One respondent commented that

estimates-to-complete should only be used when a significant part of

the contract effort has been performed.

Response: The Board believes that use of estimates-to-complete in

lieu of original estimates better measures the true impact of a change

in cost accounting practice because it applies the new practice only to

the contract effort for which the new practice will be used for cost

accumulation and reporting purposes. Distortions between planned

contract performance and actual contract performance can lead to

distorted cost impact computations if original estimates are used. The

use of estimates-to-complete is also consistent with the prescribed

methodology for pricing change orders which add and/or delete contract

work. The Board acknowledges that in cases where little contract effort

has been performed, there should be virtually no difference between

using an estimate-to-complete as compared to the original estimate

methodology.

Comment: One commenter stated that the computation and completion

of a GDM was a difficult and costly exercise.

Response: Current Federal regulations already require the

submission of GDM estimates by contract type and by agency, and have so

for a long time. The Board's proposed GDM approach requires summary

data only by contract type. The Board anticipates the existing

requirement for summary data by agency would eventually be deleted from

the procurement regulations because of the emphasis the Board is

placing on the individual contract data included in the cost impact

settlement proposal. Any agency having a CAS-covered contract that is

significantly affected by an accounting change will receive adequate

coverage and protection via the submission of a cost impact settlement

proposal based on materiality thresholds. Although computing an

accurate and reliable GDM may be difficult in some circumstances based

on the complexity and number of accounting practice changes, the

information is essential to the cognizant Federal agency official in

determining the appropriate adjustments required to protect the

financial interests of the Government when a change in cost accounting

practice occurs.

Comment: A number of commenters suggested combining the GDM and

Cost Impact Settlement Proposal into one consolidated submission.

Response: The GDM and the contractor cost impact settlement

proposal submissions serve different purposes. The GDM is intended to

provide summary data by contract type of the overall impact to the

Government as a result of an accounting change. The cost impact

settlement proposal is intended to provide a basis for resolving the

cost impact proposal without requiring a detailed cost impact proposal.

To streamline contractor submissions, the two may be combined provided

that the GDM is separately presented on the first page of the combined

submission.

Comment: One commenter objected to the requirement to submit

additional contract data during the cost impact settlement proposal

stage, suggesting that, if no settlement can be reached based on the

data initially submitted, a detailed cost impact settlement proposal

should be required.

Response: The Board believes that the interests of both the

Government and CAS-covered contractors are served best if the data

submission requirements are kept to a minimum. The Board visualizes

instances where a contractor could supplement contract data included in

the initial cost impact settlement proposal with a few additional

contracts in order to provide sufficient information to resolve a cost

impact. The proposed supplemental approach would be less costly and

should result in a more timely resolution of a cost impact than if a

contractor had to put together a separate and distinct detailed cost

impact proposal having different and significantly more data

requirements. The Board believes that once this process is put into

actual practice, the superiority of the supplemental data approach over

a detailed cost impact proposal will be borne out.

Comment: A number of commenters suggested switching the definitions

of offsets and netting.

Response: Although never previously defined in a formal rule or

regulation, the term ``offsets'' has acquired a connotation that most

individuals familiar with the cost impact process have adopted over the

years, i.e., the process of combining cost increases with cost

decreases to arrive at a net smaller cost impact number than the

individual contract cost impact amounts. The term offset has also taken

on the concept of a technique used to reduce the number of individual

contract price or cost adjustments that need to be made as a result of

a change in cost accounting practice, or a failure to comply with cost

accounting standards or established practices. The Board does not wish

to disturb these accepted connotations and concepts. On the other hand,

the process of determining to what extent increased costs may occur as

a result of a voluntary change in cost accounting practices, although

always required, has never been specifically identified. The Board

believes that for clarity's sake, the process should be defined, and

has dubbed this process ``netting''.

Comment: Several commenters expressed the view that offsets should

be permitted between different types of contracts.

Response: The proper application of offsets has long been a source

of confusion and controversy. For this reason, the Board has chosen to

make it explicit that offsets shall only be made within the same type

of contract. The primary rule of offsets is that use of the

[[Page 49205]]

technique should not result in costs paid by the Government that are

materially different from that which would result if all affected

contract prices had actually been adjusted. This rule cannot be met if

offsets are applied to different types of contracts, particularly

between flexibly priced and firm fixed-price contracts. The Board

believes that use of the offset technique will be minimized by the

individual contract materiality threshold concept included in the

proposed 9903.405.

Comment: One commenter asked if offsets will be limited to the

``all other contract'' category under the proposed rule.

Response: For single changes in cost accounting practices within an

individual business unit or segment, offsets will in most, but not

necessarily all, cases be limited to the ``all other contract''

category. The provision at 9903.405-5(b)(3) does allow for the offset

technique to be applied to individual contracts, provided that it does

not materially reduce the amount of the price adjustment to contracts

exceeding the individual contract materiality threshold, or reduce the

cost impact to these contracts to an amount below the threshold. For

multiple changes within the same business unit, offsets are applied to

the same contract to the extent that one or more changes may have an

upward impact while other changes have a downward impact on the same

contract, as provided by 9903.405-5(b)(4). Offsets are also applied

between different business units or segments for changes that affect

multiple segments to mitigate action that needs to be taken to preclude

increased costs, as provided by 9903.405-5(b)(6).

Comment: One commenter suggested that the Board add an illustrative

chart at 9903.405-5(d) to clarify what adjustments should or should not

be made to the various types of contracts in order to preclude payment

of increased costs when a voluntary change is made.

Response: The Board agrees that such a chart would provide useful

clarifying information and has inserted a chart at 9903.405-5(d)(3).

Comment: One commenter suggested that the concept of ``potential

increased cost paid'' be added to the definition of ``increased cost

paid''.

Response: The Board finds no useful purpose to such a definition.

The Board has defined increased costs as they relate to changes in

accounting practices, cost estimating noncompliances and cost

accumulation noncompliances. These definitions, when taken together,

constitute potential increased costs paid. Increased costs paid occurs

when the increased costs to CAS-covered contracts, as defined, is

actually paid by the United States. Procedures described in 9905.405-

5(d), 9903.406-3 and 9903.406-4 set forth action that can be taken to

preclude or reduce the payment of increased costs, as well as

appropriate action to recover the increased costs once they have been

paid.

Comment: One commenter argued that the Board had exceeded its

authority as a result of the definition of increased cost on firm

fixed-price contracts and the method prescribed to recover such

increased costs, and further suggests that such recovery is tantamount

to an unauthorized penalty.

Response: The Board strongly disagrees with these arguments. When a

downward price adjustment is made to a fixed-price contract to reflect

a lesser allocation of costs resulting from a change in cost accounting

practices, no penalty is placed on the contractor. The adjustment does

no more than reduce the contract price so that it is consistent with

those accounting practices actually used during contract performance.

Without this adjustment, the contractor would receive an unjustified

enlargement of profit due merely to a shift of costs caused, not by the

elimination of costs, but by a change in cost accounting practices.

Clearly, payment of this unwarranted windfall represents increased

costs to the Government. The contract price adjustment provisions for

changes in cost accounting practices included in the CAS contract

clause are meant to preclude the payment of these increased costs, as

well as to adjust contract values so that they are consistent with the

contract costs accumulated during contract performance.

Comment: One commenter asked that the Board develop and prescribe

specific materiality threshold amounts for contract price adjustment

purposes.

Response: Consistent with the Board's decision not to specify

precise amounts in the materiality provisions at 9903.305, the Board

believes the establishment of specific materiality threshold amounts

for adjustments of contract prices due to changes in cost accounting

practice is best left to the cognizant Federal agency official based on

the individual circumstances involved and discussions with the

contractor.

Comment: A number of commenters expressed concern about the

difficulty in obtaining the funding to effect the contract price

adjustments negotiated for changes in cost accounting practices.

Response: Although the funding issue is a legitimate concern, it is

one which all of the contracting parties that are affected by changes

in cost accounting practices must work with the cognizant Federal

agency official to overcome.

Comment: Several contractor commenters expressed the view that a

noncompliance that does not result in a material increase in costs to

the Government should not be considered a noncompliance, and asked that

the provision on Technical Noncompliance at 9903.406-5 be deleted.

Response: The Board does not agree with the commenters' position.

Once a cognizant Federal agency official determines that a practice is

noncompliant, there is no reason why some subsequent determination has

to be made again in the future. Any significant increased costs paid as

a result of the noncompliant condition in the event that the impact of

the noncompliance subsequently becomes material, should be immediately

recoverable by the Government with applicable interest. This serves to

discourage the continued use of a noncompliant practice, regardless of

materiality and best protects the interests of the Government when a

noncompliant practice exists.

Restructuring Activities

Comment: The ANPRM will discourage restructuring activities.

Response: Some commenters erroneously interpreted the Board's

proposal to mean that the net savings attributable to restructuring

activities will be included in the measurement of the cost impact of

any cost accounting practice changes resulting from the restructuring

activities. The cost impact process deals only with the greater or

lesser allocation of total ongoing costs to individual contracts

resulting from a change in cost accounting practice. Savings due to

reductions in the costs of ongoing functions or changes in the level of

costs are not subject to adjustment under CAS and are not to be

included in cost impact estimates.

Educational Institutions

Comment: A university suggested that the Board comment on how the

cost impact process should be handled during periods when predetermined

rates are in effect. When would GDM and Cost Impact Settlement

Proposals be required? The Board should consider the effect of the

proposed regulation on educational institutions if extended to grant

and cooperative agreements awards under OMB Circular A-21.

Response: In a predetermined rate environment, the basic underlying

[[Page 49206]]

assumption is that the educational institution's cost accounting

practices, e.g., the classification of a cost as either a direct cost

or an indirect cost, will be followed consistently during the multi-

year periods covered by such rates. The predetermined indirect cost

rates are predicated upon cost data for one base year which may be

adjusted to reflect future year cost levels for the periods to be

covered. The base year data is accumulated and forecasted in accordance

with the institution's established cost accounting practices.

Once established, the predetermined indirect cost rates are applied

to appropriate estimated base costs to determine the estimated indirect

costs included in cost proposals for potential awards. After award, as

sponsored agreements are actually performed, the predetermined rates

are also applied to the actual base costs that are accumulated in

accordance with the institutions's established cost accounting

practices.

To be consistent, the cost accounting practices used to determine

indirect pool costs and allocation base costs forecasted for the

covered years must be followed consistently when proposal costs are

estimated and when actual costs are accumulated and reported during the

covered periods. Should there be any changes in cost accounting

practices (e.g., if an indirect cost were to be reclassified as a

direct cost), while a sponsored agreement is actually performed, the

set of assumptions or conditions regarding the composition of the pools

and allocation bases used to establish the predetermined rates and the

estimated cost proposal would be changed to a different set of

conditions. In such cases, the continued application of the same

predetermined indirect cost rate in such circumstances could result in

the inconsistent allocation of costs and inequitable claims for the

reimbursement of actual costs. A contract price or cost adjustment may

be required for such changes under the Board's rules.

To minimize or preclude over- or under-payments resulting from

``compliant'' changes in cost accounting practices, educational

institutions are required to notify their cognizant Federal agency

officials of any planned changes in cost accounting practice. If

necessary, appropriate revisions to reflect the cost impact of a change

in cost accounting practice on a predetermined rate should be effected

promptly. This could minimize or preclude the need for subsequent cost

or price adjustments attributable to a compliant accounting change.

The Board agrees with the commenter that the cost impact process

should be uniformly applied in an efficient and economical manner for

all Federal awards affected by a compliant cost accounting practice

change or a noncompliance. Therefore, certain unique provisions,

including specified agency waiver authority, applicable solely to

educational institutions that are subject to OMB Circular A-21, have

been included in the NPRM being promulgated today.

Comment: One university suggested that the contract clause for

educational institutions at 9903.201-4(e) also be updated.

Response: The referenced clause became effective on January 9,

1995, and the Board does not believe sufficient time has elapsed to

warrant its revision at this time. Further comments on the desirability

of conforming the clause with the language being proposed today for the

``Full'' and ``Modified'' clauses are requested. If there is support

for such revision, the Board will consider updating the clause in the

final rule.

F. Additional Public Comments

Interested persons are invited to participate by submitting data,

views or arguments with respect to this NPRM. All comments must be in

writing and submitted to the address indicated in the ADDRESSES section

of this NPRM. Computer diskette copies of your comments in WordPerfect

6.1 or other format that is compatible with WordPerfect will be

appreciated.

The Board is considering the establishment of certain new

requirements that it believes would clarify and facilitate the overall

process governing changes in cost accounting practices. Therefore, the

Board invites interested parties to specifically comment on the

following NPRM provisions being proposed today:

Changes in cost accounting practices:

--Proposed 9903.302-2(c) would exempt certain changes in cost

accounting practices from contract price or cost adjustment and the

cost impact process.

Contract price and cost adjustment process:

--Proposed 9903.201-6(b) establishes new criteria for determining when

a voluntary change in cost accounting practice may be treated as a

desirable change.

--Proposed 9903.405-2(b)(1) requires CAS-covered contractors to notify

the Government of and fully disclose changes in cost accounting

practices that are required to comply with a new or modified Standard

or interpretation thereof 60 days prior to the submission of a price

proposal in which the contractor first uses the required change to

estimate costs for a potential CAS-covered contract or subcontract.

--Proposed 9903.405-2(b)(2) establishes new notification requirements

for voluntary and desirable changes.

--Proposed 9903.405-2(f) provides a new equitable adjustment provision

for contracts negotiated within 60 days after a contractor notifies the

Government of a voluntary change that would otherwise be subject to a

CAS-covered contract's no increased cost provision.

--Proposed 9903.405-4(b) provides for the use of a cost impact

settlement proposal that would permit early resolution of the estimated

cost impact in lieu of the use of a detailed cost impact proposal.

List of Subjects in 48 CFR Part 9903

Cost accounting standards, Government procurement.

Richard C. Loeb,

Executive Secretary, Cost Accounting Standards Board.

For the reasons set forth in this preamble, chapter 99 of title 48

of the Code of Federal Regulations is proposed to be amended as set

forth below:

1. The authority citation for part 9903 continues to read as

follows:

Authority: Pub. L. 100-679, 102 Stat 4056, 41 U.S.C. 422.

PART 9903--CONTRACT COVERAGE

Subpart 9903.2--CAS Program Requirements

2. Section 9903.201-4 is proposed to be amended by revising

paragraphs (a) (1) and (c), and the contract clauses set forth in

paragraphs (a) and (c), to read as follows:

9903.201-4 Contract clauses.

(a) Cost Accounting Standards--Full Coverage. (1) The contracting

officer shall insert the clause set forth below, Cost Accounting

Standards--Full Coverage, in negotiated contracts, unless the contract

is exempted (see 9903.201-1), the contract is subject to modified

coverage (see 9903.201-2), or the clause prescribed in paragraphs (d)

or (e) of this subsection is used.

* * * * *

COST ACCOUNTING STANDARDS--FULL COVERAGE

(AUGUST 1996)

(a) The provisions of Part 9903 of 48 CFR, Chapter 99, including

the definitions and requirements contained therein, are

[[Page 49207]]

incorporated herein by reference and the Contractor, in connection

with this contract, shall--

(1) Disclosure. Disclose in writing the Contractor's cost

accounting practices by submission of a Disclosure Statement as

required by 9903.202. The practices disclosed for this contract

shall be the same practices currently disclosed and applied to all

other contracts and subcontracts being performed by the Contractor

and which contain a Cost Accounting Standards (CAS) contract clause.

If the Contractor has notified the Contracting Officer that the

Disclosure Statement contains trade secrets, and commercial or

financial information which is privileged and confidential, the

Disclosure Statement shall be protected and shall not be released

outside of the Government.

(2) Changes in Cost Accounting Practices. Follow consistently

the Contractor's cost accounting practices in accumulating and

reporting contract performance cost data concerning this contract.

If any change in cost accounting practices is made for the purposes

of any CAS-covered contract or subcontract, the change must be

applied prospectively from the date of applicability to this

contract and the Contractor's Disclosure Statement must be amended

accordingly. If the contract price or cost of this contract is

materially affected by such changes, adjustment shall be made in

accordance with subparagraph (a)(4) or (a)(5) of this clause, as

appropriate.

(3) Compliance with Standards. Comply with all CAS contained in

part 9904, including any modifications and interpretations thereto,

in effect on the date of award of this contract or, if the

Contractor has submitted cost or pricing data, on the date of final

agreement on price as shown on the Contractor's signed Certificate

Of Current Cost Or Pricing Data. The Contractor shall also comply

with any CAS, including any modifications or interpretations

thereto, which become applicable because of a subsequent award of a

CAS-covered contract or subcontract to the Contractor. Such

compliance shall be required prospectively from the date of

applicability to such contract or subcontract.

(4) Compliant changes in cost accounting practices. As required

by Subpart 9903.4, provide timely notification of changes in

disclosed or established cost accounting practices, provide data

concerning the cost impact of such changes and:

(i) Required change. Agree to an equitable adjustment of the

price of this contract as provided under this provision if the

contract cost is materially affected by a change to a disclosed or

established cost accounting practice which, pursuant to subparagraph

(a)(3) of this clause, the Contractor or a subcontractor is required

to make.

(ii) Voluntary change. Agree to an adjustment in the price or

cost of this contract as provided under this provision if contract

cost is materially affected by a voluntary change made by the

contractor or a subcontractor; provided that no agreement may be

made under this provision that will result in the payment of any

increased costs by the United States in the aggregate for all of the

contractor's or a subcontractor's CAS-covered contracts and

subcontracts affected by the change.

(iii) Desirable change. Agree to an equitable adjustment of the

price of this contract as provided in this provision if contract

cost is materially affected by a change in cost accounting practice

made by the contractor or a subcontractor that the cognizant Federal

agency official finds to be desirable change.

(5) Noncompliance. As required by Subpart 9903.4, initiate

action to correct any noncompliance, provide data concerning the

cost impact of the noncompliance and agree to an adjustment of the

contract price or cost if the Contractor or a subcontractor fails to

comply with an applicable Cost Accounting Standard, including any

modifications or interpretations thereto, or to follow any cost

accounting practice consistently and such failure results or will

result in any increased costs paid by the United States. Also, agree

to the recovery of any increased costs paid by the United States,

together with interest thereon computed at the annual rate

established under section 6621 of the Internal Revenue Code of 1986

(26 U.S.C. 6621) for such period, from the time the payment by the

United States was made to the time the adjustment is effected. In no

case shall the Government recover costs greater than the increased

cost to the Government, in the aggregate, on the relevant contracts

subject to price or cost adjustment, unless the contractor made a

change in its cost accounting practices of which it was aware or

should have been aware at the time of price negotiations and which

it failed to disclose to the Government.

(b) Disputes. If the cognizant Federal agency official and the

Contractor disagree as to whether the Contractor or a subcontractor

has complied with an applicable CAS in Part 9904, including any

modifications or interpretations thereto, an applicable provision or

requirement in Part 9903 or as to any resulting price or cost

adjustment demanded by the United States, such failure to agree will

constitute a dispute under the Contract Disputes Act (41 U.S.C.

601).

(c) Access to records. The Contractor shall permit any

authorized representatives of the Government to examine and make

copies of any books, records, documents, papers, or records,

regardless of form (e.g., machine readable media such as disk, tape,

etc.) or type (e.g., data bases, applications software, data base

management software, utilities, etc.) relating to compliance with

the requirements of this clause.

(d) Flowdown to Subcontracts. Unless the subcontract is exempt

under 9903.201, the Contractor shall include in all negotiated

subcontracts which the Contractor enters into, the substance of this

clause, except paragraph (b), and shall require such inclusion in

all other subcontracts, of any tier, including the obligation to

comply with all applicable CAS, including any applicable

modifications or interpretations thereto, in effect on the

subcontractor's award date or if the subcontractor has submitted

cost or pricing data, on the date of final agreement on price as

shown on the subcontractor's signed Certificate of Current Cost or

Pricing Data, except that if the subcontract is awarded to a

business unit which pursuant to 9903.201-2 is subject to other types

of CAS coverage, the substance of the applicable clause set forth in

9903.201-4 shall be inserted.

(End of clause)

* * * * *

(c) Cost Accounting Standards--Modified Coverage. (1) The

contracting officer shall insert the clause set forth below, Cost

Accounting Standards--Modified Coverage, in negotiated contracts when

the contract amount is over $500,000, but less than $25 million, and

the offeror certifies it is eligible for and elects to use modified CAS

coverage (see 9903.201-2), unless the clause prescribed in paragraphs

(d) or (e) of this subsection is used.

(2) The clause below requires the contractor to comply with CAS

9904.401, 9904.402, 9904.405 and 9904.406, to disclose (if it meets

certain requirements) actual cost accounting practices, and to follow

disclosed and established cost accounting practices consistently.

COST ACCOUNTING STANDARDS--MODIFIED COVERAGE

(AUGUST 1996)

(a) The provisions of Part 9903 of 48 CFR, Chapter 99, including

the definitions and requirements contained therein, are incorporated

herein by reference and the Contractor, in connection with this

contract, shall--

(1) Disclosure. Disclose in writing the Contractor's cost

accounting practices by submission of a Disclosure Statement, if it

is a business unit of a company required to submit a Disclosure

Statement, pursuant to 9903.202. The practices disclosed for this

contract shall be the same practices currently disclosed and applied

to all other contracts and subcontracts being performed by the

Contractor and which contain a Cost Accounting Standards (CAS)

contract clause. If the Contractor has notified the Contracting

Officer that the Disclosure Statement contains trade secrets and

commercial or financial information which is privileged and

confidential, the Disclosure Statement shall be protected and shall

not be released outside of the Government.

(2) Changes in Cost Accounting Practices. Follow consistently

the Contractor's cost accounting practices in accumulating and

reporting contract performance cost data concerning this contract.

If any change in cost accounting practices is made for the purposes

of any CAS-covered contract or subcontract, the change must be

applied prospectively from the date of applicability to this

contract and the Contractor's Disclosure Statement must be amended

accordingly. If the contract price or cost of this contract is

materially affected by such changes, adjustment shall be made in

accordance with subparagraph (a)(4) or (a)(5) of this clause, as

appropriate.

(3) Compliance with Standards. Comply with the requirements of

9904.401, Consistency in Estimating, Accumulating and

[[Page 49208]]

Reporting Costs; 9904.402, Consistency in Allocating Costs Incurred

for the Same Purpose; 9904.405, Accounting For Unallowable Costs;

and 9904.406, Cost Accounting Period; including any modifications or

interpretations thereto, in effect on the date of award of this

contract, or, if the Contractor has submitted cost or pricing data,

on the date of final agreement on price as shown on the Contractor's

signed Certificate Of Current Cost Or Pricing Data. The Contractor

shall also comply with any modifications or interpretations to such

CAS which become applicable because of a subsequent award of a CAS-

covered contract or subcontract to the Contractor. Such compliance

shall be required prospectively from the date of applicability to

such contract or subcontract.

(4) Compliant changes in cost accounting practices. As required

by Subpart 9903.4, provide timely notification of changes in

disclosed or established cost accounting practices, provide data

concerning the cost impact of such changes and:

(i) Required change. Agree to an equitable adjustment of the

price of this contract as provided under this provision if the

contract cost is materially affected by a change to a disclosed or

established cost accounting practice which, pursuant to subparagraph

(a)(3) of this clause, the Contractor or a subcontractor is required

to make.

(ii) Voluntary change. Agree to an adjustment in the price or

cost of this contract as provided under this provision if contract

cost is materially affected by a voluntary change made by the

contractor or a subcontractor; provided that no agreement may be

made under this provision that will result in the payment of any

increased costs by the United States in the aggregate for all of the

contractor's or a subcontractor's CAS-covered contracts and

subcontracts affected by the change.

(iii) Desirable change. Agree to an equitable adjustment of the

price of this contract as provided in this provision if contract

cost is materially affected by a change in cost accounting practice

made by the contractor or a subcontractor that the cognizant Federal

agency official finds to be a desirable change.

(5) Noncompliance. As required by Subpart 9903.4, initiate

action to correct any noncompliance, provide data concerning the

cost impact of the noncompliance and agree to an adjustment of the

contract price or cost if the Contractor or a subcontractor fails to

comply with an applicable Cost Accounting Standard, including any

modifications or interpretations thereto, or to follow any cost

accounting practice consistently and such failure results or will

result in any increased costs paid by the United States. Also, agree

to the recovery of any increased costs paid by the United States,

together with interest thereon computed at the annual rate

established under section 6621 of the Internal Revenue Code of 1986

(26 U.S.C. 6621) for such period, from the time the payment by the

United States was made to the time the adjustment is effected. In no

case shall the Government recover costs greater than the increased

cost to the Government, in the aggregate, on the relevant contracts

subject to price or cost adjustment, unless the contractor made a

change in its cost accounting practices of which it was aware or

should have been aware at the time of price negotiations and which

it failed to disclose to the Government.

(b) Disputes. If the cognizant Federal agency official and the

Contractor disagree as to whether the Contractor or a subcontractor

has complied with an applicable CAS in Part 9904, including any

modifications or interpretations thereto, an applicable provision or

requirement in Part 9903 or as to any resulting price or cost

adjustment demanded by the United States, such failure to agree will

constitute a dispute under the Contract Disputes Act (41 U.S.C.

601).

(c) Access to records. The Contractor shall permit any

authorized representatives of the Government to examine and make

copies of any books, records, documents, papers, or records,

regardless of form (e.g., machine readable media such as disk, tape,

etc.) or type (e.g., data bases, applications software, data base

management software, utilities, etc.) relating to compliance with

the requirements of this clause.

(d) Flowdown to Subcontracts. Unless the subcontract is exempt

under 9903.201, the Contractor shall include in all negotiated

subcontracts which the Contractor enters into, the substance of this

clause, except paragraph (b), and shall require such inclusion in

all other subcontracts, of any tier, including the obligation to

comply with all applicable CAS, including any applicable

modifications or interpretations thereto, in effect on the

subcontractor's award date or if the subcontractor has submitted

cost or pricing data, on the date of final agreement on price as

shown on the subcontractor's signed Certificate of Current Cost or

Pricing Data, except that if the subcontract is awarded to a

business unit which pursuant to 9903.201-2 is subject to other types

of CAS coverage, the substance of the applicable clause set forth in

9903.201-4 shall be inserted.

(End of clause)

3. Section 9903.201-6 is proposed to be revised to read as follows:

9903.201-6 Desirable changes.

(a) Prior to making any equitable adjustment under the provisions

of paragraph (a)(4)(iii) of the contract clauses set forth in 9903.201-

4(a), 9903.201-4(c) or 9903.201-4(e), the cognizant Federal agency

official shall make a finding that the change is desirable, as defined

at 9903.403, i.e., desirable and not detrimental to the interests of

the Government.

(b) The determination as to whether or not a change in cost

accounting practice is desirable should be made on a case-by-case basis

in accordance with, but not limited to, the following criteria:

(1) A change in cost accounting practice shall be deemed to be

desirable and not detrimental if the cognizant Federal agency official

determines that, for a Cost Accounting Standard which the contractor

has complied with, the change is necessary in order for the contractor

to remain in compliance with that Standard.

(2) The cognizant Federal agency official shall determine that a

change in cost accounting practice is desirable and not detrimental if

the change from one compliant practice to another compliant practice

was recommended in writing by the cognizant Federal agency official and

the Contractor agrees to make the change.

(3) The cognizant Federal agency official's finding should not be

made solely because of the financial impact of the proposed change on a

contractor's or subcontractor's current CAS-covered contracts. A change

may be determined to be desirable and not detrimental to the

Government's interest even though costs of existing contracts may

increase, provided there is a reasonable expectation that benefits will

accrue to the Government in future awards.

4. Section 9903.201-7 is proposed to be revised to read as follows:

9903.201-7 Cognizant Federal agency responsibilities.

(a) The requirements of 48 CFR Chapter 99 shall, to the maximum

extent practicable, be administered by the cognizant Federal agency

responsible for a particular contractor organization or location,

usually the Federal agency responsible for negotiating indirect cost

rates on behalf of the Government. The cognizant Federal agency should

take the lead role in administering the requirements of Chapter 99 and

coordinating CAS administrative actions with all affected Federal

agencies. When multiple CAS-covered contracts and/or subcontracts or

more than one Federal agency are involved, the cognizant Federal agency

official and affected agencies shall coordinate their activities in

accordance with the responsibilities specified in paragraph (d) of this

section. Agencies should discourage agency officials from individually

administering CAS on a contract-by-contract basis. Coordinated

administrative actions will provide greater assurances that individual

contractors follow their cost accounting practices consistently under

all their CAS-covered contracts and that aggregate contract price and

cost adjustments required under CAS-covered contracts for changes in

cost accounting practices or CAS noncompliance issues are determined

and resolved, equitably, in a uniform overall manner.

(b) Federal agencies shall prescribe regulations and establish

internal policies and procedures governing how agencies will administer

the

[[Page 49209]]

requirements of CAS-covered contracts, with particular emphasis on

inter-agency coordination activities. Procedures to be followed when an

agency is and is not the cognizant Federal agency should be clearly

delineated. Agencies are urged to coordinate on the development of such

regulations.

(c) Internal agency policies and procedures shall provide for the

designation of the agency office(s) or officials responsible for

administering CAS under the agency's CAS-covered contracts and

subcontracts at each contractor and subcontractor business unit and the

delegation of necessary contracting authority to agency individuals

authorized to negotiate cost impact settlements under CAS-covered

contracts, e.g., Contracting Officers, Administrative Contracting

Officers (ACO's) or other agency officials authorized to perform in

that capacity.

(d) Responsibilities.

(1) The cognizant Federal agency official shall:

(i) Make all required determinations for all CAS-covered contracts

and subcontracts.

(ii) Coordinate with affected agencies when developing the

Government's negotiation position regarding settlement of the overall

cost impact and potential modification of CAS-covered awards, prior to

actual negotiations.

(iii) Negotiate the cost impact settlement, in the aggregate, for

all CAS-covered contracts and subcontracts materially affected by the

change in cost accounting practice.

(iv) Inform the affected agencies of the negotiation results, by

distribution of the negotiation memorandum.

(v) Request affected agencies to prepare implementing contract

modifications and to obtain implementing subcontract modifications from

their next higher-tier contractor, as appropriate. The modifications

shall be predicated on the negotiated cost impact settlement reflected

in the negotiation memorandum and are to be forwarded for signature by

the contractor through the cognizant Federal agency official.

(vi) Concurrently, obtain contractor signatures for all contracts

and subcontracts to be modified and distribute the executed

modifications to the awarding agencies.

(2) Awarding agencies shall:

(i) Coordinate with and support the cognizant Federal agency

official.

(ii) Prepare and/or obtain contract modifications needed to

implement negotiated cost impact settlements, as requested by the

cognizant Federal agency official.

(iii) When the cognizant Federal agency official has properly

determined a cost impact settlement on behalf of the Government, make

every effort to provide funds required for increased contract price

modifications to affected Contracting Officers for obligation so that

the cognizant Federal agency official can concurrently execute all the

requested contract modification(s) needed to settle the cost impact

action in a timely manner.

Subpart 9903.3--CAS Rules and Regulations

5. Section 9903.301 is amended by adding two definitions to read as

follows:

9903.301 Definitions.

(a) * * *

* * * * *

Function, as used in this part, means an activity or group of

activities that is identifiable in scope and has a purpose or end to be

accomplished. Examples of functions include activities such as

accounting, marketing, research, product support, drafting, assembly,

inspection, field services.

* * * * *

Intermediate cost objective means a cost objective that is not a

final cost objective. Intermediate cost objectives are used to

accumulate the costs of specific functions or groups of functions that

are generally included in specific indirect cost pools and then

allocated as pooled cost to other intermediate and/or to final cost

objectives. Intermediate cost objectives may also be used to accumulate

direct costs that are included in a cost pool and allocated to final

cost objectives as a direct charge.

* * * * *

6. Section 9903.302-1 is amended by revising paragraph (c) to read

as follows:

9903.302 Definitions, explanations, and illustrations of the terms,

``cost accounting practice'' and ``change to a cost accounting

practice.''

9903.302-1 Cost accounting practice.

* * * * *

(c) Allocation of cost to cost objectives as used in this part,

refers to the cost accounting methods or techniques used to

systematically accumulate and distribute costs to intermediate and

final cost objectives. The allocation of cost to cost objectives

includes both the direct and indirect allocation of costs.

(1) Examples of cost accounting practices involving the allocation

of cost to cost objectives are the determinations made on:

(i) How a cost is to be accumulated in the contractor's cost

accounting system,

(ii) Whether a cost is to be directly or indirectly allocated to

final cost objectives,

(iii) The selection and composition of cost pools, and

(iv) The selection and composition of the appropriate allocation

bases.

(2) The selection of cost pools involves the determination to

establish one or more homogeneous cost pools for the accumulation of

specific costs to be allocated to other intermediate and/or to specific

final cost objectives at specified locations. Normally, separate pools

are established for specific functional activities, e.g., for a

specified assembly operation within a particular segment. The

composition of cost pools involves the determinations to identify and

accumulate, by specific elements of cost, the costs of the specific

functions or groups of functions to be included within each established

cost pool.

(3) The selection of an allocation base involves the determination

on what type of activity (e.g., labor hours, square footage) or cost

data (e.g., labor dollars, total cost input) will be used as the basis

for the allocation of the total costs accumulated in each pool to

intermediate and/or final cost objectives at specified locations.

Normally, the allocation base activity selected for each pool is the

activity that best represents the causal or beneficial relationship

between the pooled costs and the base activity. The composition of an

allocation base involves the determination to collect and accumulate

the selected base activity data for a particular function, or group of

functions, associated with each established pool. The composition of a

business unit allocation base includes the specific cost and/or

functional groupings within the base. The composition of a home office

allocation base includes the grouping of segments within the applicable

base. Examples of allocation bases include direct engineering labor

hours for a specific direct engineering function performed at a

specified location, total cost input of a particular segment, total

payroll costs for specific segments reporting to the same group or home

office.

* * * * *

7. Section 9903.302-2 is revised to read as follows:

9903.302-2 Change to a cost accounting practice.

(a) Change to a cost accounting practice, as used in this part,

including the contract clauses prescribed at 9903.201-4, means any

alteration in a cost accounting practice, as defined in 9903.302-1,

whether or not such practices are covered by a Disclosure Statement,

including the following changes in cost accumulation:

(1) Pool combinations. The merging of existing indirect cost pools.

[[Page 49210]]

(2) Pool split-outs. The expansion or breakdown of an existing

indirect cost pool into two or more pools.

(3) Functional transfers. The transfer of an existing ongoing

function from an existing indirect cost pool to a different pool or

pools.

(b) Exceptions.

(1) The initial adoption of a cost accounting practice for the

first time a cost is incurred, or a function is created, is not a

change in cost accounting practice. This exception shall be applied at

the segment or company-wide level, depending upon the nature of the

cost or the function involved. At the segment level, different segments

can establish different cost accounting practices for the same type of

cost when the cost is incurred for the first time or a function is

created by each segment. This exception does not apply to transfers of

ongoing functions, e.g., from one segment to another segment or home

office.

(2) The partial or total elimination of a cost or the cost of a

function is not a change in cost accounting practice.

(3) The revision of a cost accounting practice for a cost which

previously had been immaterial is not a change in cost accounting

practice.

(4) The transfer of an existing ongoing function from a segment's

existing overhead or G&A indirect cost pool to a different pool is not

a change in cost accounting practice provided:

(i) The ongoing costs are directly allocated back to the original

pool for reallocation to final cost objectives, and

(ii) The segment continues to identify and accumulate the directly

allocated cost of the function within the same pool in the same manner

as was done before the change.

(c) Cost accounting practice changes exempt from contract price and

cost adjustment. The following types of changes in cost accounting

practice shall not be subject to contract price or cost adjustment.

However, the cost accounting practices resulting from such changes must

comply with all applicable Cost Accounting Standards and notification

of the change in cost accounting practice must be provided as required

by 9903.405-2.

(1) Changes in cost accumulation practices that result due to a

transfer of functions or merger of cost pools which are undertaken for

improved management efficiencies and effectiveness and which involve

the physical realignment or reduction of facilities or personnel.

(2) Changes in the selection and/or composition of an overhead or

general and administrative expense pool resulting from the

consolidation of existing pools or the expansion of an existing pool

into two or more pools that are not exempt under paragraph (c)(1) of

this section but meet all of the following conditions:

(i) The elements of cost and the functions included in the original

and resultant merged or split-out pools remain the same. After the

change, the costs of the ongoing functions are identified and

accumulated in the resultant merged pool or split-out pools in the same

manner and at the same level of detail.

(ii) The selected activity used as the allocation base remains the

same for the affected pools. After the change, the merged allocation

base activity or split-out allocation base activity is identified and

accumulated in the new merged allocation base or split-out allocation

bases.

(iii) The merged or split-out pools involve the allocation of

similar pooled overhead or G&A costs to similar final cost objectives

where the underlying levels of pooled costs and allocation base

activity involve similar proportional relationships. Pools shall be

considered similar if, after the change, the resultant pools are

homogeneous (see 9904.418-50(b)) and the rates (or rate) used to

allocate pooled indirect costs to final cost objectives fall within a

corridor of plus or minus one percent of the rate (or rates) that would

have resulted if the combination or expansion had not occurred. The

comparison shall be based on the same level of ongoing pooled costs and

allocation base activity that is expected to occur after the change is

made. For example, if under the original cost accounting practices

followed for a single pool the overhead recovery rate would be 200%,

then the resultant split-out rates must fall within the corridor of

198% to 202%. In the case of a combination of pools and their

respective allocation bases, the corridors around the two original

rates that would result if there were no combination must converge or

overlap to be considered similar, e.g., if the continued use of two

pools would result in rates of 101% and 99%, their respective corridors

of 100% to 102% and 88% to 100% would overlap.

* * * * *

8. Section 9903.302-3 is amended by adding a new introductory

paragraph, revising introductory paragraphs (a), (b) and (c), revising

the illustration at (c)(3) and by adding new illustrations (c)(4),

through (c)(11) to read as follows:

9903.302-3 Illustrations of changes which meet the definition of

``change to a cost accounting practice.''

The following illustrations are not intended to cover all possible

changes in cost accounting practices nor are the illustrations to be

used as limitations for determining if an accounting change has

occurred. Further, each illustration is not intended to be all-

inclusive. Accordingly, the lack of a mentioned change in cost

accounting practice does not mean that there is not a change in cost

accounting practice. The decision as to whether a change in cost

accounting practice has or has not occurred, requires a through

analysis of the circumstances of each individual situation based on the

definitions and exceptions specified in 9903.302-1 and 9903.302-2.

(a) The cost accounting practice used for the measurement of cost

has been changed. * * *

(b) The cost accounting practice used for the assignment of cost to

cost accounting periods has been changed. * * *

(c) The cost accounting practice used for the allocation of cost to

cost objectives has been changed.

------------------------------------------------------------------------

Description Accounting treatment

------------------------------------------------------------------------

* * * *

* * *

(3) The contractor changes to a (3)(i) Before change: The

different allocation base.. contractor used a direct

manufacturing labor hours base

to allocate costs accumulated

in the manufacturing overhead

pool to final cost objectives.

(ii) After change: The

contractor uses a direct

manufacturing labor dollars

base to allocate costs

accumulated in the

manufacturing overhead pool to

final cost objectives.

(iii) The described change from

a direct labor hours base to a

direct labor dollars base

represents a change in the

selection of the allocation

base activity.

[[Page 49211]]

(4) A Segment combines two similar (4)(i) Before change: The

ongoing functions. Segment established separate

(i) For internal management and assembly overhead pools to

financial reporting purposes, the accumulate the indirect costs

ongoing direct and indirect assembly applicable to Plant A's and

operations at Plants A and B are Plant B's respective assembly

merged into a new combined plant-wide functions. Pooled costs were

pool. allocated to individual final

cost objectives based on Plant

A's and Plant B's respective

assembly direct labor dollars

allocation bases.

(ii) After change: The indirect

costs of the two ongoing

assembly functions are

combined and accumulated in

one indirect assembly cost

pool. Pooled costs are

allocated to individual final

cost objectives based on a

total assembly direct labor

dollars allocation base

applicable to the two plant

locations.

(iii) A cost accounting

practice change occurred

because the selection and

composition of the pool has

changed and the composition of

the allocation base has

changed.

(iv) Because the pools were

combined, the specific

indirect costs associated with

Plant A and Plant B are now

accumulated in one pool and

are allocated to all

individual final cost

objectives performed at both

Plants A and B.

(5) Assume the same circumstances as in (5)(i) The merging of the two

(4) above except that Plant A is indirect cost pools into one

closed. indirect cost pool and the

(i) The contractor's total overall merging of the two allocation

costs of operations are reduced. bases resulted in a cost

accounting practice change for

the same reasons cited in (4)

above.

(ii) The change involves reductions and/ (ii) The change resulted in

or transfers of employees and the sale economies and efficiencies due

of various physical assets by both to physical changes and

Segments. reductions in personnel. The

CAS-covered contracts that

were affected by the change in

practice are not subject to

contract price and cost

allowance adjustment or the

cost impact process under the

exemption provided by 9903.302-

2(c)(1).

(6) Assume the same circumstances as in (6)(i) The merging of the two

(4) above except that the two ongoing indirect cost pools into one

assembly functions continue to operate indirect cost pool and the

in the same manner before and after merging of the two allocation

the change and that the two plants bases resulted in a cost

otherwise remain unchanged. accounting practice change for

the same reasons cited in (4)

above.

(ii) If the merged indirect

cost pools were determined to

be similar under the exemption

criteria provided at 9903.302-

2(c)(2), then the CAS-covered

contracts that were affected

by the change in practice

would not be subject to

contract price and cost

allowance adjustment or the

cost impact process.

(7) Assume the same circumstances as in (7)(i) Before change: Segments

(4) above except that Plants A and B A and B each established an

are separate Segments A and B that are assembly overhead pool to

combined as Segment C for management accumulate the indirect costs

reporting purposes. applicable to their respective

assembly functions. Pooled

costs were allocated to final

cost objectives based on

Segment A's and B's respective

assembly direct labor dollars.

(ii) After change: Segment C

establishes a single assembly

overhead pool to identify and

accumulate the costs of

Segment A's and Segment B's

ongoing indirect assembly

functions. Pooled costs are

allocated to final cost

objectives based on Segment

C's total assembly direct

labor dollars generated by the

two ongoing but separate

assembly operations.

(iii) For the same reasons

cited in (4) above, a cost

accounting practice change has

occurred. Because the number

of pools established by the

contractor has changed, the

specific costs associated with

Segments A and B are now

allocated to all of the

individual final cost

objectives performed by both

Segments A and B.

(iv) If either one of the

exemptions contained in

9903.302-2(c) applies, then

the CAS-covered contracts that

were affected by the change in

practice would not be subject

to contract price and cost

allowance adjustment or the

cost impact process.

(8) The contractor changes how the (8)(i) Before change: The

ongoing indirect costs of the indirect costs applicable to

manufacturing and assembly operations the manufacturing and assembly

are accumulated and allocated to final functions were accumulated in

cost objectives by a segment. a plant-wide indirect cost

pool and allocated to final

cost objectives by use of a

direct labor dollars base

comprised of manufacturing and

assembly direct labor dollars.

During each cost accounting

period, a single plant-wide

indirect cost rate was used to

allocate the accumulated

indirect costs to individual

final cost objectives.

(ii) After change: The ongoing

indirect manufacturing and

assembly costs are split-out

and accumulated separately in

a manufacturing pool and

assembly pool. The pooled

costs are allocated to final

cost objectives by use of a

manufacturing direct labor

dollars base and an assembly

direct labor dollars base,

respectively. Two indirect

cost rates are now used to

allocate the ongoing indirect

costs to individual final cost

objectives.

[[Page 49212]]

(iii) The decision to

accumulate the ongoing costs

of the manufacturing and

assembly functions separately,

in two pools instead of one,

represents a change in the

selection and composition of

the pool. The decision to

allocate the accumulated pool

costs to final cost objectives

by use of separate allocation

bases for the manufacturing

and assembly functions instead

of one plant-wide allocation

base represents a change in

the composition of the base.

(9) The contractor transfers the (9)(i) Before change: The cost

incoming materials inspection of performing the incoming

function. inspection function was

(i) Incoming materials are inspected in accumulated in an intermediate

the same manner before and after the cost objective that was

change. included in the Segment's

manufacturing overhead expense

pool. Accumulated pool costs

were allocated to final cost

objectives based on

manufacturing direct labor

dollars.

(ii) After change: The

accumulated cost of the

incoming inspection function

is included in the Segment's

materials handling overhead

pool. These pooled costs are

allocated to final cost

objectives based on direct

material costs.

(iii) The decision to include

the accumulated cost of the

ongoing inspection function in

a different cost pool

represents a change in the

composition of the two pools.

The decision to allocate

incoming inspection costs to

final cost objectives by use

of a material cost base rather

than a labor dollars base

represents a change in the

selection of the allocation

base activity for the incoming

inspection function.

(10) A contractor establishes a new (10) As of the effective date

product line by acquiring another of acquisition, the contractor

company. Both entities are performing requires the new segment to

CAS-covered contracts. group, accumulate and

(i) The acquired company will be distribute the continuing

treated as a new segment. The costs of the acquired ongoing

contractor's new segment will complete functions differently, e.g.,

the CAS-covered contracts that were the acquired company's single

novated from the prior company to the overhead pool is split into

contractor. It will not perform any two new pools. The cost of the

work associated with the contractor's ongoing functions will be

existing lines of business. grouped and accumulated in

different indirect expense

pools and allocated to

different final cost

objectives by use of two

allocation bases split-out

from the previously used

single base.

(i) The changes made by the

acquiring contractor represent

changes in the selection and

composition of the pools and

the composition of the bases

for the acquired CAS

contracts. Unless one of the

exemptions at 9903.302-2(c)

applies, the cost accounting

practice changes are subject

to the contract price and cost

adjustment provisions of the

acquired CAS-covered

contracts.

(ii) The initial adoption

exception provided by 9903.302-

2(b)(1) would not apply

because this is not a first

time incurrence of cost or

creation of a function, with

regard to the ongoing acquired

CAS-covered contracts.

(11) A contractor expands the existing (11)(i) As of the effective

product line of Segment A by acquiring date of acquisition, Segment A

another company. Both entities are merges the continuing costs of

performing CAS-covered contracts. the acquired company's ongoing

(i) The acquired company will be functions into Segment A's

absorbed by Segment A. indirect cost pools and

(ii) Segment A will complete the allocation bases, in

acquired CAS-covered contracts that accordance with Segment A's

were novated from the prior company to established cost accounting

the contractor. practices. Segment A's pool

and base now include the

ongoing functions of both

Segment A and the acquired

company.

(ii) The costs of the

contractor's existing

contracts will be accumulated

and reported differently than

when the contract costs were

estimated. The newly

established allocation bases

and indirect cost pools

include both the existing and

acquired ongoing functions.

(iii) The pool and base

combinations made by the

acquiring contractor represent

changes in the selection and

composition of the pools and

bases for the existing Segment

and acquired company. Unless

one of the exemptions at

9903.302-2(c) applies, the

cost accounting practice

changes are subject to the

contract price and cost

adjustment provisions of the

existing and acquired CAS-

covered contracts.

(iv) The exceptions provided by

9903.302-2(b)(1) would not

apply because this is not a

first time incurrence of cost

or creation of a function,

with regard to the existing or

acquired CAS-covered

contracts.

------------------------------------------------------------------------

9. Section 9903.302-4 is amended by adding an introductory

paragraph, and illustrations (h) through (k) to read as follows:

9903.302-4 Illustrations of changes which do not meet the definition

of ``Change to a cost accounting practice.''

The following illustrations are not intended to cover all possible

changes that are not changes in cost accounting practice nor are the

illustrations to be used as limitations for determining that an

accounting change has not occurred. The decision as to whether a change

in cost accounting practice has or has not occurred, requires a

thorough analysis of the circumstances of each individual situation

based on the definitions and exceptions specified in 9903.302-1 and

9903.302-2.

[[Page 49213]]

------------------------------------------------------------------------

Description Accounting treatment

------------------------------------------------------------------------

* * * *

* * *

(h)(1) The contractor consolidates the (h)(1) (i) Before the change,

accounting functions performed Segments A and B each directly

directly by Segment A and Segment B. identified and accumulated the

A new service center is established cost of their accounting

within Segment B to perform the functions in intermediate cost

accounting function for several objectives that were included

segments. in their respective G&A

expense pools.

(ii) After the change, the

costs of performing the

accounting function for

Segment A and the other

segments are accumulated

directly by Segment B in a

newly established accounting

service center cost pool.

Segment B allocates the

accumulated service center

costs to the benefiting

Segments based on actual usage

factors. Segments A and B

continue to identify and

accumulate the accounting

service cost charges received

from Segment B in their

respective Segment G&A expense

pools.

(iii) Since Segments A and B

continued to specifically

identify and accumulate the

contractor's costs of

performing Segment A's and B's

accounting functions in their

respective G&A expense pools,

before and after the change,

no change in the contractor's

established cost accounting

practices has occurred.

(h)(2) Assume the same circumstances as (h)(2) (i) Before the change,

in (h) above, except that after the Segment A directly identified

change the function is performed by a and accumulated the cost of

home office. its accounting functions in an

intermediate cost objective

that was included in its G&A

expense pool.

(ii) After the change, the

costs of performing the

accounting function for

Segment A and the other

segments are accumulated

directly by the home office

and the accumulated costs are

allocated to the benefiting

Segments based on actual usage

factors. Segment A continues

to identify and accumulate the

accounting service cost

charges received from the home

office in the Segment's G&A

expense pool.

(iii) Since Segment A continued

to specifically identify and

accumulate the contractor's

costs of performing Segment

A's accounting functions in

the G&A expense pool, before

and after the change, no

change in the contractor's

established cost accounting

practices has occurred.

(iv) A change in cost

accounting practice would

occur if Segment A no longer

accumulated the costs of its

ongoing accounting functions

in the same intermediate cost

objective, in the G&A pool,

e.g., if Segment A were unable

to do so because the

contractor accumulated the

costs of the accounting

functions with other costs at

the home office and allocated

the combined costs to Segments

on a common usage base or as

residual expense.

(i) The contractor transfers an (i)(1) Before the transfer, the

inspection department employee from employee's salary was

Plant A to Plant B. identified and accumulated as

inspection labor in Plant A's

overhead pool.

(2) After the transfer, the

employee's salary is similarly

identified and accumulated in

Plant B's overhead pool. The

salaries of all other

employees performing the

inspection function at Plants

A and B continue to be

identified and accumulated in

their respective pools.

(3) Since the cost of the

inspection functions at Plants

A and B continue to be

identified and accumulated

within the same pools, before

and after the change, no

change in cost accounting

practice has occurred.

(j) A contractor with a corporate home (j)(1) After change: The costs

office creates a new segment for the of the contractor's home

purpose of entering a new line of office continue to be

business. The new segment will not accumulated and allocated to

perform any work associated with the segments in the same manner.

contractor's existing CAS-covered The new segment is added to

contracts. the home office allocation

base or bases used to allocate

home office costs to all

segments.

(2) The addition of the new

segment to the base represents

an initial adoption of a cost

accounting practice for the

segment when it was created

(see exception at 9903.302-

2(b)(1)). Since the selection

and composition of the pool

and applicable allocation

bases were not otherwise

changed, the described home

office change is not a cost

accounting practice change

requiring contract price or

cost adjustments.

(k) Assume the same circumstances as in (k)(1) For the reasons stated

(j) above, except that: in (j) above, the described

(1) The contractor acquired a new home office change is not a

segment that is performing CAS-covered cost accounting practice

contracts from another company. change.

(2) The acquired segment will continue (2) At the segment level, the

to estimate, accumulate and report first time incurrence of the

costs in accordance with the original acquiring contractor's home

company's compliant and previously office cost allocation is an

disclosed cost accounting practices initial adoption of a cost

for that segment. A new Disclosure accounting practice (see

Statement is filed to that effect. exception at 9903.302(b)(1)).

Also disclosed is the contractor's Since the contractor adopted

home office cost allocation to the the acquired segment's

segment. previously established cost

accounting practices, no

change in established cost

accounting practices occurred

for the acquired CAS-covered

contracts.

------------------------------------------------------------------------

[[Page 49214]]

10. Section 9903.302-5 is added to read as follows:

9903.302-5 Mergers and Acquisitions.

(a) Each CAS-covered contract requires that the performing

contractor consistently follow its established and disclosed cost

accounting practices over the contract's entire period of performance.

(b) When a contractor or a segment performing a CAS-covered

contract is acquired by a different contractor through a merger or

acquisition, the acquired contractor or segment shall accumulate and

report costs incurred from the effective date of acquisition or merger

through completion of the acquired contract consistently in accordance

with the cost accounting practices established by the acquired

contractor or segment. Changes made to such established and/or

disclosed cost accounting practices after the effective date of the

merger or acquisition by the acquiring contractor shall be processed as

changes in cost accounting practice in accordance with the requirements

of Part 9903.

(c) This subsection applies equally to CAS-covered subcontracts

acquired by a contractor or subcontractor.

9903.306 [Removed and Reserved]

11. Section 9903.306 is amended by removing and reserving the

section.

12. A new Subpart 9903.4 is proposed to be added to read as

follows:

Subpart 9903.4--Contractor Cost Accounting Practice Changes and

Noncompliances

9903.401 Applicability of Subpart.

9903.401-1 CAS-covered contracts and subcontracts.

9903.401-2 Educational Institutions.

9903.402 Purpose.

9903.402-1 Changes in Cost Accounting Practice.

9903.402-2 Failure to comply (Noncompliances) with an applicable

9903.403 Definitions.

9903.404 Materiality determination for making adjustment.

9903.405 Change in Cost Accounting Practice.

9903.405-1 General.

9903.405-2 Notification of Changes in Cost Accounting Practices.

9903.405-3 Determination of Adequacy and Compliance and Request for

General Dollar Magnitude (GDM).

9903.405-4 Contractor Cost Impact Submissions.

9903.406 Noncompliances.

9903.406-1 General Types of Noncompliances.

9903.406-2 Determination of Noncompliance.

9903.406-3 Cost Estimating Noncompliance.

9903.406-4 Cost Accumulation Noncompliance.

9903.406-5 Technical noncompliances.

9903.407 Illustrations.

9903.407-1 Change in Cost Accounting Practice--Illustrations.

9903.407-2 Compliance illustrations.

Subpart 9903.4--Contractor Cost Accounting Practice Changes and

Noncompliances

9903.401 Applicability of Subpart.

9903.401-1 CAS-covered contracts and subcontracts.

(a) Subpart 9903.4 rules and regulations are to be applied

uniformly to all CAS-covered contracts and subcontracts affected by a

compliant change in cost accounting practices and/or a noncompliant

cost accounting practice. By accepting the first CAS-covered contract

or subcontract that incorporates part 9903, which includes this subpart

9903.4, the contractor agrees to process noncompliance actions and

changes occurring after the award of that contract or subcontract in

accordance with this subpart for all existing CAS-covered contracts and

subcontracts affected by the change or noncompliance.

(b) To aid in meeting the requirements set forth in (a) for

processing noncompliance actions and changes in cost accounting

practices, the contractor shall maintain a system for identifying all

existing CAS-covered contracts and subcontracts, and their periods of

performance.

9903.401-2 Educational Institutions.

(a) Subpart 9903.4 rules and regulations apply to all CAS-covered

contracts and subcontracts awarded to educational institutions. Such

CAS-covered contracts and subcontracts incorporate part 9903 by

reference and contain specific terms and conditions that require

contract price or cost adjustments for material cost impacts

attributable to compliant changes in cost accounting practices and/or

to noncompliant practices. Subpart 9903.4 establishes procedures for

determining the required adjustments. Other Federally sponsored

agreements that do not contain a CAS contract clause are subject to

similar requirements under OMB Circular A-21, Cost Principles for

Educational Institutions, which incorporated the Board's Disclosure

Statement (Form CASB DS-2) and the CAS in part 9905. OMB Circular A-21

also requires adjustments for sponsored agreements affected by material

cost impacts due to changes in compliant cost accounting practices or

due to the application of a noncompliant practice used to estimate,

accumulate or report the costs of sponsored agreements.

(b) The CASB and OMB requirements were designed to be compatible

and are to be administered by the cognizant Federal agency official in

a uniform and cost effective manner. To the maximum extent feasible,

the cognizant Federal agency official should apply a single set of

procedures when obtaining cost impact data and when determining the

adjustments that may be required for individual CAS-covered contracts

and other Federally sponsored agreements affected by the same change or

noncompliance. The procedures applied to all Federally sponsored

agreements, including CAS-covered contacts and subcontracts, should be

consistent with subpart 9903.4 requirements and objectives.

(c) Waiver authority for compliant changes. When an educational

institution changes a compliant cost accounting practice that affects

CAS-covered contracts and other Federally sponsored agreements, the

cognizant Federal agency official may waive or modify, on a case-by-

case basis, applicable section 9903.405 requirements for affected CAS-

covered contracts and subcontracts if deemed necessary in order to

establish appropriate alternative procedures or methods for obtaining

cost impact data or determining contract price or cost adjustments in a

uniform manner for all Federally sponsored agreements. The basis for

the waiver and the alternate procedures utilized shall be documented in

a written determination. This waiver authority does not apply to the

notification requirements in 9903.405-2 or the adequacy and compliance

determinations required by 9903.405-3.

9903.402 Purpose.

9903.402-1 Changes in Cost Accounting Practice.

The contract clauses prescribed in 9903.201-4, Contract clauses,

set forth the requirements for changes in cost accounting practices

that a contractor may be required to make in order to comply with a

standard, modification or interpretation thereof that becomes

applicable to existing covered contracts for the first time due to the

subsequent award of a covered contract or may otherwise decide to make,

e.g., a change from an established or disclosed compliant cost

accounting practice to another compliant cost accounting practice.

Section 9903.405 establishes the specific actions to be taken by the

contracting parties, pursuant to such changes. Section 9903.405 also

establishes procedures for adjustments of contract amounts that are

materially

[[Page 49215]]

affected by changes in cost accounting practices, while not requiring

adjustment of all contracts that are affected by such changes.

9903.402-2 Failure to comply (Noncompliances) with an applicable Cost

Accounting Standard or to follow any cost accounting practice

consistently.

The contract clauses prescribed in 9903.201-4, Contract clauses,

require the contractor or subcontractor to agree to an adjustment of

the contract price or cost if the contractor or subcontractor fails to

comply with an applicable Cost Accounting Standard, modification or

interpretation thereto, or to follow any cost accounting practice

consistently, and such failure results or will result in any increased

cost paid, in the aggregate, by the United States, under CAS-covered

contracts and subcontracts. Section 9903.406 establishes the actions to

be taken by the contracting parties in order to correct the

noncompliant practices and/or effect recovery of any increased costs

paid as a result of the noncompliance.

9903.403 Definitions.

This section 9903.403 defines terms as used in this part 9903,

including the contract clauses prescribed at 9903.201-4.

Applicability date means (a) for required cost accounting practice

changes, the date on which a contractor is first required to accumulate

and report costs in accordance with an applicable Standard,

modification or interpretation thereto; and (b) for voluntary cost

accounting practice changes, the date on which a contractor begins to

use a new cost accounting practice for cost accumulation and reporting

purposes.

Contracts subject to adjustment means CAS-covered contracts and

subcontracts, including definitized contract options, that have

contract performance beyond the applicability date of a change in cost

accounting practice, and have their current contract prices based on a

previous cost accounting practice.

Cost impact means the increase or decrease in estimated or actual

costs allocable to a CAS-covered contract or subcontract due to a

compliant change in cost accounting practices, a noncompliance with a

cost accounting standard, or a failure to follow cost accounting

practices consistently.

Desirable change means a voluntary change to a contractor's

established or disclosed cost accounting practices that the cognizant

Federal agency official finds is desirable and not detrimental to the

Government.

Detailed cost impact proposal means a proposal that shows the cost

impact of a change in cost accounting practice for contracts subject to

adjustment that have an estimate-to-complete which exceeds a threshold

amount specified by the cognizant Federal agency official.

Effective date means:

(1) for compliance with Standards, modifications and

interpretations thereto, the date on which a contractor is first

required to estimate proposed contract costs in accordance with an

applicable standard, modification or interpretation, as specified by

the CAS Board; and

(2) for voluntary cost accounting practice changes, the date on

which a contractor begins using a new cost accounting practice for cost

estimating purposes.

General dollar magnitude estimate means an estimate of the

aggregate cost impact, by contract type, of a change in cost accounting

practice, on contracts subject to adjustment.

Increased costs due to a change in compliant cost accounting

practices means:

(1) For flexibly priced CAS-covered contracts, when a greater

amount of cost will be allocated to the contract than would have been

allocated to it had the contractor not changed its cost accounting

practices; and

(2) For firm fixed-price CAS-covered contracts, when the costs to

be allocated to the contract are less than the amount of costs that

would have been allocated had the contractor not changed its cost

accounting practice(s).

Increased costs due to a cost accumulation noncompliance means

increased costs resulting from a contractor's failure to comply with

applicable Cost Accounting Standards, modifications or interpretations

thereto, or to follow its disclosed or established cost accounting

practices consistently when accumulating costs under CAS-covered

contracts, and such failure results in a higher amount of costs

allocated to a flexibly-priced CAS-covered contract than would have

been allocated to the contract had the contractor complied with

applicable Standards, modifications or interpretations thereto, or

followed its cost accounting practices consistently.

Increased costs due to a cost estimating noncompliance means

increased costs resulting from a contractor's failure to comply with

applicable standards, modifications or interpretations thereto, or to

follow its disclosed or established cost accounting practices

consistently when estimating proposal costs for a contemplated contract

(or subcontracts), and such failure results in a higher contract price

than would have been negotiated had the contractor complied with

applicable standards, modifications or interpretations thereto, or

followed its cost accounting practices consistently.

Increased costs paid means the amount the Government actually pays,

in the aggregate, for increased costs resulting from compliant cost

accounting practice changes or noncompliant cost accounting practices

used to estimate or accumulate costs.

Netting process means the technique used to determine if action

needs to be taken to preclude the payment of increased costs for

voluntary accounting changes not deemed desirable, by comparing the net

higher allocation of costs by contract type to the net lower allocation

of costs to other contract types for contracts subject to adjustment.

Notification date means the date on which the contractor formally

notifies the cognizant Federal agency official of a planned change in

cost accounting practices.

Offset process means the combining of cost increases to one or more

affected contracts of a given type with cost decreases to one or more

affected contracts of the same type, for the purpose of mitigating

action that needs to be taken due to changes in cost accounting

practices.

Required change means a change in cost accounting practice that a

CAS-covered contractor is required to make in order to comply with

applicable standards, modifications or interpretations thereto, that

subsequently become applicable to an existing contract due to the

receipt of another CAS-covered contract or subcontract.

Technical noncompliance means a noncompliant cost accounting

practice that does not produce material increased costs paid by the

Government.

Voluntary change means a change in cost accounting practice from

one compliant practice to another that a contractor with CAS-covered

contracts elects to make.

9903.404 Materiality determination for making adjustment.

Contract price adjustments or actions to preclude or recover the

payment of increased costs resulting from changes in cost accounting

practice, or failure to comply with an applicable Cost Accounting

Standard, modification or interpretation thereto, or to follow any cost

accounting practice consistently, shall only be required if the amounts

are material. In determining materiality, the cognizant Federal agency

official shall

[[Page 49216]]

use the criteria specified in 9903.305. A cognizant Federal agency

official's determination of materiality will require judgment based on

individual circumstances and discussions between the contracting

parties. Such judgments, discussions and decisions should take place as

soon as practicable after receipt of contractor notification of a

change, or final determination of noncompliance, so as to lead to a

timely resolution of the cost impact action. The cognizant Federal

agency official may forego submission of a general dollar magnitude

estimate or a cost impact proposal, or to adjust contracts, if the

cognizant Federal agency official determines that the amount involved

is immaterial based on other available data.

9903.405 Changes in Cost Accounting Practice.

9903.405-1 General.

A CAS-covered contractor shall make changes to its established or

disclosed cost accounting practices when required in order to comply

with applicable Cost Accounting Standards, including any modification

and interpretations promulgated thereto. A contractor may change its

established cost accounting practices voluntarily, provided the

cognizant Federal agency official is notified of the change and the new

practice complies with applicable Cost Accounting Standards. CAS-

covered contracts and subcontracts affected by changes in cost

accounting practices that are either required to comply with Cost

Accounting Standards, modifications or interpretations thereto, or are

made voluntarily for which the co

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