# Cost Accounting Standards Board; Changes In Cost Accounting Practices

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URL: https://www.frixlaw.com/law-library/documents/fr%3A96-23409

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 18, 1996
- **Citation:** 61 FR 49196

## Text

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

[[Page 49201]]

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 acquir

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A96-23409. Public record. Not legal advice.