# Cost Accounting Standards Board; Changes in Cost Accounting Practices

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URL: https://www.frixlaw.com/law-library/documents/fr%3A97-17773

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** July 14, 1997
- **Citation:** 62 FR 37654

## Text

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.

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-17773. Public record. Not legal advice.