Cost Accounting Standards Board; Changes in Cost Accounting Practices

OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9903

Cost Accounting Standards Board; Changes in Cost Accounting

Practices

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement

Policy, OMB.

ACTION: Supplemental notice of proposed rulemaking.

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

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

supplemental round of comments on proposed amendments to the regulatory

provisions contained in chapter 99 of title 48. The proposed amendments

being promulgated today, when issued as a final rule, would revise the

current definitions, exceptions and illustrations governing changes in

cost accounting practices 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 of either a compliant change

in cost accounting practice or a noncompliant practice on covered

contract and subcontract prices and/or costs. For covered contracts and

subcontracts awarded to an educational institution, the proposed

subpart includes a waiver provision that would permit the establishment

of a uniform set of requirements for the notification and resolution of

compliant changes to established cost accounting practices and/or the

correction of noncompliant practices that affect covered contracts,

covered subcontracts and other Federally sponsored agreements.

Due to the complexity of the proposed coverage, the Board has

decided to request an additional round of public comments prior to the

promulgation of a final rule. In preparing this notice, the Board

considered the public comments received in response to the original

Notice of Proposed Rulemaking (NPRM) that was promulgated on September

18, 1996 (61 FR 49196). Potential commenters need not resubmit their

previously submitted concerns and suggestions. Specifically, the Board

desires comments on the revisions being proposed for the first time to

the extent such comments do not duplicate previously submitted

comments. The Board is also requesting additional comments to determine

to what extent, if any, there may be support for the establishment of

new provisions that would exempt certain cost accounting practice

changes from the Board's contract price and cost adjustment

requirements (For details, see Section F., Additional Public Comments).

DATES: Comments must be submitted in writing, by letter, and should be

received by September 12, 1997.

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(2). To facilitate the CASB's review

of your submitted comments, please include with your written comments a

three point five inch (3.5'') computer diskette copy of your comments

and denote the format used. A format that is compatible with

WordPerfect 6.1 or 5.1 is preferred. The submission of public comments

via the internet by ``e-mail'' will not satisfy the specified

requirement that public comments must be submitted in writing, by

letter, as receipt of a readable data file is not assured.

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

(SDP)).

(2) Issue an Advance Notice of Proposed Rulemaking (ANPRM).

(3) Issue a Notice of Proposed Rulemaking (NPRM).

(4) Promulgate a final rule.

This promulgation supplements previously completed step 3 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. The CASB requested public

comments from interested parties on this topic in a SDP published in

the Federal Register on April 9, 1993 (58 FR 18428) and in an ANPRM

published on April 25, 1995 (60 FR 20252). On September 18, 1996, the

CASB, in an NPRM published in the Federal Register (61 FR 49196),

proposed to amend the Board's current coverage governing changes in

cost accounting practices. That original NPRM, hereafter referred to as

the ``prior NPRM,'' included proposed amendments to conform the

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

``Modified'' coverage, specify certain Federal agency responsibilities,

and expand the criteria for desirable change determinations. A new

subpart was also proposed to delineate the actions to be taken by the

contracting parties when a contractor makes a compliant change to a

cost accounting practice or follows a noncompliant practice.

Public Comments

Of the thirty-five sets of public comments received in response to

the prior NPRM, nineteen were provided in a timely manner. The public

comments were received from contractors, professional associations,

Federal agencies, accounting organizations, educational institutions,

and other individuals. A number of commenters supported the proposed

amendments contained in the prior NPRM. Some did not. The more

significant comments and concerns expressed by commenters are

summarized below.

The contractor community concluded that the Board's existing

definitions of the terms ``cost accounting practice'' and ``change to a

cost accounting practice'' need not be amended because, in their view,

CAS 418 (at 48 CFR 9904.418) provides the Government with adequate

protection when disparate cost pools are combined or split-out. As

discussed below, under Section E, Public Comments, contractors

advocated that the Board's existing rules and regulations be retained

and applied based on their interpretations of what the existing rules

and regulations require. Their interpretations were, however, selective

and did not cover the entire spectrum of possibilities under the

Board's existing rules and regulations.

[[Page 37655]]

Contractors believe that the proposed definitional revisions (if

adopted) will increase the number of cost accounting practice changes

that would have to be administered as contrasted with the practices

currently followed in implementing the Board's existing rules.

Consequently, they opined that the overall administrative burden

imposed by the Board's rules will increase.

Some commenters believe that the Truth in Negotiations Act, the

Board's Standards, and novation agreements provide adequate protection

for organizational changes and resulting shifts in costs allocated to

CAS-covered contracts.

On the other hand, Federal commenters indicated that they were in

general agreement with, and supported, the Board's proposed amendments.

One agency commented that the revised language will assist contracting

parties in addressing both changes in cost accounting practices and the

cost impact process.

Both the contractor community and the Government agency

representatives generally supported the Board's proposal to establish a

new subpart to streamline the notification and cost impact process

associated with compliant cost accounting practice changes and

noncompliances.

After consideration of the public comments received, the Board

concluded that contractors and Federal officials continue to interpret

the Board's rules and regulations governing a change in cost accounting

practice differently. The Board disagrees with the view put forth by

several commenters that the Board's existing rules are adequate and

therefore there is no need for the Board to do anything as it can rely

on the ``protection'' provided by the existing provisions at 9904.418-

50(b). To resolve the described issues and concerns, the Board herein

proposes to amend chapter 99 as follows:

--Definitions: Revise the definitions, explanations and illustrations

governing cost accounting practice changes, for purposes of making it

explicit that a change in the methods and techniques used to accumulate

cost in indirect cost pools for allocation to final cost objectives

constitutes a change in cost accounting practice. The revisions will

make explicit that 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 constitutes a change in cost

accounting practice.

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

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

cost accounting practice.

--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. It would also establish the

process for the submission of cost impact data for compliant changes

and noncompliances, and the contract price and cost adjustment process

for resolving the resulting cost impacts on individual CAS-covered

contracts and subcontracts.

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, constructive technical comments

and editorial suggestions provided by the commenters. Many of the

expressed concerns and editorial suggestions aided the CASB's

deliberations and have been incorporated into the proposed amendments

being issued today.

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 supplemental 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 should be significantly reduced.

Although the added rules and regulations being 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 proposed

amendments, when promulgated as a final rule, are 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 benefits and administrative cost savings should also

evolve from the finalization of the Board's proposed expansion of the

criteria and coverage applicable to ``desirable changes,'' particularly

with respect to practice changes resulting from actions taken to

improve the efficiency and effectiveness of a contractor's operations.

The proposed coverage should encourage, not discourage, such

organizational changes in the future. 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 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

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 shall determine

that a contractor proposed change in cost accounting practice is

desirable and not detrimental. Subsection 9903.201-7 is revised to

specify certain cognizant Federal agency responsibilities for

administering CAS-covered contracts and subcontracts.

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 subsection 9903.302-1, Cost

Accounting Practice, the definition is amended to incorporate language

changes and to add clarifying guidance. Subsection 9903.302-2, Change

to a cost accounting practice, is revised to make explicit the types of

changes that are to be regarded as a change in cost accounting

practice. 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 have been included to provide

additional guidance regarding the revised definitions of the

[[Page 37656]]

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

practice.''

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

In subpart 9903.2, the proposed amendments, when promulgated as a

final rule, will:

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.

Also specified are the corrective actions required when a contractor's

estimated cost proposal was based on a noncompliant practice and/or

actual contract cost accumulations were based on a noncompliant

practice.

Provide criteria for determining when a contractor proposed change

in cost accounting practice shall be determined to be a desirable

change that is not detrimental to the Government.

Require Federal agencies, in accordance with agency procedures, 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 office or official responsible for administering

the agency's CAS-covered contracts and subcontracts.

--Delegate contracting authority to designated agency officials, as

required, for the negotiation of cost impact settlements and associated

contract price or cost accumulation adjustments.

--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.

In subpart 9903.3, proposed for inclusion in 9903.301, are two

definitions to clarify the terms ``Function'' and ``Intermediate cost

objective.'' The proposed amendments to 9903.302-1(c), allocation of

cost to cost objectives, make explicit the methods and techniques that

are considered a cost accounting practice, including the methods and

techniques used to accumulate the cost of specific activities.

Additional subparagraphs are proposed to clarify what is meant by the

selection and composition of cost pools and their 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.

Within 9903.302-3, a new introductory paragraph is proposed to be

added regarding the use of the illustrations that follow. Introductory

paragraphs (a), (b) and (c) are proposed to be 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

practices that are consistent with the revised definitions. The new

illustration at 9903.302-3(c)(3) illustrates that the use of a

different base for the allocation of indirect costs to final cost

objectives is a change in cost accounting practice. Additional

illustrations are 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.

A new subpart 9903.4, Contractor Cost Accounting Practice Changes

and Noncompliances, is proposed. It 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 additional section is also included to illustrate the

application of the proposed coverage. The proposed coverage is briefly

described below.

Section 9903.405, Changes in Cost Accounting Practices, includes

subsections on the following areas: contractor notification of changes

in cost accounting practices; Government determinations, approvals and

initiating the cost impact process; contractor cost impact submissions;

and negotiation and resolution of the cost impact action.

Section 9903.405 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 of detail required for a cost

impact submission and materiality thresholds for required contract

price and cost adjustments. To this end, it creates a three-step

sequential process which includes (1) An initial evaluation to

determine if the cost impact of the accounting change is obviously

immaterial, (2) the use of a general dollar magnitude (GDM) settlement

proposal, and if ultimately determined necessary, (3) the submission of

a detailed cost impact proposal for contracts exceeding Government

determined materiality thresholds. The procedure encourages settlement

of material cost impacts based on the contractor's GDM 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.

Section 9903.405 includes 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

provide that offsets of increased costs against decreased costs shall

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 by the Government as a result of

a voluntary change in cost accounting practice. It clarifies how

increased costs to the Government 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

[[Page 37657]]

the estimated aggregate higher allocation of costs on flexibly-priced

contracts subject to adjustment exceeds the estimated aggregate lower

allocation of costs on firm fixed-price contracts subject to adjustment

as a result of a voluntary change in accounting practice.

Section 9903.406, Noncompliances, provides detailed rules and

regulations for handling noncompliant actions. It outlines the

procedures to be followed when the parties agree or disagree on whether

a noncompliant condition exists. An example of an acceptable GDM

Settlement Proposal format that the contracting parties may use to

resolve a noncompliance is included. The proposed section contains

separate coverage on estimating practice noncompliances and cost

accumulation practice noncompliances to clarify the different actions,

particularly to recover increased costs and/or applicable interest on

increased costs paid, that need to be taken under these different

noncompliant conditions. It also provides procedures to be followed

when a noncompliant condition does not result in material increased

costs paid by the Government.

C. Paperwork Reduction Act

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

this proposal, because this proposal imposes 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.

D. Executive Order 12866 and the Regulatory Flexibility Act

The economic impact of this proposal on contractors and

subcontractors is 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 was developed after consideration of the public comments

received in response to the Board's NPRM that was published in the

Federal Register on September 18, 1996, 61 FR 49196, 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

Comment: Several contractor representatives advocated that the

proposed amendments making explicit that pool combinations and split-

outs are changes in cost accounting practices were not necessary

because:

--Only a change in the selection of an allocation base ``method'' used

to allocate pooled costs to cost objectives is a change in cost

accounting practice.

--As long as cost pools are homogeneous, in compliance with 9904.418,

before and after a pool is combined or split-out, then no change in

cost accounting practice has occurred.

--9904.418 provides adequate protection if material differences in the

amount of costs allocated to cost objectives result due to pool

combinations or split-outs.

--One commenter stated: ``* * * Pool combinations split-outs do not

necessarily result in a change to cost accounting practice. When pools

are combined or a single pool is split into two or more pools, we do

not agree that a change in cost accounting practice has necessarily

occurred. If the combined pools consist of the same functions and the

allocation bases are the same (e.g. direct labor dollars, * * *) then

the composition of the cost pools has not changed. Only the amounts are

different. The same is true for pool split outs. * * *''

--Regarding shifts in cost allocations to contracts, another commenter

expressed the belief that the Board's concerns are eliminated by

9904.418-50(b)(2). ``* * * if the splitting out or merging of pools and

bases results in material differences from that which existed prior to

the split-out or merger, the pools cannot be changed without risking a

418 noncompliance (which protects the Government) or without causing a

change in cost accounting practice (e.g., use of an allocation base of

labor dollars instead of labor hours), in which case the Government

interests are again protected.''

Response: For the reasons set forth below, the Board does not agree

with the commenters' interpretations and conclusions.

CAS 418 Does Not Explicitly Provide the Protection Alluded to by the

Commenters

Before concluding that the cited 9904.418 provisions provide

adequate protection, one must accept the commenters' unstated premise

that the contracting parties agree on how to determine whether combined

or spilt-out pools continue to have the same beneficial or causal

relationship to cost objectives or if material differences in the

amounts of cost allocated to individual cost objectives have resulted

after a pool combination or split-out. Such a premise, however, is not

self-evident. For example, some contractors have taken the position

that as long as the original pools have similar activities (purchasing

and purchasing, inspection and inspection, etc.), then the resulting

pool combination is still compliant with CAS 9904.418 and that no

change in cost accounting practice has occurred, irrespective of

disparate pool demographics and resulting shifts of indirect costs

allocated to cost objectives.

The Board is not persuaded that most contractors, in individual

cases, would agree with the commenters' inferences, i.e., that a

comparison of the difference between the costs allocated to individual

cost objectives utilizing the original pool configurations versus the

new combined pool or split-out pools is clearly required under CAS

9904.418 or, if a material difference occurs, that a noncompliant

condition requiring corrective action exists.

In order to be compliant with CAS 9904.418, both the original

pool(s) and resulting pool combinations or split-outs, must be

homogeneous. Essentially, the CAS 9904.418 criteria involves two

concepts: One requires that activities included in a pool have the same

or similar beneficial or causal relationship to cost objectives, and

the other requires that ``pooled'' costs allocated to cost objectives

not be materially different from the allocation that would result if

the cost of activities included in that pool were allocated separately.

However, the CAS 9904.418 criteria is not explicit regarding

comparisons of costs allocated to cost objectives based on different

groupings of similar activities, such as through the use of existing

pools (or pool) versus a new combined pool or split-out pools. The

cited 9904.418-50(b) language does not specify that the contracting

parties must determine if materially different cost allocations result

due to pool combinations or split-outs, nor are such comparisons

precluded. The commenters did not indicate how cost

[[Page 37658]]

allocation comparisons between the original pool(s) and the resultant

combined pool or split-out pools could be accomplished under CAS

9904.418 in order to provide the Government with sufficient protection

in cases where material differences in cost allocations to cost

objectives result. Thus, the Board disagrees with the commenters'

premise that CAS 9904.418 comparisons provide adequate protection in

the event of material differences in cost allocations to cost

objectives attributable to pool combinations or split-outs,

particularly since some commenters and contractors have argued that

combining pools with similar activities is compliant with CAS 9904.418,

and not a practice change, irrespective of the impact it may have on

cost allocations to cost objectives.

Adoption of the commenters' concept that the Government can achieve

equity in the event significant cost shifts occur after a pool

combination or spilt-out by simply pursuing a CAS 9904.418

noncompliance would most likely result in recurring controversies and

potential disputes, particularly if a noncompliance determination were

predicated on a material difference between cost allocations resulting

under the old and new pool configurations.

Administrative Cost Implications of Noncompliances

If the Government determined that a merged or split-out pool was

not in compliance with CAS 9904.418, the noncompliant cost accounting

practice would have to be corrected and the CAS contract price or cost

adjustment remedies for estimating and/or cost accumulation

noncompliances would apply. To correct the noncompliance, the

contractor would have to replace the newly established cost accounting

practice with a compliant practice, by probably changing back to the

original practice. It is not self-evident how the commenters' suggested

alternative ``noncompliance approach'' would result in lower

administrative costs and motivate contractors to implement economy and

efficiency changes unless one were to conclude that CAS 9904.418

provides little, if any, protection for shifts in costs allocated to

cost objectives due to pool mergers and or split-outs.

Cost Accounting Practice Definition Considerations

Compliance with CAS 9904.418 before and after a pool combination or

split out does not in itself mean that there was no change in the cost

accounting practices used to accumulate pooled costs and allocation

base activities. When indirect cost pools are combined or split out,

the costs of the same ongoing activities (functions) are grouped and

accumulated differently. The intermediate cost objectives used as the

cost accumulation points in the contractor's cost accounting system may

change, e.g., intermediate cost objectives for similar functions may be

combined or split-out. There is a change in the number of pools used to

accumulate the indirect costs of specific activities for the allocation

of cost to final cost objectives. Although the pools are compliant with

CAS 9904.418, before and after the change, the methods and techniques

used to accumulate costs in intermediate cost objectives, the selection

and composition of the pool(s) and the composition of the allocation

base(s) have changed. It is precisely these changes in the pattern of

accumulating the costs of indirect functions and activities and the

accumulation of base activities that were addressed in the proposed

revisions to the definition of a ``cost accounting practice''.

Potential CAS 9904.401 Noncompliances

If the Government relied exclusively on CAS 9904.418, as suggested,

contractors might erroneously assume that indirect costs can be

estimated and accumulated differently. For example, a contractor might

estimate indirect costs in contract cost proposals based on the use of

two pools and, after award, accumulate actual costs based on the use of

one combined pool. This would, however, violate the consistency and

comparability objectives and requirements of 9904.401.

The CAS 9904.401 provision at 9904.401-50(a)(2) provides that ``* *

* the cost accounting practices used in estimating costs in pricing a

proposal and in accumulating and reporting costs on the resulting

contract shall be consistent with respect to * * * (2) The indirect

cost pools to which each element or function of cost is charged or

proposed to be charged * * *'' Therefore it could be argued that if

pool combinations and split-outs are not treated as compliant changes

in cost accounting practices, a contractor could never combine or

split-out a pool because that would result in a CAS 9904.401

noncompliance.

That line of reasoning is, however, not what the current CAS

contract clause provisions stipulate for compliant changes. The Board's

rules clearly permit contractors to combine or split-out pools as a

voluntary change from one compliant practice to another compliant

practice. However, to remedy any material shifts in costs allocated to

cost objectives resulting from such compliant changes, the contractor

is specifically required to agree to contract price and cost

adjustments under the CAS contract clauses.

In Brief

Under the Board's existing rules, pool combinations and split-outs

resulting in cost accounting practice changes are permitted as

compliant changes to established cost accounting practices. However,

the practice change is subject to the Board's notification and

disclosure requirements, and the resulting cost impact of the practice

change on CAS-covered contracts is subject to the applicable CAS

contract price and cost adjustment provisions.

The commenters' recommendations avoid resolution of the primary

issue, i.e., what constitutes a change in cost accounting practice? It

only moves the issues concerning pool combinations and split-outs from

disagreements over whether a change in cost accounting practice has

occurred to disagreements over whether there is a CAS 9904.401 or CAS

9904.418 noncompliance. It does not resolve the underlying issue.

The argument that pool combinations and split-outs should not be

considered changes in cost accounting practice that are subject to the

Board's rules for contract price and cost adjustment, as suggested by

the commenters, appears inconsistent with the resulting actions

necessitated by such actions. For example:

--New forecasted indirect cost rate agreements and/or billing rates

need to be established.

--The contractor's Disclosure Statement, if required, must be updated

to reflect the selection and composition of the new combined or split-

out pools and the composition of each new pool's allocation base.

Under the Board's proposed approach in this NPRM, if the original

pools were compliant with CAS 9904.418 and the new combined pool or

split-out pools is/are CAS 9904.418 compliant, then the resulting

changes in the methods and techniques used to accumulate the costs of

indirect activities and allocation base data, the selection and

composition of the pool(s) and the composition of the allocation

base(s), can be treated as a compliant change in cost accounting

practice. The outcome of the proposed approach is more predictable than

the commenters' suggested approach which could result in

noncompliances. The administrative costs and financial risks to

contractors associated with compliant changes should be less than the

[[Page 37659]]

administrative costs and financial risks associated with contractor

corrective actions that would be required if a practice change is

implemented and it is subsequently determined to be noncompliant.

Accordingly, the commenters' suggestions that the amendments

proposed in the prior NPRM not be promulgated were not adopted.

Comment: Several commenters stated that the proposed language

concerning ``cost accumulation'' was confusing and that cost

accumulation was not a cost accounting practice but the result of the

application of a contractor's cost accounting practices.

Response: The proposed coverage was intended to make it explicit

that the term ``cost accounting practice'' includes the methods and

techniques used to accumulate costs of specific activities in specific

intermediate cost objectives and to accumulate the costs of specific

activities, or groups of activities, in specific indirect cost pools

for subsequent allocation to intermediate and/or final cost objectives.

This concept, although questioned by several commenters, is consistent

with 9904.401-50(a)(2) which specifically requires that:

``(a) * * * The standard allows grouping of homogeneous costs in

order to cover those cases where it is not practicable to estimate

contract costs by individual cost element or function. However,

costs estimated for proposal purposes shall be presented in such a

manner and in such detail that any significant cost can be compared

with the actual cost accumulated and reported therefor. In any event

the cost accounting practices used in estimating costs in pricing a

proposal and in accumulating and reporting costs on the resulting

contract shall be consistent with respect to `` * * * (2) The

indirect cost pools to which each element or function of cost is

charged or proposed to be charged * * * ''

Since commenters opined that the proposed language may be

interpreted differently, the Board has essentially retained the

existing language at 9903.302-1(c) that cited `` * * * methods and

techniques used to accumulate costs * * * '' in an attempt to mitigate

the commenters' expressed concerns and to facilitate implementation of

the amendments being proposed today. The Board wishes to emphasize,

however, that the proposed coverage contained in this NPRM is not

intended to alter the meaning of any Standard in parts 9904 or 9905 of

the Board's regulations. Rather, the intent is to facilitate an

understanding that the Board's definition of a cost accounting

practice, in part 9903, includes the methods and techniques used to

accumulate cost in specific intermediate cost objectives and the

selection of the number of pools established to accumulate the costs of

specific functions (or activities). Specifically, that the number of

pools established to accumulate the costs of specific activities, or

groups of activities, included therein, is a method or technique used

to allocate indirect costs, i.e., a cost accounting practice.

Accordingly, the phrase ``selection * * * of cost pools'' was added to

the definition of a cost accounting practice (see 9903.302-

1(c)(1)(iii)). Where deemed appropriate, the illustrations proposed in

the prior NPRM for inclusion in section 9903.302-3 were revised to

further clarify these cost accounting practices.

Comment: Several commenters opined that existing regulations

provide the Government with adequate protection against significant

cost shifts resulting from pool combinations and split-outs. One

commenter stated: `` * * * The Truth in Negotiations Act requires full

disclosure of contractor decisions and plans (regarding organizational

changes) prior to contract award. The causal beneficial relationship

and homogeneity requirements of the Standards require that major

elements of indirect pools have the same or similar relationship to

benefiting cost objectives. Novation agreements prevent improper cost

increases to the Government * * * ''

Response: The referenced laws and regulations serve different

purposes.

The Truth in Negotiations Act (TINA) only applies to the specific

data that the contractor identifies and certifies as being accurate,

complete and current as of a specified date. A signed certification is

normally obtained prior to contract award when contract negotiations

are completed or agreement on contract price occurs. After contract

award, TINA provides no protection for decisions or plans made to

change the cost accounting practices used to accumulate the costs of

contract performance. Also, TINA provides no protection for contracts

priced using noncompliant practices. The Board's rules and Standards

do. Applicable CAS contract clauses require that the same cost

accounting practices used to develop contract cost proposal estimates

be applied consistently when accumulating the costs of contract

performance, after contract award. Changes in compliant practices are

permitted but affected contract prices and costs are subject to

adjustment for the cost impact of the change in practice. TINA and CAS

are completely independent concepts that have entirely different

applications and purposes.

As discussed in a prior comment, 9904.418, in and of itself, does

not address all aspects relative to changes in cost accounting

practices resulting from pool combinations or split-outs.

Novation agreements do not address a contractor's cost increases or

decreases due to changes in cost accounting practices. Novation

agreements are used only when a contract is transferred or assigned

from the original performing entity to a subsequent performing entity

(``successor-in-interest''). Novation agreements limit the cost to the

Government (amount paid by the Government) by precluding increased

contract costs for the novated contracts. The novation agreement

enables the Government to disallow any higher level of costs incurred

by the successor in interest.

Comment: One commenter suggested that the words ``at specified

locations'' proposed for 9903.302-1(c) (2) and (3) be replaced with

``for a particular segment, home office, or business unit'' because

contractors may not accumulate costs by location.

Response: The suggestion was adopted.

Comment: Several commenters suggested that certain language in

proposed 9903.302-1(c) (1), (2) and (3) be deleted or conformed with

the language in the Board's rules and applicable Standards.

Response: To the extent deemed appropriate, the Board has revised

the proposed language for 9903.302-1(c) for improved conformity with

the language contained in the Board's rules and applicable Standards.

Comment: In reading the prior NPRM preamble comments at 61 FR

49199, some commenters concluded that to move work from one segment to

another is deemed a cost accounting practice change by the Board. One

commenter stated the prior NPRM implies that a contractor cannot decide

to move contract work to another segment without generating a cost

accounting practice change.

Response: If there is a change in the place of performance for some

part of the contract work, the costs estimated to be performed in-house

by the proposing segment will not be accumulated in the proposing

segment's cost accounting records under the same elements of cost as

proposed, e.g., as direct material, labor and allocable overhead cost.

Instead the allocable contract costs will still be accumulated by the

same performing segment, but as a different cost element, e.g., intra-

company transfer cost, in accordance with the segment's established

cost accounting practices. Such intra-company

[[Page 37660]]

``purchases'' or ``orders'' that result in the accumulation of costs

under different cost elements by the proposing segment do not

constitute a change to that segment's established cost accounting

practices.

However, the prior NPRM also stated that if the responsibility for

performing a contract is transferred in its entirety from one segment

to another segment, that ``neither segment's cost accounting practices

may have changed * * * Such changes in the place of contract

performance are subject to applicable procurement regulations * * * ''

In such cases, the costs of contract performance estimated in

accordance with the original segment's cost accounting practices would

not be incurred, accumulated and reported by the original proposing

segment. Instead, a different segment, i.e., the acquiring segment,

would accumulate the costs of contract performance in accordance with

its established cost accounting practices. The contract transfer does

not constitute a change to either segments' established cost accounting

practices. Such contract transfers in place of performance are not

specifically addressed under the Board's regulations which presume that

contracts and subcontracts will be performed by the segment or segments

designated in the contractor's proposal. Resolution of contract

transfers resulting in changes in the place of contract performance

remain subject to applicable procurement regulations.

Comment: One commenter stated that the prior NPRM appears

inconsistent. Specifically: `` * * * the NPRM states that a change in

the composition of a cost pool or allocation base represents an

accounting practice change. However, performing an additional contract

within that cost pool and allocation base, or completing an existing

contract does not represent an accounting practice change. Similarly,

the transfer of an ongoing G&A function, such as Marketing, from a Home

Office to a Business Segment, is treated in the NPRM as a change but

transfers of employees are not * * * '' Another commenter stated that

under the prior NPRM, composition of the pool would be defined as a

volume change.

Response: There is no inconsistency.

The Board's underlying concept is that the indirect cost of

performing a specific function (or activity) must be accumulated in the

same intermediate cost objective and included in the same indirect cost

pool when a contractor estimates and accumulates costs. An entire

function cannot be transferred from one indirect cost pool to another

indirect cost pool after award unless the contractor processes a

compliant change in cost accounting practice. Otherwise, the transfer

is not in compliance with the requirements of 9904.401 or 9905.501, as

applicable.

An individual employee can change duties to support different

functions and be transferred from function to function or from pool to

pool. Such employee transfers are not a change in cost accounting

practice as long as the costs of the ongoing functions or activities

continue to be accumulated in the same intermediate cost objectives and

the intermediate cost objectives remain in the same indirect cost

pools.

Volume changes (e.g., adding contract work or completing work) are

not a cost accounting practice change. There is no inconsistency

because the addition of new work and completion of existing work is

considered in the contractor's forecasts when direct and indirect cost

levels are estimated to support the contractor's forecasted indirect

cost rates that are used to estimate contract costs.

Comment: A commenter concluded that the Government may deem

equipment transfers to be a change in cost accounting practice.

Response: Presumably, the commenter is referring to the physical

transfer of equipment whose costs are depreciated and recovered as an

indirect cost. A change in cost accounting practice would not result if

the physical transfer of equipment occurs because the equipment will be

used to support a different function or activity. The Board's

assumption is that the original function and the different function did

not move, i.e., the indirect costs of each function are included in the

same indirect cost pool or pools before and after the transfer. Only

the equipment and its depreciation charge moved because the equipment

is now used to support the different function. Therefore, the described

transfer of equipment is similar to the employee transfer discussed

above and the ``employee transfer'' illustration that is proposed to be

added as ``not a change in cost accounting practice'' (see 9903.302-

4(h) in this NPRM).

Change to a Cost Accounting Practice--Exceptions

Comment: Regarding the proposed revisions for 9903.302-2(b)(1), one

commenter recommended that the undefined term ``company-wide'' proposed

in the prior NPRM be replaced with the term ``home office''.

Response: The commenter's recommendation was adopted. In addition,

the last sentence was revised to clarify that the exception does not

apply to transfers of ongoing functions between segments as well as to

transfers of ongoing functions between pools within a segment.

Comment: Regarding the proposed addition of a new exception at

9903.302-2(b)(4), commenters expressed concern that the rationale for

the proposed exception was not clear, that the proposed language was

not clear and/or that certain technical aspects required expansion.

Another opined that the cost impact of the change would be zero and

that there was no benefit from this exception. A Federal agency

commented that the described exception is a cost accounting practice

change that should be disclosed to the Government and treated as an

``exemption'' from the cost impact and contract price and cost

adjustment process.

Response: The unintended confusion and concerns generated by this

proposed exception have been interpreted by the Board to mean that the

anticipated costs of implementation associated with this proposed

exception could far exceed the potential benefits envisioned by the

Board. Accordingly, the Board is not proceeding with the previously

proposed exception in this supplemental NPRM. Consequently, when a

contractor makes the types of changes that were proposed in the prior

NPRM as exceptions to the Board's definition of a ``change to a cost

accounting practice,'' such changes shall not be treated as exceptions

to the Board's rules. Instead, the determination of whether a change in

cost accounting practice has or has not occurred shall continue to be

made in accordance with the Board's promulgated definitions of the

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

practice.''

Exemptions From Contract Price And Cost Adjustment Proposed in the

Prior NPRM That Are Withdrawn

9903.302-2(c)(1)--Physical Changes To Improve Management Efficiency and

Effectiveness

Comments: Contractors conceptually supported the proposed exemption

for improved effectiveness and efficiencies but recommended significant

language changes and questioned the level of detail needed to obtain

the exemption. The concern was that the administrative cost of

requesting the exemption would approximate the same levels of cost

needed to prepare and support a cost impact proposal. Examples of

recommendations were that:

--Detailed guidance be developed on what constitutes ``improved

[[Page 37661]]

management efficiency and effectiveness,'' to eliminate the potential

requirement of a cost impact as measurable proof of such efficiency and

effectiveness.

--The criteria should not be limited to just ``* * * changes in cost

accumulation practices * * *'' It should apply to all applicable cases.

The term ``physical realignment'' should be clarified.

Other commenters did not support the proposed exemption.

One respondent recommended ``* * * deletion of the (c)(1) exemption

since it does not support consistency, the primary objective of the

Cost Accounting Standards. It also does not support the objective of

fairness since the contractor's interests are placed above the

interests of the government with no legal recourse. Historically at

this contractor location, the contract price and cost adjustment

process has not hindered contractor accounting change decisions that

result in more economical business operations . . . Further, the

current exemption criterion is too broad, does not appear consistent

with the prefatory response requiring significant physical and cost

level changes, and promotes inconsistent treatment of organizational

accounting changes. The tremendous resources expended to enhance the

Cost Accounting Standards, especially in the cost impact area, will be

neutralized by this one sentence exemption, if implemented.

Contractor's will be allowed to submit nearly all future accounting

changes under this exemption while the improved CAS cost impact

regulations may rarely ever be used . . .''

A Federal agency representative recommended deletion of the

exemption proposed in the prior NPRM and reinstatement of the desirable

change criteria that was proposed in the ANPRM. Another Federal agency

official recommended that the proposed exemption be revised to ``* * *

state that in order for a change in cost accumulation practice to be

exempt from a contract price and cost adjustment, it must result from

restructuring activities and the contractor must notify the cognizant

Federal agency official of the change prior to beginning the

restructuring activities or by some other mutually agreeable date.''

Response: The contractor community indicated that the

administrative costs associated with the submission of data and other

efforts needed to support a request for the proposed exemption may

exceed the administrative costs associated with the cost impact

process. If the request for exemption were denied, the contractor would

still be subject to potential contract price and cost adjustment and

the CAS cost impact process. The contractor community advocated

expansion of the proposed cost accumulation exemption criteria (which

was designed to mitigate the cost impact process associated with pool

combinations and split-outs) to include all cost accounting practice

changes. Additionally, the contractor community advocated that the

criteria for desirable changes also be expanded to include changes made

to improve the economy and efficiency of the contractor's operations.

The Federal agency's recommendation that only a change in cost

accounting practice resulting from restructuring activities be

exempted, implies that a contractor's exemption request would not be

approved unless the restructuring activities are determined to result

in savings in accordance with that agency's procedures. The Board does

not believe that CASB rules and agency procurement regulations should

be so inextricably interwined.

In order to arrive at an equitable balance between the previously

proposed ``exemption'' provision and the equitable adjustment

provisions applicable to ``desirable changes,'' the Board, in this

supplemental NPRM, proposes to replace the previously proposed

exemption coverage with expanded ``desirable change'' coverage as

described below, under the heading ``Desirable Changes.'' The Board

believes such expanded ``desirable change criteria'' when finalized in

the Board's regulations will result in greater use of that provision,

and that it would not discourage contractor's from implementing economy

and efficiency measures that result in cost accounting practice

changes. The approach being proposed in this NPRM should also minimize

the costs required to administer compliant changes made to a

contractor's cost accounting practices.

Additional comments relative to this matter are requested under

Section F.

9903.302-2(c)(2)--Changes in the Selection and Composition of Overhead

and General and Administrative Expense Pools when Specified Criteria

are Met

Comment: Several contractor and two Federal agency representatives

recommended deletion of this previously proposed exemption. One

commenter supported the Board's proposal. Another recommended that the

proposed one percent corridor be expanded.

Response: The proposed exemption was intended to allow contractors

to combine or split-out pools that included the same or similar types

of activities with common beneficial or causal characteristics;

provided, the resulting indirect cost allocations to final cost

objectives would closely approximate the indirect cost allocations that

would have resulted had the pool combination or split-out not been

made. In such circumstances, contractors would provide notification of

the change in cost accounting practice, demonstrate that the resulting

indirect cost rates are expected to fall within a prescribed corridor,

but they would not be required to incur the administrative costs

associated with the cost impact process. The proposal was not supported

by either the contractor community or by Federal representatives. The

Board has, therefore, withdrawn this proposed exemption from the

supplemental NPRM being issued today.

Additional comments relative to this matter are requested under

Section F.

Illustrations--Changes in cost accounting practices

Comment: Commenters suggested certain editorial changes to the

illustration proposed at 9903.302-3(c)(4) in the prior NPRM. One

commenter stated that the illustration did not represent a change in

cost accounting practice since the accounting method or technique had

not changed.

Response: The proposed illustration is consistent with the Board's

definitions of the terms ``cost accounting practice'' and ``change to a

cost accounting practice.'' The illustration was revised to incorporate

suggested editorial changes and to emphasize how the methods and

techniques had changed with respect to cost accumulation, selection and

composition of the pool, and composition of the allocation base.

Comment: In regard to the illustrations proposed at 9903.302-3(c)

(5) and (6) in the prior NPRM, one commenter disagreed that the

illustrations depicted changes to cost accounting practices and

recommended that they be deleted. Others inquired regarding the

application of the Board's proposed exemptions to the illustrated

practice change.

Response: The purpose of the proposed illustrations was to provide

examples of practice changes subject to the proposed exemptions from

the contract price and cost adjustment. Since the proposed exemptions

have

[[Page 37662]]

been withdrawn, the proposed illustrations have also been withdrawn.

Comment: A commenter recommended deletion of the illustration

proposed at 9903.302-3(c)(9) in the prior NPRM because ``* * * the

method or technique has not changed * * *'' Another indicated that the

illustration represented a change in cost accounting practice because

there has been a ``* * * a change in the allocation base * * *'' but

that the illustration was confusing in that the change was referred to

as ``* * * a change in the selection of the allocation base activity *

* * perhaps if the word ``activity'' is deleted, users will not have to

interpret what was intended.''

Response: The illustrated transfer of the entire inspection

function from one pool to another pool is a change in cost accounting

practice because several of the methods or techniques listed as

examples in the definition of the term ``cost accounting practice''

have changed. The proposed illustration was revised to more precisely

cite the methods or techniques that changed (see 9903.302-3(c)(7)).

Comment: The illustration proposed at 9903.302-3(c)(10) in the

prior NPRM introduces the concept of contract practices versus

contractor practices. Extending the voluntary change concepts to

contract practices that change because of a merger or acquisition is

inappropriate. One commenter did not agree that the depicted pool

split-out was a change in cost accounting practice.

Response: The purpose of the proposed illustration is to make

explicit that a cost accounting practice change made to an acquired

segment's established cost accounting practices by an acquiring

contractor after the effective date of a merger or acquisition is a

change to that segment's established cost accounting practices with

regard to the acquired CAS-covered contracts that will be completed by

the acquired segment. The Board agrees with the commenter that the

Board's rules governing changes to a cost accounting practice apply to

the contractor's cost accounting practices established for the

performing segment or business unit, and that separate practices are

not to be established for individual contracts. However, the Board's

rules are applied to individual contracts through the incorporation of

an applicable CAS contract clause which requires the contractor to

comply with applicable Standards and to consistently follow the

contractor's established (or if required, disclosed) cost accounting

practices when accumulating and reporting contract performance cost

data. Thus, when the acquiring contractor elects to change the cost

accounting practices previously used by the acquired segment to

estimate and accumulate contract costs, a cost accounting practice

change occurs for the acquired CAS-covered contracts affected by the

practice change, and such covered contracts are subject to potential

contract price and cost adjustment. The proposed illustration was

modified to reflect that the contracting parties agreed that a change

to a cost accounting practice had occurred (see 9903.302-3(c)(8)).

Comment: The use of the words ``identified'' in the illustration

proposed to be added as 9903.302-4(i) in the prior NPRM is not clear.

Response: The illustration, promulgated in this proposed rule at

9903.302-4(h), was revised to clarify that the transfer of an employee

from one intermediate cost objective to a different intermediate cost

objective does not result in a change to a cost accounting practice

when the costs of the ongoing functions or activities continue to be

accumulated consistently in the same intermediate cost objectives and

that the intermediate cost objectives remain in the same indirect cost

pools, before and after the employee is transferred. The words

``identified'' were deleted where it appeared.

Comment: With respect to the illustration proposed to be added as

9903.302-4(j) in the prior NPRM, the increase in the base for the

allocation of home office costs resulting from the creation of a new

segment is not an ``initial adoption'' of a cost accounting practice.

Response: The initial allocation of home office costs to a newly

created segment constitutes the initial adoption of a cost accounting

practice for that entity. If the same established practices used for

existing segments are applied (e.g., volume increase in base) or if a

special or different allocation method or technique is established to

reflect the beneficial or causal relationship of the home office costs

to the new segment, a cost accounting practice is established for the

first time, and, if required, must be disclosed. However, such first

time adoptions are treated as an exception from the definition of a

change to a cost accounting practice in order not to trigger the CAS

contract price and cost adjustment provisions. The proposed

illustration, promulgated in this rule at 9903.302-4(i), was revised to

make explicit that the described ``increase in the base for the

allocation of home office costs'' is a first time adoption of a cost

accounting practice, i.e., an exception to the definition of a change

to a cost accounting practice.

Contract Clauses

Comment: A commenter recommended deletion of the proposed words

``or will result'' in paragraph (a)(5), entitled ``Noncompliance,'' of

the proposed contract clause because the commenter believed that the

meaning and resulting application of the phrase was unclear. The

commenter inquired: Does it apply to increased costs under the

contracts that have been awarded by the date of noncompliance or is a

projection based on future awards required?

Response: The intent of the phrase ``will result'' is to require

consideration of the amounts remaining to be paid under existing CAS-

covered contracts affected by a noncompliant cost accounting practice

that was used to estimate contract costs. For example, assume that a

noncompliant practice was used to estimate contract costs for a fixed-

price contract which resulted in the negotiation of an overstated

price. After award, at the time the noncompliance is being resolved,

the affected fixed-price contract is partially complete with units of

production remaining to be billed at the negotiated contract unit

price. In such cases, increased costs paid occurred when the Government

paid for the units that were completed and delivered. Increased costs

paid by the Government would also result in the future as the

contractor receives payment for the remaining contract items when they

are completed and delivered. Resolution of estimating noncompliances,

in the form of required contract price adjustments for affected cost-

type and/or fixed-price contracts, need not wait until the Government

actually pays the increased costs included in the negotiated contract

price. The proposed provision was retained.

Comment: A commenter recommended that the ``access to records''

paragraph be revised by deleting the proposed coverage describing the

type and form of records covered. The commenter expressed concern that

the proposed language regarding providing copies of computer software

may involve third party agreements.

Response: The previously proposed references to ``software'' have

been deleted from the revised contract clause language being proposed

today.

Comment: A Federal agency recommended that the contract clause at

9903.201-4(d), applicable to negotiated contracts awarded to a United

Kingdom contractor, and 9903.201-4(e) Cost

[[Page 37663]]

Accounting Standards--Educational Institutions, be modified for

consistency with the amendments proposed for the contract clauses at

9903.201-4(a), Full Coverage, and 9903.201-4(c), Modified Coverage.

Response: Clause (d), for United Kingdom contractors, is quite

different from the other referenced provisions. In addition, it is both

brief and simple. In the absence of any identified implementation

problems, that clause does not appear to be in need of modification.

The clause for educational institutions was promulgated on November 8,

1994. In response to one related ANPRM comment, the Board asked in the

prior NPRM (61 FR 49206) for further comments on the desirability and

support for making such revisions. Only this one comment was received.

Accordingly, the Board believes that such revision is not currently

warranted.

Desirable Changes

Comment: Several contractors urged the Board to retain the ANPRM

provisions that included economy and efficiency changes as examples of

desirable changes. A professional association recommended: ``* * * make

it clear that organizational changes intended to produce cost savings

are desirable and should be administered using equitable adjustment

procedures.''

Response: The ANPRM criteria for desirable changes was deleted when

the NPRM exemption for economy and efficiency changes was proposed. The

Board concluded that performing contractors and Federal officials

should not be able to choose which of the two types of coverage should

be applied to changes in cost accounting practices that result from

contractor actions taken to improve the economy and efficiency of

operations. In practice, such provisions could result in endless

debates and produce potential disputes between the contracting parties.

Accordingly, the ANPRM desirable change criteria citing economies and

efficiencies were not incorporated in the prior NPRM issued on

September 18, 1996.

As discussed under the heading ``Exemptions From Contract Price And

Cost Adjustment Proposed in the Prior NPRM are Withdrawn,'' a number of

commenters expressed concern that the proposed exemptions, while

appreciated for their fairness, would increase rather than decrease

contract administrative costs. Some also believed that the exemptions

should be expanded and that more detailed procedural provisions were

needed. After considering the comments received, the Board concluded

that the proposed ANPRM economy and efficiency criteria provide for an

equitable resolution process that can be reasonably implemented, in a

fairly predictable manner, with a minimum of administrative effort.

Further, the ANPRM approach was generally supported by contractors and

a commenting Federal official. Accordingly, the Board proposes to adopt

the commenters' recommendations to reinstate the ANPRM ``economy and

efficiency'' criteria for ``desirable'' changes (and to also delete the

previously proposed ``exemptions'') in this supplemental NPRM.

Additionally, the previously proposed permissive use of the ANPRM

economy and efficiency criteria was replaced by mandatory language that

states a change in cost accounting practice ``shall'' be deemed a

desirable change if a listed criterion is met.

Specific comments relative to this proposed provision are requested

under Section F.

Comment: Clarify that the proposed criteria are not conjunctive by

adding the phrase ``one or more of'' after ``not limited to.''

Response: The proposed criteria are not conjunctive. The

recommended phrase was added at 9903.201-6(b) to clarify that only one

criterion needs to be met for a practice change to be deemed a

desirable change.

Comment: Several commenters from the contractor community again

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 continues to disagree with the commenters. As

stated in the prior NPRM, 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 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: Several commenters recommended deletion or revision of the

proposed criteria at 9903.201-6(b)(1) which provides that if the

Government determines that a change in cost accounting practice is

``necessary'' in order for the contractor to remain in compliance with

an applicable Standard, the practice change shall be deemed to be a

``desirable'' change. The commenters believed such changes are

``required'' changes that are subject to equitable adjustments under

the CAS contract clause provisions for required changes. Furthermore,

contractors should not be required to request a second determination

that a change ``required to remain in compliance'' be deemed a

desirable change.

Response: As stated in the prior NPRM preamble comments (61 FR

49202), the CAS contract clause provisions that refer to a ``required''

change only pertain 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 ``desirable'' changes, 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.

When a determination is made that a practice change was

``necessary,'' it is expected that the cognizant Federal

[[Page 37664]]

agency will treat that determination as the equivalent of a desirable

change determination. No further paperwork is envisioned by the Board

in such cases. If not determined ``necessary'' and the practice change

is not otherwise considered to be a desirable change, the compliant

practice change would be a voluntary change that is subject to the ``no

increased cost to the Government'' provisions of affected CAS-covered

contracts and subcontracts.

To distinguish subsequent changes in cost accounting practices from

first time ``required'' practice changes, the Board has retained the

proposed criteria, including the proposed designation of ``necessary''

in the rule being proposed today. The proposed procedures at 9903.405-

2(d) for requesting that a voluntary change be considered a desirable

change were modified to also require the submission of data

demonstrating that a change was ``necessary'' to remain in compliance

with an applicable Standard.

Comment: Two Federal commenters objected to the criteria proposed

at 9903.201-6(b)(2) in the prior NPRM. One stated that the provision is

subject to misinterpretation, that contractors are responsible for

initiating voluntary changes and that the Government only determines if

a practice change is adequate and compliant. The other commenter also

believes it is inappropriate for the Government to make recommendations

to contractors to change an accounting practice.

Response: In response to the ANPRM, 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, since they apparently had experienced such

conditions. 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. In the prior

NPRM, a requirement for a written Government recommendation was added

to preclude contractor actions or misinterpretations of conversational

exchanges with Government representatives.

The Board has reconsidered this matter and agrees with the Federal

commenters that the Government should not recommend specific cost

accounting practices to be applied by contractors. Rather, authorized

Government representatives should limit their oversight activities to

determining whether a contractor's proposed or established cost

accounting practices are in compliance with the Board's applicable

Standards. Accordingly, the referenced provision has been deleted from

this supplemental NPRM.

Cognizant Federal Agency Responsibilities

Comment: Representatives from two Federal agencies expressed a

number of concerns regarding proposed subsection 9903.201-7 and one

recommended deletion of proposed paragraph (d) therein. The primary

concerns were that the proposed amendments may conflict or duplicate

existing and/or future provisions in Federal Acquisition Regulation

(FAR) subparts 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 continues to recognize that responsibility for

administering CAS-covered contracts rests with the various Federal

agencies, including civilian agencies that are subject to CASB rules

and regulations. The Board, in reviewing how the CAS cost impact

process was conducted 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 by the contracting

parties. This supplemental NPRM proposes a precise yet flexible

approach for the submission of cost impact data due to compliant

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.

However, the Board also recognizes that certain implementing

administrative policies and procedures need to be established in

applicable agency regulations. Accordingly, the Board has modified the

previously proposed provisions to provide agencies with more

flexibility in developing applicable implementing policies and

procedures. Proposed paragraph (d) has been significantly modified in

this supplemental NPRM. It was retitled to reflect its applicability to

just the processing of contractor changes in cost accounting practices.

The proposed language was revised to state that actions are to be taken

in accordance with applicable agency regulations. A new paragraph (3)

was added to clarify that other methods may be used to resolve

negotiated cost impact settlements if the cognizant Federal agency

official determines that funds needed to effect contract price

modifications will not be made available in a timely manner.

The Board is of the opinion that modification of contract and

subcontract prices, as prescribed in the regulations being proposed

today, represents the preferred method to be used to resolve material

cost impacts due to a change in cost accounting practice. Modification

of contract prices enable the contracting parties to establish contract

prices for covered contracts that correlate with the increased or

decreased cost allocations to such contracts that result due to

practice changes. This facilitates contract administration by

permitting meaningful comparison of estimated and actual costs. The

Board is also aware that often the necessary funding required to

increase some contract prices may not be readily available. In the NPRM

being issued today, revised coverage has been added to emphasize that

the decision on how to best achieve an equitable solution, in the

aggregate, remains a cognizant Federal agency official responsibility.

Cost Impact Process

Comment: A Federal agency expressed concern about the extent of

detailed administrative responsibilities and requirements included in

the prior NPRM. An industry representative presented a similar view by

stating that some of the proposed material was overly prescriptive.

Response: In order to fully and clearly describe the cost impact

process, inclusion of certain administrative responsibilities and

requirements is unavoidable. However, the Board agrees that some of the

prior NPRM material may have been overly instructional and prescriptive

in nature. The Board has deleted such material.

Comment: Industry commenters questioned the fairness of having

``strict'' time requirements put on contractors for cost impact

responsibilities, while the Government had ``suggested'' time periods

for completion of their required actions. A Federal agency commenter,

on the other hand, wanted more flexibility with regard to time

requirements applied to the responsibilities of cognizant agency

officials.

Response: In order to fairly respond to both industry and

Government groups, all specific time frame requirements,

[[Page 37665]]

with the exception of the advance notification requirements for changes

in cost accounting practices, have been deleted from the NPRM being

issued today. Previously proposed time requirements were replaced with

language that states that actions should be taken ``on or before the

date specified by the cognizant Federal agency official or other

mutually agreeable date''. However, the Board concluded that the length

of time taken to complete the change in cost accounting practice and

noncompliance cost impact and resolution process has been a problem in

the past, and believes the problem will continue if not adequately

addressed by procurement officials. The Board therefore urges Federal

agencies to establish reasonable and specific time guidelines in their

implementing regulations for the completion of the various steps to be

specified in subpart 9903.4 when this rulemaking process is completed.

Comment: One industry commenter suggested that the term

``voluntary'' be eliminated from the definition of a desirable change

because not all desirable changes are voluntary. A Government commenter

suggested that the rule refer to changes that are not required changes

as either voluntary changes ``not deemed desirable'' or as voluntary

changes deemed ``desirable'', as applicable.

Response: The Board believes that through usage and practice the

contracting parties familiar with the requirements of the CAS contract

clause provisions governing compliant changes in cost accounting

practices have assigned distinct meanings to the terms ``voluntary''

and ``desirable'' changes. The usage of and reference to these terms in

most of the commenters' responses affirms the Board's belief. The Board

therefore does not wish to disturb this commonly accepted and

understood usage of these terms. The proposed definition of a voluntary

change was revised for greater consistency with the common usage of the

term by adding that it is a change ``that is not deemed desirable by

the cognizant Federal agency official and for which the Government will

pay no increased costs''. Similarly, the definition of a desirable

change has been expanded to indicate that these are changes which

become subject to ``equitable adjustments'' if covered contracts are

affected by the change. Thereafter in the proposed subpart being issued

today, practice changes are referred to as ``voluntary'' when no

increased costs will be paid by the Government and as ``desirable''

when equitable adjustments will apply.

Comment: Several industry commenters objected to the proposed

notification requirement for required changes (at 9903.405-2(b)(1) in

the prior NPRM). The commenters contended that the proposed 60 day

advance notification requirement was not always practical or even

possible when a Request For Proposal provides a shorter time period for

proposal submissions.

Response: Estimated costs proposed for a CAS-covered contract must

be predicated on cost accounting practices that are compliant with the

CAS that will apply to the potential contract, if awarded. The proposed

advance notification requirement was intended to provide the Government

with additional time to determine if the contractor's changed cost

accounting practice to be used for contract cost estimating purposes

was adequately disclosed and compliant with the potentially applicable

CAS. However, the Board agrees with the commenters that the 60 day

advance notification requirement may not always be practical. The

proposed requirement was revised to require notification ``* * * as

soon as it becomes known that a required change must be made, but no

later than the date of submission of the price proposal in which the

contractor must first use the changed practice to estimate costs for a

potential CAS-covered contract.''

Comment: Industry commenters, in general, objected to the proposed

provisions (at 9903.405-2(b)(2) (i) and (ii) in the prior NPRM) which

precluded contractors from using a proposed new accounting practice for

estimating costs for the first time (the effective date) until the

earlier of 60 days after notification or the date a determination of

adequacy and compliance is made by the cognizant Federal agency

official. A Government agency expressed concern about applying

different treatment for contracts awarded between the notification date

and effective date based on the ``preclusion of use'' provision, than

for other contracts awarded prior to the notification date for

voluntary changes. They recommended that the Board delete the ``special

equitable adjustment'' treatment included in the prior NPRM for these

contracts. A group of ``concerned U.S. Taxpayers'' raised several

questions with regard to the ``special equitable adjustment''

provisions which indicated that the procedure included in the prior

NPRM for these ``special'' contracts may be difficult to apply.

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

of consistency exists as to the point in time when contractors actually

begin to use 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's purpose in proposing the

``special equitable adjustment treatment'' provision was to promote

consistency in use of changed practices for estimating costs for price

proposals.

After considering the many negative comments received about this

provision, the Board has decided to withdraw the proposed requirement

which would have precluded contractors from immediately using proposed

new practices for estimating purposes. The Board is also eliminating

the related ``special equitable adjustment'' provisions proposed for

contracts awarded between the notification and effective dates (at

9903.405-2(f), 9903.405-5(d)(7) and 9903.407-1(h) in the prior NPRM).

Due to this elimination, the effective date for voluntary changes being

proposed in this supplemental NPRM is the date on which the contractor

first begins using the new practice for estimating costs for potential

CAS-covered contracts. In the event that the cognizant Federal agency

official subsequently determines that the new practice is noncompliant

with an applicable Cost Accounting Standard, the contractor's

implementation of the noncompliant practice for estimating purposes

would be handled in accordance with 9903.406-3.

The Board has also revised the previously proposed requirements for

the notification date for voluntary changes based on the elimination of

the ``preclusion of use'' and ``special equitable adjustment''

provisions. As revised, the requirement for notification is ``60 days

before the applicability date'' or the date of submission of the first

contract price proposal which reflects the use of the voluntary change

(see 9903.405-2(b)(2) in this NPRM). The previously proposed provision

of concern to some commenters regarding the establishment of a

``revised notification date'' (at 9903.405-3(a) in the prior NPRM) has

also been eliminated since this related to the 60 day window period for

the ``preclusion of use'' and ``special equitable adjustment''

provisions.

Comment: Several Government commenters requested that the Board

include a provision requiring the Federal agency official to notify the

contractor of the desirable change determination so that a voluntary

[[Page 37666]]

change could be treated as a ``desirable'' change for cost impact and

contact price adjustment purposes.

Response: Since there is a proposed requirement for the contractor

to submit a written request and provide written justification for

desirable changes, the Board agrees that the cognizant Federal agency

official's decision and response should also be in writing. The Board

proposes to establish this requirement at 9905.405-3(b). When the

contractor provides the required notification, a determination has not

yet been made by the cognizant Federal agency official as to whether a

voluntary change is or is not desirable. Accordingly, 9903.405-2(b)(2)

was revised to clearly reflect that the notification requirement

applies to a voluntary change. A similar requirement concerning the

determination made on planned voluntary changes with retroactive

applicability dates is also proposed at 9903.405-3(c).

Comment: In the interest of streamlining, both industry and

Government commenters recommended that the general dollar magnitude

(GDM) submissions and Cost Impact Settlement Proposal submissions (at

9903.405-4 (a) and (b) in the prior NPRM) be combined into one

submission.

Response: The Board agrees with this recommendation. A combined

submission format is being proposed at 9903.405-4(a)(4). The Board has

decided to refer to the submission as a ``GDM Settlement Proposal'' in

order to give recognition to the submission's two purposes: (1) To

provide a general dollar magnitude estimate of the aggregate cost

impact amounts by contract type; and (2) to provide the contractor an

opportunity to propose specific adjustments to settle the cost impact

of a change in cost accounting practice. Previously proposed paragraph

(c) covering the submission of a detailed cost impact proposal has been

moved to 9903.405-4(b).

Comment: One commenter suggested that a contractor's cost impact

submissions be shown by two contract groups rather than by contract

type. The suggested groups were ``firm fixed-price'' and ``other than

firm fixed-price''.

Response: The Board believes that the suggested ``other than firm

fixed-price'' grouping to be inappropriate because it would combine

contracts that should not be combined, e.g., incentive contracts with

non-incentive contracts. In order to reduce the number of contract

types that must be listed in the GDM Settlement Proposal, the Board

believes that in most situations, the contract types may be limited to

the following groups: firm fixed-price (FFP); time and material (T&M);

incentive type (FPI/CPIF); and all other cost reimbursement contracts.

These contract ``type'' groupings are illustrated in the GDM Settlement

Proposal being proposed today at 9903.405-4(a)(4).

Comment: One industry commenter recommended that a contractor

initially only be required to submit a GDM estimate of the aggregate

impact of changes in cost accounting practices so that a materiality

determination can be made prior to requesting any individual contract

data. A Government commenter supported the submission of some contract

data, as proposed in the prior NPRM, by opining that ``a GDM alone does

not furnish any information on the expected impact on specific large

contracts, and the lack of data may cause delays and requirements for a

detailed cost impact proposal''.

Response: The submission of some individual contract data with the

GDM aggregate estimate serves three purposes. First, it provides

reasonable assurance with regard to the accuracy of the aggregate

estimate by contract type submitted in the GDM. Secondly, it provides

additional and needed support to determine if a cost impact due to

changes in cost accounting practices is material both in the aggregate

and for individual contracts. Finally, it provides a contractor an

opportunity to propose specific adjustments to settle the cost impact

without resort to a detailed cost impact proposal. The Board included

in the prior NPRM, and has more prominently displayed in this NPRM, a

provision that states that if the cognizant Federal agency official

determines that the impact of a change is obviously immaterial, the

process will be considered completed (see 9903.405-3(d)). Absent an

``obviously immaterial'' condition, the Board continues to believe that

individual contract data is needed to evaluate the accuracy of the GDM

aggregate estimate and to determine the materiality of the impact both

for the aggregate amounts and for individual contracts. The Board has

therefore retained the proposed requirement for the submission of

individual contract data along with the GDM aggregate estimate (as part

of the GDM Settlement Proposal).

Comment: A Government commenter recommended that the previously

proposed provision at ``* * * 9903.405-3(b) be expanded to specifically

require the contractor to submit a GDM. Disputes have arisen over who

is required to submit a GDM, the contractor or the Government''.

Response: In order to make clear that it is the contractor that is

required to prepare and submit the GDM Settlement Proposal, the Board

has included revised wording at 9903.405-3(e) in this NPRM.

Comment: One commentator suggested that the baseline for computing

the cost impact due to changes in cost accounting practices be the

``before change'' cost data baseline as opposed to the ``after change''

cost data baseline as proposed at 9903.405-4(a)(3).

Response: The most important factors in the computation of the cost

impact of a change in cost accounting practice are: (1) to use a

consistent cost data baseline; and (2) to isolate the cost impact of

cost allocation differences on covered contracts that are due solely to

the application of the original and changed cost accounting practices.

If this is done properly, there should not be a significant difference

in the cost impact amount, regardless of which baseline is used. The

Board continues to believe that the ``after change'' cost data baseline

is preferable for the reason stated at 9903.405-4(a)(3). The Board has

not mandated its use, however, as evidenced by the proposed use of the

word ``should'' and the phrase ``in most cases'' included in this

subparagraph. To provide added flexibility for determining the data to

be used for cost impact computation purposes, additional language was

inserted to reflect the Board's preference for the use of the latest

forecasted data used for forward pricing purposes, while still

permitting the use of other data that ``is considered preferable and

agreed to by both the contractor and cognizant Federal agency

official.''

Comment: One industry commenter suggested that the Board establish

specific materiality thresholds for the aggregate, ``all other''

contract, and individual contract amounts for contract price adjustment

purposes.

Response: The Board's decision not to specify materiality amounts

for cost impact thresholds is consistent with the position the Board

has taken in the past with regard to this issue. The Board leaves such

materiality determination decisions to the cognizant Federal agency

officials who must evaluate the specific circumstances on a case-by-

case basis in making these determinations.

Comment: Several industry commenters argued that the use of the

``netting'' process described in the prior NPRM be expanded to required

and desirable changes, and not be limited to ``no increased costs''

voluntary changes. One Government commenter recommended deleting the

term ``netting'' because ``* * * it is confusing for the rule to

discuss the two different terms, `offset' and `netting'. Since

[[Page 37667]]

`offsets' is the term currently used and most contractors and

contracting officers are familiar with it, we see no reason to

introduce a new term.''

Response: The concept of ``netting'' only has relevance for a

voluntary change for which there will be no increased costs to the

Government. The proposed use of the term ``netting'' was to be

associated with the process used to determine if the Government would

potentially pay increased costs, in the aggregate, after giving

consideration to appropriate adjustments of all affected contracts, due

to the cost impact of a voluntary change in cost accounting practice.

Since increased cost to the Government is not a concern for required or

desirable changes which result in equitable adjustments upward or

downward based on the cost impact, ``netting'' simply does not apply to

such practice changes. The Board agrees with the Government commenter

that the introduction of the term has caused some additional confusion

concerning this process. The term ``netting'' has therefore been

eliminated from this NPRM.

The process for determining whether increased costs to the

Government would result after all potential contract price adjustments

are considered is still an essential action that must be accomplished

for a voluntary change. The required process is specified at 9903.405-

5(d) in this NPRM.

Comment: Regarding the ``preclusion of increased cost'' matrix

previously proposed at 9903.405-5(d)(3) for voluntary changes, one

industry commenter argued that it was not equitable that no upward

adjustments be made when a higher amount of costs are to be allocated

to both flexibly priced and firm fixed-price contracts, while downward

adjustments to both flexibly priced and firm fixed-price contracts are

made when a lower amount of costs were to be allocated to these

contract types as a result of voluntary changes in cost accounting

practices. Other commenters argued that downward adjustments to CAS-

covered fixed-price contracts should be limited to corresponding upward

adjustments to CAS-covered flexibly priced contracts, or otherwise a

``windfall'' accrues to the Government.

Response: The proposed matrix is intended to show that for

voluntary changes, the Government will not pay increased costs in the

aggregate by precluding any net upward price adjustments. The Board's

proposed rule is predicated on the basic concept that the Government

should not pay more than the Government would have paid had the

voluntary change not been made. That is the important distinction

between a voluntary change and a desirable or required change.

If the same scenarios that appear in the matrix were applied to

required or desirable changes, there would be no limit on upward or

downward adjustments, nor would there be a concern with regard to

whether the cost allocation increases or decreases were coming from

other CAS-covered work, other Government non-CAS-covered work, or

commercial work. For required or desirable changes, CAS-covered

contracts are subject to equitable adjustments under the changes clause

of the contract. Therefore, in the scenario for required and desirable

changes in which the costs to be allocated are higher for all contract

types, the CAS-covered contracts are equitably adjusted upward to

reflect the impact of the change (see 9903.405-5(d)(6)). The Government

certainly could not claim an ``offset'' against the upward adjustment

of the flexibly priced contracts by saying that a corresponding higher

amount of costs to be allocated to firm fixed-price contracts

represents ``decreased'' cost, thereby denying the contractor its

equitable adjustments. The same is true of the opposite scenario of a

lower amount of costs to be allocated to all contract types due to

required and desirable changes. The contractor similarly has no

``offset'' claim here, and the Government is entitled to its downward

equitable adjustments under the contract clause provisions for required

and desirable changes.

The contract clause provision for changes in cost accounting

practices which applies to ``any change'' is that ``the change must be

applied prospectively'' and that ``if the contract price or cost of

this contract is materially affected by such changes, such adjustment

shall be made in accordance with subparagraph (a)(4) or (a)(5) of this

clause'' (see (a)(2) of the contract clause at 9903.201-4(a)).

Therefore, in accordance with this provision, contract prices are to be

adjusted upward or downward to reflect any material cost impact due to

compliant changes in cost accounting practices. The only exception

results from the ``no increased cost'' provision for voluntary changes

at (a)(4)(ii) of the contract clause. This precludes net upward

contract price adjustments for voluntary changes. There is no similar

preclusion of net downward contract price adjustments for voluntary

changes.

The Government should be left no worse off as a result of a

voluntary change than it is for a required or desirable change with

regard to contract price adjustments. Therefore, net downward contract

price adjustments can and should be made if the cost impact reflects a

lower amount of costs in the aggregate to be allocated to CAS-covered

contracts as a result of changes in cost accounting practices. Such net

downward adjustments do not create a ``windfall'' to the Government.

Nor do these downward contract price adjustments result in recovery by

the Government of costs greater than the lesser allocation of costs in

the aggregate on the relevant contracts subject to price adjustment

(this would only occur if the Government made downward contract price

adjustments greater than the aggregate lower cost allocation amounts

reflected by the cost impact). The contract price adjustments merely

adjust the affected contract values to make them consistent with the

costs expected to be accumulated under the changed cost accounting

practices to be used to accumulate costs on those contracts for the

remainder of their contract performance period.

Due to the apparent continuing confusion regarding the use of the

term ``increased costs'', the Board re-examined the proposed

definitions contained in the prior NPRM. The Board concluded that it

was not commonly understood that the definition of increased cost was

dependent upon the type of contract involved and whether the contract

price would or would not reflect the changes in cost allocations

resulting from a change in cost accounting practice. The Board has

therefore modified the proposed definitions to clarify that the term

``increased cost'' refers to ``increased cost to the Government'' and

that the definition is from the point of view of the condition that

would result if no contract price or cost adjustments were made to

achieve equity.

Comment: Another commenter recommended substituting ``Increased

Costs'' and ``Decreased Costs'' for ``Higher'' and ``Lower'' in the

matrix to conform with the terms used throughout the NPRM with regard

to cost impacts due to changes in cost accounting practices.

Response: Since ``Increased Costs'' has a certain defined

connotation in the CAS Board's rules and regulations, use of this term

disturbs the various scenarios and related conclusions presented in the

column entitled ``Actions To Be Taken To Preclude Increased Costs''.

However, in order to make clear what is meant by ``Higher'' and

``Lower'' in the matrix with regard to shifts of costs resulting from

voluntary changes, descriptive footnotes have been added in the matrix

(see

[[Page 37668]]

9903.405-5(d)(3)). The proposed language is consistent with the

language used in the definitions of increased costs included in

9903.403.

Comment: One commenter suggested that the Board eliminate the term

``disallow'' in the matrix since we are dealing with costs that are

otherwise allowable except for the ``no increased cost'' provision for

voluntary changes.

Response: The Board proposes to replace the term with the phrase

``preclude payment of'' to be consistent with the wording in the

contract clause provision for voluntary changes.

Comment: One commenter interpreted the prior NPRM as requiring

that, for noncompliances, detailed cost impact proposals must be

submitted, and stated that ``requiring a detailed cost impact proposal

for all noncompliances is contrary to acquisition reform and

streamlining Government regulations.''

Response: The Board did not intend that a detailed cost impact

proposal be submitted for all noncompliances. The Board's prior

proposal has been revised to clarify this point. In this NPRM, the

proposed language at 9903.406-2(e) specifies that a cost impact

submission may be in a format similar to the GDM Settlement Proposal

shown at 9903.405-4(a)(4), the detailed cost impact proposal specified

at 9903.405-4(b) or other mutually agreeable format which will

accomplish the objectives of 9903.406-3 (c) and (d) for a cost

estimating noncompliance or 9903.406-4 (c) and (d) for a cost

accumulation noncompliance. Also, an example of a GDM Settlement

Proposal format for a noncompliance action has been added to 9903.406-

2(e). Elsewhere in proposed 9903.406, the previously proposed phrase

``cost impact proposal'' was replaced with the phrase ``cost impact

submission'' in order to avoid the perception that a detailed cost

impact proposal was being required for all noncompliances.

Comment: One commenter recommended using the phrase ``cost

accounting noncompliance'' in lieu of ``cost accumulation

noncompliance''.

Response: The Board proposed the terms ``estimating'' and

``accumulating'' to describe the two types of noncompliances that can

occur. The two terms are consistent with the terminology used in

9904.401 which requires consistency in the cost accounting practices

used to estimate and accumulate costs. The Board believes that use of

the phrase ``cost accounting noncompliance'' would lead to confusion

since cost accounting practices are used to both estimate and

accumulate costs.

Comment: One commenter recommended that a provision be added that

would allow a contractor to submit data demonstrating that the impact

of a noncompliance is immaterial and therefore could be handled under

9903.406-5 as a Technical Noncompliance.

Response: The Board agrees with this recommendation and proposed

language has been added at 9903.406-3(a) and 9903.406-4(a) to reflect

this permitted action.

Comment: One commenter suggested that the Board add an illustration

to show that a situation similar to the one described in the prior NPRM

illustration proposed at 9903.407-1(e)(1) could be resolved by

adjusting one contract rather than three contracts.

Response: The Board has added such an illustration at 9903.407-

1(d)(2) in this NPRM.

Comment: One commenter advised that, in the proposed illustration

at 9903.407-1(g)(2), the statement that increased cost on a CPFF

contract was ``coming from a shift of costs from both Contract A and

other non-government work'' implies that the need to preclude costs

depends on how the costs are shifted and recommended its deletion.

Response: The Board did not intend to imply that, when changes in

cost accounting practices result in shifts of costs to or from CAS-

covered contracts, the resolution of the cost impact and resulting

contract price adjustments would be affected or influenced by whether

the cost shift was coming from or going to other CAS-covered work or

non-CAS-covered work. In order to avoid any unintentional implications

or inaccurate inferences, the cited reference to the source of the

shift of costs onto the CPFF contract was deleted (see the revised

illustration at 9903.407-1(f)(2) in this NPRM).

Comment: A commenter did not understand why the proposed resolution

of the estimating noncompliance illustrated in the prior NPRM, at

9903.407-2(a)(2), did not result in net upward adjustments to the

affected fixed-price contracts. Specifically, the commenter stated that

``we are unable to determine either the logic or the regulatory basis

for the Government to keep the windfall profit''.

Response: The commenter's assertion appears to be that fixed-price

contract prices should be adjusted upward to reflect the full amount by

which the estimated costs contained in the contractor's cost proposals

were understated due to the application of a noncompliant cost

accounting practice. This contrasts with the proposed resolution shown

in the referenced illustration which limited the upward adjustment on

one fixed-price contract to the downward adjustment experienced on a

different fixed-price contract, i.e., an approach that results in no

increased cost, in the aggregate, to the Government when an estimating

noncompliance is corrected. The proposed illustration was consistent

with the regulatory provisions proposed in the prior NPRM at 9903.406-

3(c)(2). The Board's rationale was based on the opinion that

contractors are expected to consistently apply their established cost

accounting practices, in compliance with applicable Cost Accounting

Standards when estimating costs for potential CAS-covered contracts,

and, if the contract is awarded, when accumulating and reporting the

costs of contract performance. The Board's continuing objective is to

encourage contractors to utilize compliant cost accounting practices in

a consistent manner when submitting cost proposals that are intended to

reflect the estimated costs of contract performance expected to be

accumulated in the contractor's cost accounting records if the contract

were awarded.

In questioning the Board's basis for the proposed solution, perhaps

the commenter is advocating that the correction of a contractor's

estimating noncompliance, as illustrated in the prior NPRM, should

result in revised contract prices that are higher, in the aggregate,

than the amounts agreed to by the contracting parties at the time of

negotiation. If such a policy were established, a contractor that

inadvertently or knowingly proposed a lower estimated cost by using a

noncompliant cost accounting practice would have the potential ability

to gain a competitive advantage or mislead the Government regarding the

eventual cost to the Government while being assured that after contract

award, by initiating action to correct the noncompliant practice, the

contract price would be revised upward to fully cover the understated

costs. The Board does not agree with the thrust of the commenter's

inquiry.

Accordingly, the illustration proposed in the prior NPRM was

retained in this NPRM. In addition, 9903.406-3(d) was revised to

clarify that estimating noncompliances cannot result in net upward

contract price adjustments. A schedule was also added to illustrate

whether contract price adjustments are to be required for flexibly-

priced and/or fixed-price contracts when an estimating noncompliance

results in the negotiation of contract prices that are higher or lower

than the prices that

[[Page 37669]]

would have resulted had a compliant practice been used.

Comment: One commenter advised that it would be useful if the Board

would prescribe which of the two ``underpayment interest rates''

prescribed at 26 U.S.C. 6621 specifically applies to the CAS contract

price adjustment interest provision required by 41 U.S.C. 422(h)(4) and

included in the various CAS contract clauses.

Response: The Board agrees with the commenter that this issue has

engendered some confusion among contractors and Government agencies.

The Board's enabling statute, and the various CAS contract clauses,

specify that the interest rate prescribed at 26 U.S.C. 6621 shall be

used in making such calculations. At the time the Board's current

enabling statute was enacted, this provision only contained one

``underpayment interest rate''. Subsequntly, the statute was amended to

include two different ``underpayment interest rates''. Upon careful

consideration of this issue, the Board has concluded that the lesser of

the two ``underpayment rates'' should be used in making the appropriate

interest adjustment calculation. The Board has reached this conclusion

after considering the specialized nature of the more recently enacted

``underpayment rate for large corporations'' and what would appear to

be its limited use in certain Internal Revenue Service tax enforcement

actions. In addition the interest rate specified at 26 U.S.C.

6621(a)(2) was the rate in effect at the time that the Board's current

enabling statute was enacted. To effect the requested clarification, a

revision has been made at 9903.306.

Educational Institutions

Comment: Several commenters suggested that the Board exempt

educational institutions from the requirements of proposed subpart

9903.4, Contractor Cost Accounting Practice Changes and Noncompliances.

They believed that OMB Circular A-21, Cost Principles for Educational

Institutions, as amended April 26, 1996, which now incorporates the

Board's applicable Standards and Disclosure Statement, provides

sufficient coverage and guidance for the reporting of changes to

established cost accounting practices and for making required price or

cost adjustments if a practice change or a noncompliance results in a

material cost impact on Federally sponsored agreements, including any

CAS-covered contracts.

Response: As proposed, subpart 9903.4 would have applied to all

CAS-covered contractors, including educational institutions. However, a

waiver provision authorizing cognizant agencies to waive, on a case-by-

case basis, any CAS unique 9903.405 requirements for determining the

cost impact of compliant changes in cost accounting practices under

CAS-covered contracts awarded to educational institutions was also

provided at 9903.401-2 in the prior NPRM. The waiver provision was

intended to provide maximum flexibility when the cognizant Federal

agency official must concurrently determine contract price and cost

adjustments for CAS-covered awards and make similar adjustments for non

CAS-covered contracts and Federal grants in accordance with applicable

OMB Circular A-21 requirements. Under the proposed waiver authority,

the cognizant Federal agency official can waive specific CAS adjustment

methodologies so that one set of calculations can be applied, in a

consistent manner, to the total universe of Federally sponsored

agreements affected by a compliant change in cost accounting practice.

However, actions specified in subpart 9903.4 requiring notification to

the Government when a practice change is made and to equitably resolve

the cost impact resulting from the use of a noncompliant cost

accounting practice used to estimate, accumulate or report costs were

not subject to the proposed waiver.

Although OMB Circular A-21 does not contain the specificity

contained in subpart 9903.4 for determining the cost impact of a cost

accounting practice change or a noncompliance on CAS-covered contracts,

the Board is sympathetic with the commenters' expressed concerns. To

promote the concept that the cognizant Federal agency official should

administer all Federally sponsored agreements on a consistent basis

with regard to cost accounting matters, the Board, in the NPRM being

issued today, has expanded the proposed waiver authority to include all

of the requirements of subpart 9903.4 except for the adequacy and

compliance determinations required by 9903.405-3(a). As revised, the

proposed provision requires the cognizant Federal agency official to

administer the cost accounting aspects of CAS-covered contracts awarded

to an educational institution in accordance with proposed subpart

9903.4 procedural requirements but where alternate procedures are

deemed appropriate and necessary in order to achieve a uniform and

consistent approach for all Federally sponsored agreements being

performed by an educational institution, the cognizant official is

authorized to waive subpart 9903.4 requirements on a case-by-case

basis. A provision requiring the cognizant Federal agency official to

determine the specific procedures to be applied for providing

notification of a cost accounting practice change and resolving the

cost impact due to a change in cost accounting practice or a

noncompliance is also being proposed (see 9903.401-2).

F. Additional Public Comments

Interested persons are invited to participate by submitting data,

views or arguments with respect to the proposed amendments contained in

this NPRM. All comments must be in writing and submitted timely to the

address indicated in the ADDRESSES section of this NPRM.

The Board is considering the establishment of certain new

provisions that it believes would facilitate the overall process

governing compliant changes in cost accounting practices and

noncompliances. Therefore, the Board invites interested parties to

specifically comment on the following amendments being proposed today:

--Proposed 9903.201-6(c)(2), Desirable changes, which proposes to

establish that when cost savings are expected to result from management

actions that will be taken to improve the economy and efficiency of

operations, changes in cost accounting practices associated with such

operational changes shall be deemed to be desirable and not detrimental

to the Government. Such determinations would permit the equitable

adjustment of existing CAS-covered contracts materially affected by

such changes in cost accounting practices.

--Proposed 9903.401-2, Educational Institutions, which proposes to

establish that the cognizant Federal agency official is required to

administer the cost accounting aspects of CAS-covered contracts and

other Federally sponsored agreements in a uniform and consistent

manner. Where determined necessary, the proposed provisions would

permit the cognizant Federal agency official to waive applicable

subpart 9903.4 requirements to attain that objective.

--Proposed 9903.406-2(e) which includes a newly proposed General Dollar

Magnitude Settlement Proposal format for determining and resolving the

estimated cost impact of a noncompliant cost accounting practice.

--Proposed 9903.406-3(d) which includes a newly proposed schedule

[[Page 37670]]

for determining the contract price adjustments to be required when an

estimating noncompliance occurs.

Exemption provisions under consideration.

In addition to requesting public comments on the proposed

amendments being promulgated today, the Board requests interested

parties to provide their views on the potential establishment of

``exemption'' coverage in the Board's rules and regulations that would

exempt compliant changes in cost accounting practices from contract

price and cost adjustment when specified criteria are met.

The Board, after considering the public comments received in

response to the ``exemptions'' that were proposed in the prior NPRM, is

proposing in this NPRM to establish expanded coverage for ``desirable

change determinations'' inlieu of the previously proposed

``exemptions'' as discussed in section E above under the topic heading

``Exemptions From Contract Price And Cost Adjustment Proposed in the

Prior NPRM are Withdrawn.'' However, the Board will consider this

matter further if commenters responding to this NPRM indicate that

there is a compelling need and strong support for the establishment of

such exemptions, in addition to the proposed amendments being issued

today in this NPRM.

To assist interested parties wishing to comment on this matter, the

Board is providing below the draft ``exemption'' coverage that was

prepared by the CASB staff as ``Option B'' and ``Option C'' for the

Board's consideration. Specifically of interest to the Board are the

potential commenters' views regarding the draft exemption criteria and

procedural requirements. Commenters may wish to indicate under what

specific circumstances, if any, they believe a particular draft

exemption should be applied or modified. For example: Should the Option

B exemption be limited to major nonrecurring organizational changes

that materially alter a contractor's operations? Should it only apply

to restructuring activities approved in advance under agency

regulations? The submission of specific alternative criteria and/or

procedural requirements that commenters believe could result in the

establishment of workable regulatory exemption coverage are also

welcome.

Option B--Draft Exemption for Improved Management Efficiency and

Effectiveness

Commenters primarily opined that it was not clear how the exemption

proposed in the prior NPRM at 9903.302-2(c)(1) would be administered or

what evidence was needed to obtain the proposed exemption. To that end,

the CASB staff drafted for the Board's consideration coverage along the

following lines:

1. In section 9903.302-2, add a new paragraph ``(c)'' to read as

follows:

(c) Voluntary Cost accounting practice changes exempt from contract

price and cost adjustment. The types of voluntary changes in cost

accounting practice described in (1) below 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 the allocation of cost to cost objectives involving

the transfer of functions or merger of cost pools that are made due to

management actions which are undertaken for improved management

efficiencies and effectiveness and which involve the physical

realignment or reduction of facilities or personnel.

(2) To qualify for this exemption the contractor must, prior to

making the change:

(i) Request the exemption.

(ii) Submit a comprehensive description of the planned change(s)

intended to improve the segment's or business unit's economy and

efficiency of operations and of the voluntary changes to the

contractor's established cost accounting practices that will be made to

implement the planned change(s).

(iii) Provide a summary schedule of the aggregate increase or

decrease in the total amount of costs expected to be allocated to all

existing CAS-covered fixed-price contracts and flexibly-priced

contracts (by contract types; such as fixed-price incentive, cost-

reimbursement, etc.) after the change(s) are made.

(iv) Demonstrate that an equal or lesser amount of costs, in the

aggregate, will be allocated to any existing CAS-covered contracts that

are flexibly priced, by contract type, after the planned changes are

implemented.

(3) The required cost comparison calculation methodology is

summarized below:

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

Flexibly priced

Fixed-price contracts, by

contracts contract type

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

1. Total amount of costs that

would be allocated to existing

CAS-covered contracts, in

accordance with established

cost accounting practices, at

the estimated cost levels that

would continue if the

contemplated economy and

efficiency changes were not

made.

2. Total amount of costs that

would be allocated to existing

CAS-covered contracts, in

accordance with the new

changed cost accounting

practices, at the estimated

new cost levels that would

result if the planned economy

and efficiency management

changes were made.

3. Difference (1. minus 2.).

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

(4) When the requirements of 9903.302-2(c)(2)(iv) are met, the

cognizant Federal agency official shall notify the contractor that the

voluntary change(s) to established cost accounting practices resulting

from the planned management changes will be exempt from the contract

price and cost adjustment provisions of affected CAS-covered contracts.

(5) When the requirements of 9903.302-2(c)(2)(iv) are not met, the

cognizant Federal agency official shall determine, in writing, if the

voluntary change to the contractor's established cost accounting

practices resulting from the planned management changes otherwise

qualifies for the exemption, i.e., that the potential savings to be

realized in cost proposals for anticipated future CAS-covered contracts

and subcontracts when the planned economy and efficiency changes are

implemented will substantially exceed any increased cost allocations to

flexibly-priced contracts identified under (c)(3) above. If so

determined, the cognizant Federal agency official shall notify the

contractor that the voluntary change to the contractor's established

cost accounting practices otherwise qualifies

[[Page 37671]]

for the requested exemption, i.e., the voluntary practice change will

be exempt from the contract price and cost adjustment provisions

contained in existing CAS-covered contracts affected by the changes.

(6) When the cognizant Federal agency official determines the

voluntary change to the contractor's cost accounting practices

resulting from the planned management changes does not qualify for the

requested exemption, the cognizant Federal agency official shall inform

the contractor of the determination and initiate the cost impact

process in accordance with 9903.405-3. The contractor may request a

desirable change determination in accordance with 9903.201-6 and

subpart 9903.4 prior to the submission of a requested cost impact

submission.

2. Modify paragraph 9903.201-6(c)(2) proposed in this NPRM by

deleting the economy and efficiency criteria proposed at 9903.201-

6(c)(2)(i) or by replacing that proposed mandatory provision with a

permissive provision that reads as follows:

Section 9903.201-6 Desirable changes.

* * * * *

(``x'') The cognizant Federal agency official should determine that

a change in cost accounting practice is beneficial and not detrimental

if cost savings, in the aggregate, will occur under existing and/or

future CAS-covered contracts and subcontracts, e.g., cost accounting

practice changes attributable to:

(i) An organizational change that combines, separates or

centralizes operations, and the contractor or subcontractor

demonstrates that more efficient and economical operations will result.

* * * * *

Option C--Draft Exemption for Changes in the Selection and Composition

of Overhead and General and Administrative Expense Pools.

The contractor community did not appear to object to an equitable

process to determine and resolve material differences in the amount of

costs allocated to CAS-covered contracts that may occur due to a pool

combination or split-out. Rather, they expressed concerns regarding the

rigid process that was proposed in the prior NPRM. Accordingly, the

CASB staff prepared for the Board's consideration the following draft

exemption provision that would provide the cognizant Federal agency

official with a flexible process for determining if a requested

exemption for a practice change attributable to a pool combination or

split should be granted.

1. In section 9903.302-2, add a new paragraph ``(d)'' to read as

follows:

(d) Voluntary cost accounting practice changes exempt from contract

price and cost adjustment. The types of voluntary changes in cost

accounting practice described in (1) below 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 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 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 accumulated in

intermediate cost objectives that are now included in the resultant

merged pool or split-out pools.

(ii) The selected allocation base remains the same for the affected

pools. After the change, only the composition of the allocation base

will change since the merged or split-out allocation base(s) are now

accumulated in a new configuration for each selected pool in the post-

change pool structure.

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

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

and the underlying levels of pooled costs and allocation base measures

retain their proportional relationships with respect to the existing

CAS-covered contracts. This test is met if the cognizant Federal agency

official determines that, after the change, the resultant pools are

homogeneous (see 9904.418-50(b)) and the amount of indirect costs

allocated to individual CAS-covered contracts affected by the change is

not materially different from the amounts that would have been

allocated to such final cost objectives if the pool combination(s) or

split-out(s) had not occurred.

(2) To qualify for this exemption the contractor must, prior to

making the change:

(i) Request the exemption.

(ii) Submit a comprehensive description of the planned pool

combinations or split-outs, including details concerning the estimated

amount of costs to be accumulated in the original and resultant pool or

pools, the respective allocation base totals, and their respective

indirect cost rates.

(iii) Provide a summary schedule of the aggregate increase or

decrease in the total amount of costs expected to be allocated to all

existing CAS-covered fixed-price contracts and flexibly-priced

contracts (by contract types; such as fixed-price incentive, cost-

reimbursement, etc.) after the change(s) are made.

(3) In making the determination required under 9903.302-

2(d)(1)(iii) above, the cognizant Federal agency official may determine

that a material difference in the amount of indirect costs allocated to

CAS-covered contracts will not result if the rates (or rate) used to

allocate pooled indirect costs to final cost objectives fall within a

corridor that is plus or minus a stated percentage (to be determined by

the cognizant Federal official on a case by case basis) of the rate (or

rates) that would have resulted if the combination or expansion had not

occurred. The comparison shall be based on the level of ongoing pooled

costs and allocation base activity that is expected to occur after the

change is made. For example, assuming a one percent corridor was

determined to be an appropriate range and under the original cost

accounting practices followed for a single pool the overhead recovery

rate is expected to 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 forecasted 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 ``one percent'' corridors of 100% to 102% and 98% to 100%

would overlap.

(4) The cognizant Federal agency official shall determine, in

writing, if the voluntary change to the contractor's established cost

accounting practices resulting form the planned pool combination or

split-out qualifies for the exemption. The cognizant Federal official

shall inform the contractor of the determinations made. If the

voluntary change is determined to be exempt, no further action is

required. If not determined to be exempt, the cognizant Federal

official will initiate the cost impact process in accordance with

9903.405-3. The contractor may request a desirable change determination

in accordance with 9903.201-6 and subpart 9903.4 prior to the

submission of a requested cost impact submission.

[[Page 37672]]

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 following clause, 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.

(2) * * *

COST ACCOUNTING STANDARDS--FULL COVERAGE

(June 1997)

(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 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

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 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 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 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 documents, papers, or records, regardless of type and

regardless of whether such items are in written form, in the form of

computer data or in any other form, relating to compliance with the

requirements of this clause.

(d) Flowdown to subcontracts. 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 CAS in effect on the subcontract'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.

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.

This requirement shall apply only to negotiated subcontracts in

excess of $500,000, except that the requirement shall not apply to

negotiated subcontracts otherwise exempt from the requirement to

include a CAS clause as specified in 9903.201-1.

(End of clause)

* * * * *

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

contracting officer shall insert the following clause, 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 following clause requires the contractor to comply with

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

certain requirements) actual cost accounting

[[Page 37673]]

practices, and to follow disclosed and established cost accounting

practices consistently.

COST ACCOUNTING STANDARDS--MODIFIED COVERAGE (JUNE 1997)

(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

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 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 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 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 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 documents, papers, or records, regardless of type and

regardless of whether such items are in written form, in the form of

computer data or in any other form, relating to compliance with the

requirements of this clause.

(d) Flowdown to Subcontracts. 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 CAS in effect on the subcontract'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.

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.

This requirement shall apply only to negotiated subcontracts in

excess of $500,000, except that the requirement shall not apply to

negotiated subcontracts otherwise exempt from the requirement to

include a CAS clause as specified in 9903.201-1.

(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, one or more of the criteria

specified in paragraph (c) of this subsection.

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

desirable and not detrimental if the cognizant Federal agency official

determines that:

(1) 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) Cost savings, in the aggregate, will occur under existing and/

or future CAS-covered contracts and subcontracts, e.g., cost accounting

practice changes attributable to:

(i) An organizational change that combines, separates or

centralizes operations, and the contractor or subcontractor

demonstrates that more efficient and economical operations will result.

(ii) The development of a new and significantly improved cost

accounting system that will be implemented at a specific date in the

future. The purpose of the new cost accounting system is to improve the

contractor's or subcontractor's financial management

[[Page 37674]]

capabilities and there is a reasonable expectation that more efficient

and economical operations will result and benefits will accrue to the

Government.

(3) Circumstances, other than those listed in paragraphs (c) (1)

and (2) of this section, included as justification in the contractor's

written request for a desirable change determination clearly

demonstrate that the change is otherwise desirable and not detrimental

to the interests of the Government.

(d) 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 applicable agency regulations. 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 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) Processing changes in cost accounting practices.

(1) The cognizant Federal agency official shall, in accordance with

applicable agency regulations:

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

and subcontracts affected by a change in cost accounting practice,

including cost impact materiality determinations, in the aggregate.

(ii) Coordinate with affected agencies on the 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) When contract and/or subcontract price adjustments are

negotiated:

(A) Request affected agencies to prepare implementing contract

modifications and to obtain implementing subcontract modifications from

the 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.

(B) 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, in accordance with applicable agency

regulations:

(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.

(3) If the cognizant Federal agency official makes a written

determination that funding needed to execute required modifications is

not expected to be available, an equitable solution by use of any other

suitable technique which resolves the negotiated cost impact settlement

may be used (see 9903.405-5(c)(3)).

Subpart 9903.3--CAS Rules and Regulations

5. Section 9903.301 is proposed to be amended by adding two

definitions in alphabetical order 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 proposed to be amended by revising

paragraph (c) to read as follows:

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 assign an

item of cost or a group of items of cost to intermediate and final cost

objectives.

[[Page 37675]]

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 methods and techniques used to:

(i) Accumulate cost in the contractor's cost accounting system,

(ii) Determine whether a cost is to be directly or indirectly

allocated to intermediate or final cost objectives,

(iii) Determine the selection and composition of cost pools, and

(iv) Determine the selection and composition of the appropriate

allocation bases.

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

establish one or more cost pools for the accumulation of specific costs

to be allocated to other intermediate and/or to final cost objectives

for a particular segment, home office, or business unit. The

composition of cost pools involves the determinations to accumulate, by

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 allocation measurement activity (e.g., labor hours,

square footage, labor dollars, total cost input) will be used as the

basis for the allocation of the total costs accumulated in each

selected pool to intermediate and/or final cost objectives for a

particular segment, home office, or business unit. The composition of

an allocation base involves the determination to accumulate and measure

the selected allocation base data associated with each selected pool

that was established. The composition of an allocation base includes

the specific 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 proposed to be 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.

(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 in its entirety 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 home office 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 pool or segment to

another pool, 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.

(c) Mergers and Acquisitions. (1) Each CAS-covered contract

requires that the performing contractor consistently follow its

established or disclosed cost accounting practices over the contract's

entire period of performance.

(2) When a business unit or a segment performing a CAS-covered

contract is acquired by a different contractor through a merger or

This text is long and has been trimmed here. Open the source document for the complete record.