Cost Accounting Standards Board; Changes in Cost Accounting Practices

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

round of comments on proposed amendments to the regulatory provisions

contained in chapter 99 of title 48. The CASB's objective in issuing

this document is to utilize the proposed amendments as a basis for

holding an open public meeting, conducting a benchmarking survey, and

soliciting public comments.

The proposed amendments, when issued as a final rule, would revise

the current definitions, exceptions and illustrations governing changes

in cost accounting practices; exempt certain changes in compliant cost

accounting practices from the CASB's contract price and cost adjustment

requirements, and establish new coverage for ``desirable changes.'' A

new subpart 9903.4, Contractor Cost Accounting Practice Changes and

Noncompliances, is also proposed. The new subpart would establish

contractor notification requirements for circumstances when contractors

make changes to their compliant cost accounting practices. The new

subpart would also delineate the process for determining and resolving

the cost impact of a compliant change in cost accounting practice or a

noncompliant practice on existing covered contract and subcontract

prices and/or costs.

Educational Institutions: For covered contracts and subcontracts

awarded to an educational institution, the proposed subpart also

provides that certain subpart requirements may be waived, on a case-by-

case basis, if the cognizant Federal agency official concurrently

establishes with the educational institution an ``advance agreement''

that details the specific procedures to be followed for the

notification and resolution of compliant changes to established cost

accounting practices and/or the correction of noncompliant practices

when the educational institution is performing covered contracts,

covered subcontracts and other Federally sponsored agreements.

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

received by October 19, 1999.

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 9013, Washington, DC

20503. Attn: CASB Docket No. 93-01N(3). 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 Corel

WordPerfect 8 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: In response to the second of comments

requested on this topic in the Supplemental Notice of Proposed

Rulemaking, promulgated on July 14, 1997 (hereinafter referred to as

``SNPRM-I''), a number of commenters expressed their concerns regarding

the purpose and scope of the Board's proposed amendments. In

consideration of those concerns, the Board has decided to request a

third round of public comments via this Supplemental Notice of Proposed

Rulemaking (hereinafter referred to as ``SNPRM-II'') To ensure the

views and concerns of interesteed parties are fully surfaced, the Board

will also conduct an open public meeting and initiate a

``benchmarking'' survey.

Open Public Meeting

In addition to the submission of public comments, the Board will

schedule an open public meeting to discuss this proposed rule. The

date, time and location details of that meeting will be the subject of

a separate Federal Register notice.

Benchmarking Survey

In response to the Board's prior proposal, some commenters

generally recommended that the Board field test and/or further study

the impact its proposal will have on contractors and the Government and

then to reconsider the need for the proposed amendments. For a more

detailed discussion of the commenters' concerns, see ``Cost Benefit

Issues'' contained in Section B below. To better understand such

concerns, the Board will invite a small number of major defense

contractors to participate in a coordinated ``benchmarking'' survey.

The objective of the survey will be to specifically identify the

additional number of contract price and cost adjustment cases that

would result if the Board's current proposal were applied to actual

contractor changes that occurred in a recently completed cost

accounting period. Participation by contractors will be on a voluntary

basis. Collection and identification of the survey data is expected to

be coordinated with the contractor's cognizant Federal audit

organization prior to its submission. These ``benchmarking'' surveys

will be formally initiated by the Board through coordination with

interested industry associations. For those contractors that wish to

participate in the survey but are not included in the resultant

contractor groupings established through coordination with the industry

associations, the survey questionnaire may be obtained by faxing a

request to the CASB staff at 202-395-5105. In such cases, the survey

data should be submitted by the due date specified below. Timely

submitted contractor surveys will be examined, on a sampling basis, by

the cognizant Federal audit organization after they are received by the

CASB.

A. Regulatory Process

The CASB's rules, regulations and Cost Accounting Standards (CAS)

are codified at 48 CFR Chapter 99. Section 26(g)(1) of the Office of

Federal Procurement Policy Act, 41 U.S.C. 422(g), requires that the

Board, prior to the establishment of any new or revised Standard,

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 Notice is a continuation of the third step of the four-step

process.

[[Page 45701]]

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 an 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 NPRM also 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. On July 14, 1997, the CASB published the SNPRM-I

in the Federal Register (62 FR 37654), to solicit additional comments

concerning certain proposed revisions to the previously proposed NPRM

coverage and to solicit comments to determine to what extent, if any,

there may be support for the establishment of new provisions that would

exempt certain voluntary changes in a contractor's cost accounting

practices from the Board's contract price and cost adjustment

requirements.

Public Comments

Of the sixty-nine sets of public comments received in response to

the SNPRM-I, fifty-nine were provided in a timely manner. The public

comments were received from contractors, educational institutions,

professional associations, Federal agencies, accounting organizations,

and other individuals. A number of commenters supported the

establishment of new provisions that would exempt from the Board's

contract price and cost adjustment requirements those voluntary changes

in compliant cost accounting practices that directly result from

changes made by a contractor to improve the economy and efficiency of

its operations. Some commenters supported the proposed amendments

contained in the SNPRM-I. Some did not. Others offered suggestions on

how the proposed coverage might be clarified or otherwise improved. The

responses received in a timely manner are addressed in Section E,

Public Comments.

Certain other inquiries and concerns, of a more general nature,

that were expressed by several commenters with respect to the Board's

overall objectives and rationale for the proposed amendments are

addressed immediately below.

Board Objectives and Rationale

A number of contractors and professional associations questioned

the purpose of the Board's proposed amendments and asked if other more

simplified approaches would not better serve the Government and

contractors. Some commenters felt that the Board had never supplied a

clear rationale for the proposed definition of the term ``cost

accounting practice.'' One commenter stated that because ``cost

accounting practice'' is not so much an accounting concept as it is a

key to the administration of CAS, a statement of purpose or rationale

would help to understand the CAS Board's goal.

The Board's objectives are discussed below.

Continuing Board Objective: To support the Government's procurement

process for negotiated cost-based contracts.

The Board's continuing objective is to promote an acquisition

environment wherein Government contracting officials can, with a high

degree of confidence, rely upon the estimated and actual cost

information provided by contractors relative to (1) the costs contained

in and/or submitted in support of proposed contract prices, (2) the

overall costs of operations and/or (3) the costs of prior contract

performance. Because the Board's CAS and Interpretations often limit or

narrow the range of alternative cost accounting practices that might

otherwise be used by a contractor, or by competing contractors, in

calculating submitted cost information, Government procurement

officials can with a greater degree of reliance make meaningful

analyses and comparisons when contractor submitted cost information is

derived through a contractor's consistent application of CAS compliant

cost accounting practices.

Pursuant to its enabling statue, the Board promulgates CAS and

Interpretations that are designed to achieve uniformity and consistency

in the cost accounting practices used by contractors to estimate,

accumulate and report costs. The concepts of ``uniformity'' and

``consistency'' are set forth in the Board's ``Statement of Objectives,

Policies and Concepts'' (57 FR 31036, 7/13/92). The Board's rules also

require the larger CAS-covered contractors to formally disclose to the

Government their established cost accounting practices, via submission

of a disclosure statement. Disclosure reduces the potential for

Government misunderstandings concerning contractor cost information

submissions. Consequently, the submission of estimated or actual cost

information developed by contractors based on the consistent

application of CAS compliant cost accounting practices enables the

Government to make more meaningful cost comparisons between competing

contractors, facilitates the negotiation of fair and reasonable

contract prices, and permits the Government to make more reliable

comparisons of a particular contractor's estimated and actual contract

costs.

Immediate Board Objective: To bridge the gap between contractor

cost accounting matters and the Government's procurement process for

negotiating and administering negotiated cost-based contracts,

particularly when contractors fail to apply their established cost

accounting practices in a consistent manner, fail to comply with

applicable CAS or make compliant changes to their established cost

accounting practices.

Statutory Requirement. Under its enabling statute, the Board is

required to promulgate regulations that require contractors and

subcontractors to ``* * * agree to a contract price adjustment * * *

for any increased costs paid to such contractor or subcontractor by

reason of a change in the contractor's or subcontractor's cost

accounting practices or by reason of a failure by the contractor or

subcontractor to comply with applicable cost accounting standards.''

Accordingly, the Board's implementing regulations include provisions

that are designed to establish what constitutes a ``change to a cost

accounting practice'' and ``increased cost'' to the Government. The

Board's regulations also provide for contract price and cost

adjustments if a contractor changes its established cost accounting

practice or applied a noncompliant practice. The Board's current

proposal is designed to facilitate the implementation of the Board's

statutory requirements.

Cost Accounting Practice Definition: Consistent with the Board's

statutory requirements, the purpose of the Board's proposed amendments

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

``change to a cost accounting practice'' is to direct the contracting

parties to focus on the cost accounting

[[Page 45702]]

practices actually used by contractors to accumulate cost in cost pools

for subsequent allocation to intermediate and final cost objectives

when determining if a voluntary change in cost accounting practice has

occurred. Specifically, the proposed amendments make clear that changes

in the selection and/or composition of cost pools are changes in the

methods and techniques used to allocate cost to cost objectives, i.e.,

a change to a cost accounting practice.

Based on the commenters' stated perceptions, some contractors

apparently believe that the term ``cost accounting practice'' as

defined in the Board's existing rules is merely a contractual term of

art that is used to identify a finite or limited number of

circumstances which trigger contract price or cost adjustments under

the terms and conditions of CAS-covered contracts. In their view, a

change in cost accounting practice only occurs if the change is

specifically cited or illustrated in the Board's rules. That line of

reasoning would inappropriately preclude from consideration the

complete spectrum of cost accounting practices actually used by each

contractor to accumulate costs in cost pools for subsequent allocation

to intermediate and final cost objectives. The commenters' inferences

are that the Board has the ability to promulgate a rule that describes

or illustrates every conceivable circumstance that the Board considers

to be a change to a cost accounting practice for each contractor

performing CAS-covered contracts. That, however, is not feasible or

desirable. Instead, the Board's objective is to maintain cost

accounting practice definitions that can be related to each

contractor's established cost accounting practices.

The Board's proposed definitions are, therefore, from a broader

perspective. The Board's objective is to permit the application of the

Board's rules to all contractors and subcontractors, regardless of

their specific individual cost accounting practices applied to

accumulate costs. The Board's expectations are that the contracting

parties will be able to determine, on a case-by-case basis, whether a

change in a particular contractor's established cost accounting

practice has occurred based on the revised language contained in the

Board's proposed definitions. Under the definition being proposed

today, if a contractor makes changes that alter the flow of pooled

costs to intermediate and final cost objectives, for ongoing functions,

such changes would generally be considered a change in cost accounting

practice. Thus, it is the substance of the actual change made that is

to be evaluated by the contracting parties. A cost accounting practice

change may occur even if it is not specifically depicted in the Board's

rules.

The accompanying illustrations are a secondary source of guidance

regarding the application of the primary policy reflected in the

definitional language. A determination that a change in practice has

occurred should normally result whenever there is a change in how

pooled costs are accumulated for allocation to intermediate and final

cost objectives. The determination is, therefore, not limited to only

those circumstances that replicate the conditions associated with the

changes in cost accounting practices illustrated in the Board's amended

rule or by any previously proposed coverage (proposed definitional

language or illustrations) associated with this rulemaking that is not

eventually incorporated in the final rule.

Contract Price and Cost Adjustments. In proposing a new subpart

9903.4, the Board's objective is to establish a definitive cost impact

process that fully considers and reflects how contractor submitted cost

information is used by the Government (i) to negotiate contract prices

at the time of award, (ii) to convert cost ceilings or target costs

into final contract prices for flexibly priced contracts after award,

and (iii) to pay contract costs under the terms and conditions of the

different types of negotiated cost based contracts (FFP, CPFF, etc.)

that are utilized by the Government to obtain products, supplies and

services, research, etc.

Contractor cost estimates submitted to support proposed contract

prices for the performance of specific tasks generally reflect the

amount of direct and indirect costs that contractors expect they will

actually accumulate in accordance with their established cost

accounting practices after receipt of a contract award, if they were

selected to perform the specific tasks. The Government's negotiators

rely upon such cost estimates when they establish the negotiated

contract price at the time of contract negotiations, prior to contract

award. If a contractor changes a compliant cost accounting practice

after contract award, the amount of costs accumulated for existing CAS-

covered contracts may increase or decrease in comparison to the amounts

that would have been accumulated had no practice change been made. Such

post award changes made by a contractor could result in the payment of

increased costs by the Government. If a contractor applied a

noncompliant cost accounting practice, the amount of estimated costs

based on the noncompliant practice may result in overstated or

understated negotiated contract prices and/or the amount of actual

costs accumulated for resultant CAS-covered contracts may be higher or

lower than the amounts that would have resulted if a compliant practice

had been used to accumulate costs. In such circumstances, contract

price or cost adjustments may be required to preclude the payment of

increased cost, to correct overstated contract prices and to deobligate

overstated funding obligations that resulted from an estimating

noncompliance, or to address individual contract cost overrun or

underrun conditions that may result. Adjustments may also be required

so that Government cost comparisons between estimated and actual costs

of contract performance contained in contract cost status reports

result in valid comparisons.

By proposing a definitive cost impact process, the Board is taking

action to establish how the contracting parties are henceforth to:

Estimate the amounts by which the amount of costs

accumulated under existing CAS-covered contracts will increase or

decrease after a compliant cost accounting practice change is made.

Convert the estimated changes in cost accumulation

(increases or decreases) for individual contracts to equitable contract

price adjustments for ``required'' and ``desirable'' practice changes.

Determine if ``voluntary'' cost accounting practice

changes made unilaterally by a contractor after contract award will

result in the payment of increased costs, in the aggregate, by the

Government and to prescribe the actions to be taken to preclude the

payment of the aggregate increased costs. At the time of contract

award, a contractor agrees to consistently apply its established cost

accounting practices when accumulating and reporting the costs of

contract performance. A voluntary change in cost accounting practice

negates that agreement and triggers the CAS contract clause price and

cost adjustment provisions which preclude the Government from paying

aggregate increased costs (as defined by the Board) that may result

from a voluntary change in cost accounting practice. When a contractor

makes a voluntary change to its established cost accounting practices,

the amount of contract costs accumulated by the contractor for

individual contracts may increase or decrease as compared to the

amounts

[[Page 45703]]

that would have been accumulated for the individual contracts had the

practice change not occurred. The cost impact process being proposed

prescribes how to determine if the Government would pay ``increased

costs,'' in the aggregate, as the result of a voluntary change in

practice for the different types of contracts that may be involved (FFP

or flexibly priced contracts). The increased cost determination is

predicated upon an analysis of the changes in individual contract cost

accumulations that are expected to result after the practice change and

a determination on whether or not contract price adjustments or other

actions are required to preclude the payment of aggregate increased

costs, e.g., require adjustment of the Government's contractual

obligations to pay the negotiated cost-based contract prices (FFP or

cost ceilings for flexibly priced contracts) which were determined at

the time of award based on proposed contract costs that were estimated

in conformity with the contractor's then established cost accounting

practices and the contractor's agreement to consistently apply such

established practices when accumulating and reporting the actual costs

of contract performance.

Convert the estimated changes in cost accumulations

(increases or decreases) for individual contracts to contract price

adjustments and/or other actions that may be required to preclude the

payment of increased costs or to otherwise reflect the cost impact of

``voluntary'' cost accounting practice changes.

Determine if increased cost to the Government, in the

aggregate, occurred in the event a noncompliant cost accounting

practice was used to estimate contract costs and/or to accumulate

contract costs.

Correct noncompliant conditions.

The purpose of the foregoing discussion is intended to guide

interested parties in commenting on the Board's proposal.

Alternative Procedures

Some commenters advocated that the use of other approaches might

better serve the Government and its contractors. The thrust of their

arguments was that other measurement criteria for evaluating the

reliability of contractor cost submissions and remedies for

``unreliable'' cost submissions might be developed with the result that

the contracting parties would incur less administrative costs. General

references were made to recent regulatory changes established by the

procurement community in response to acquisition reform legislation

that produced ``streamlined'' acquisition regulations for contract

awards where contract prices are generally based on ``adequate price

competition,'' e.g., the use of ``past performance'' evaluations for

determining responsible sources and ``Process Oriented Contract

Administration Services (PROCAS),'' a ``team approach'' review program

developed by the Defense Logistics Agency that establishes increased

reliance on contractor internal control procedures so that Government

surveillance can be lessened. How such alternative processes might be

related to the implementation of the Board's statutory requirements for

negotiated cost-based contracts was not, however, detailed. Any

alternative system, if designed to provide the basis for making

meaningful evaluations regarding compliance with the Board's CAS and

the resulting submission and use of contractor prepared cost

information, would require a baseline or benchmark against which

submitted cost information could be measured, verified and equitably

adjusted if unreliable cost information had been submitted. Additional

contractor reporting systems and new measurement criteria relative to

the Board's statutory requirements would need to be developed and

implemented. Team reviews also consume considerable resources, pose

scheduling delays, and are generally invoked only at the largest

contractor locations.

In a cost-based contracting environment, the use of such

alternative processes may not be as effective or less costly than the

Board's administrative requirements. The Board has carefully considered

the commenters' views and believes that its regulatory requirements

(once amended as proposed in this SNPRM-II) and Standards result in a

reasonably efficient and effective process for administering contractor

cost accounting matters that affect the pricing of negotiated cost-

based Government contracts and subcontracts.

Cost Benefit Issues

Cost Accounting Practice Definition

A number of commenters opined that the costs of implementation of

the Board's proposed amendments would exceed any cost savings the Board

might expect from the potential recovery of increased costs paid by the

Government. The commenters premised their concerns on the notion that

the proposed amendments to the Board's definitions of a ``cost

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

increase the number of cases (cost accounting practice changes) that

will need to be reported to the Government and subjected to the Board's

cost impact process. They reasoned that the increased number of cases

will, in turn, increase the Government's and contractors'

administrative costs over the levels currently being experienced.

Consequently, they generally recommended that the Board field test and/

or further study the impact its proposal will have on contractors and

the Government and then reconsider the need for the proposed

amendments. It is their belief that the Board will find that the

Government's and contractors' administrative cost levels would increase

substantially while any increase in the levels of ``increased costs''

to be recovered by the Government would not justify the higher

administrative cost levels.

The Board acknowledges that for some contractors the reported

number of cost accounting practice changes that would become subject to

the Board's contract price or cost adjustment process may increase when

compared to the number currently being reported. The possible increase

would not be due to the actual number of ``changes'' made each year,

but rather due to those changes that have been made routinely in the

past but were not treated by the contractor as a ``change to a cost

accounting practice'' (e.g., pool combinations, pool split-outs, and

transfers of ongoing functions from one pool to another pool). Some

contractors do not believe such changes are currently subject to the

Board's consistency requirements and CAS contract price and cost

adjustment provisions due to their interpretations of the Board's

existing definitions, illustrations and rulemaking history regarding

the definition of a change to a cost accounting practice.

Such cost pool changes normally impose additional non-CAS driven

administrative burdens on both the Government and contractors because

they generally require the negotiation of revised sets of forecasted

indirect cost rates for contract cost estimating purposes and the

establishment of revised sets of provisional and actual indirect cost

rates for the payment of accumulated actual contract costs. These

revisions are required whenever changes in the accumulation of pooled

costs significantly affect estimated and/or actual contract cost

accumulations. However, this additional administrative cost burden does

not appear to be a contractor concern since these corollary

administrative actions were not mentioned. Also not considered was the

impact of the alternative outcomes and

[[Page 45704]]

alternative administrative actions that would result if the CAS cost

impact process were not applied to uniformly resolve individual

contract cost overruns or under-runs that may result from such changes.

A study of Government cost recoveries is not needed since the Board

does not expect that only contract price reductions will occur due to

the promulgation of this proposed rule. The contract price and cost

adjustments made under the CAS cost impact process generally increase

and decrease individual contract prices and costs in synchronization

with the increase or decrease in actual cost accumulations expected to

result from the practice change. If the Government determines a

practice change to be a ``desirable change'', then the Government may

increase, not decrease, contract prices in the aggregate. The objective

is to track the expected changes in cost accumulation for the

individual covered contracts and to adjust individual contract prices,

if necessary. It is not to gain an advantage for the Government. The

``savings'' will accrue through the Government's continued reliance on

contractor cost submissions, the Government's ability to adjust

contract prices and costs to preclude the payment of increased costs

(as defined by the Board), and the implementation of a less burdensome

cost impact system.

The commenters' ``cost savings'' rationale avoided the basic issues

under consideration by the Board, i.e., what constitutes a change in a

contractor's established cost accounting practices used to estimate,

accumulate and report costs for covered contracts, and, has the Board's

statutory requirement to preclude the payment of ``increased costs''

been implemented in an effective manner? Their arguments were limited

to the premise that if the proposed amendments increase existing

administrative cost levels to the contractor and/or there is no

significant increase in the level of amounts recovered by the

Government, promulgation of the proposed amendments is not justified.

Throughout this rulemaking process, contractors continued to

advocate that, from a technical prospective, the definition of a change

to a cost accounting practice should not be amended, i.e., the Board's

contract price and cost adjustment provisions should not be triggered

if a contractor's estimated cost proposal was predicated on the

accumulation of estimated pooled costs in a particular manner and,

after contract award, the contractor elected to accumulate actual

pooled costs differently and thereby altered the amount of actual

contract costs accumulated for individual contracts. This

administrative cost burden argument is really an extension of those

technical arguments which are addressed elsewhere in this Preamble.

However, as presented, the burden argument ignores the potential direct

``cost'' risk to the Government in terms of increased contract prices

or costs that may result and be billed to the Government due to such

post-award changes. By objecting on the basis that the Board's proposed

amendments will increase the administrative cost burden, some

contractors are really arguing that the CASB's requirements for

adjusting contract prices to reflect the changes in the accumulation of

pooled costs allocated to individual contracts, should not be applied.

If such ``burden'' arguments were accepted, the CASB's cost impact

process would not be used to uniformly resolve individual contract cost

shifts resulting from such changes. The Board does not agree with such

views. The Board does not believe that the commenter's arguments have

technical merit or that the Board's proposal will materially increase

the overall administrative cost burden level currently imposed by the

Government on cost-based contractors.

The Board's objective is to consistently treat unilateral changes

made by contractors that alter the manner by which the costs of ongoing

functions are accumulated in cost pools for subsequent allocation to

intermediate and final cost objectives as a change in cost accounting

practice. Such contractor changes are viewed as a constant. They occur

irrespective of the Board's rules, regulations and Standards.

Therefore, the issue is simply whether changes in the accumulation of

pooled costs that alter the flow of costs to intermediate and final

cost objectives are also to be recognized as changes in a contractor's

cost accounting practices for contract pricing purposes.

To ensure that equity results from the Government's cost-based

contract pricing process, the Board is of the opinion that a change

made by a contractor which alters the flow of costs to cost objectives,

for ongoing functions, constitutes a change in cost accounting practice

for contract cost or pricing purposes. In the final analysis, an

approach that protects the Government's interests in an equitable

manner, consistent with the Board's enabling statute, is needed in a

cost-based contracting environment. The benefits of commonly understood

definitions that result in implementation of the Board's statutory

requirements will tend to negate the administrative costs of

implementation even if some administrative cost levels were to increase

for a short time. This is because the Board's existing rules have not

resulted in an effective, easily understood and agreed to regulation.

The contracting parties have experienced contentious disagreements and

legal disputes concerning amounts paid under covered contracts after

contractors made ``changes'' that altered the flow of costs to

intermediate and final cost objectives which in turn altered the

aggregate amount of accumulated contract costs. Settlement of these

disagreements and adjudication of the resulting legal cases,

particularly when extended over long periods of time, have produced

significant ``administrative costs'' to both the Government and

contractors. It is the Board's expectation that finalization of this

proposal to more precisely define what constitutes a ``change to a cost

accounting practice'' will reduce the potential for such disagreements

and therefore will obviate the cost of protracted legal proceedings for

many such changes in the future.

Cost Impact Process

The Board found that the administrative process for making the

contract price and cost adjustments has not always been implemented in

a uniform manner, and that the ``undocumented'' procedures and

processes for making such adjustments is not widely understood by the

Government or its contractors. The proposed cost impact process

delineates the entire process to be followed when a contractor changes

a compliant cost accounting practice, or is required to correct a non-

compliant practice. It addresses when notification of a practice change

is required and specifies a flexible process for determining and

resolving the cost impact of a cost accounting practice change or

noncompliance. The Board believes that the proposed process, when

promulgated as a final rule, will prove to be more flexible and less

burdensome than current practices. It will also facilitate user

comprehension of the process and thereby tend to reduce the overall

amount of administrative effort currently being expended to resolve

individual cases.

In Summary

The Board's continuing objectives are to maintain its existing

rules and Standards in a manner that is consistent with its enabling

statute. The purpose of the Board's current proposal is to focus

[[Page 45705]]

on the two basic issues that are an essential part of the Board's

overall contract price and cost adjustment process, i.e., what

constitutes a ``cost accounting practice'' and how to administer CAS-

covered contracts in the event a contractor or subcontractor makes a

change to its otherwise compliant cost accounting practices or a

contractor or subcontractor does not comply with an applicable CAS when

estimating, accumulating or reporting costs. Based on the public

comments received throughout this proposed rulemaking, it is clearly

evident that disagreements still exist over what should constitute a

change in a contractor's established cost accounting practices for

purposes of triggering the CAS contract price and cost adjustment

process. Accordingly, the Board believes that the amendments being

proposed today are needed to facilitate implementation of the Board's

statutory mandate concerning the payment of increased costs

attributable to contractor cost accounting practice changes, and that

the contracting community will benefit from the promulgation of a

flexible cost impact process that is designed to achieve a more

flexible and less burdensome administrative process.

The Board does not believe that its proposed amendments, when

promulgated as a final rule, will increase the level of administrative

costs currently being experienced by contractors and Government

agencies by any appreciable margin. In the long run, the benefits

accruing from a more precise definition of a ``change to a cost

accounting practice'' and a more flexible cost impact process should

reduce, not increase, the overall administrative burden currently being

experienced by contractors and agencies.

Proposed Amendments

A brief description of the proposed amendments follows:

Part 9903, Contract Coverage--Proposed Amendments

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 provide exemption criteria for determining if a voluntary

change in cost accounting practice associated with certain

restructuring activities can be exempted from the contract price or

cost adjustment requirements prescribed in part 9903. Subsection

9903.201-7 is amended to establish criteria for determining when a

voluntary change in cost accounting practice is desirable and not

detrimental to the Government's interests and to establish alternate

processes for resolving desirable changes. Subsection 9903.201-8 is

added 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 terms

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

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 voluntary change in cost

accounting practice associated with restructuring activities can be

exempted from contract price or cost adjustment.

Provide criteria for determining when a non-exempted voluntary

change in cost accounting practice can be determined to be a desirable

change that is not detrimental to the Government's interests.

Provide a more flexible process for resolving the cost impact of

certain desirable changes.

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, 9903.301 is amended to incorporate two

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

objective.'' The amendments made to 9903.302-1(c), Allocation of cost

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

considered to be a cost accounting practice, including the methods and

techniques used to accumulate the cost of specific activities in cost

pools. Additional subparagraphs are added to clarify the concepts

associated with 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 added regarding

the use of the illustrations that follow. Introductory paragraphs (a),

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

``cost accounting practices'' that have changed. The

[[Page 45706]]

illustration at 9903.302-3(c)(3) is 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 a 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 new 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 for the submission of ``cost savings''

data that will enable the cognizant Federal agency official to promptly

determine if a voluntary change can be exempted from contract price or

cost adjustment. For changes in cost accounting practices that can not

be exempted, 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 proposed 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 addresses 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 on individual

contracts 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 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, details the processes 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. 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 proposal 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 proposed rule was developed after consideration of the public

comments received in response to the Board's NPRM (61 FR 49196, 9/18/

96) and the SNPRM-I (62 FR 37654, 7/14/97) that were published in the

Federal Register, wherein public comments were invited. The NPRM

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

were reflected in the SNPRM-I. The supplemental comments received in

response to the SNPRM-I and the Board's actions taken in response

thereto are summarized in the paragraphs that follow:

Contract Price and Cost Adjustment Exemption

Comment: Although commenters remained concerned regarding the level

of detail that would be needed to obtain an exemption, they expressed

strong support for the creation of a provision that would exempt from

the Board's contract price and cost adjustment requirements those

voluntary changes in

[[Page 45707]]

cost accounting practices that are associated with management changes

made to improve the efficiency and effectiveness of a contractor's

operations.

Response: The Board's deliberations focused on how a voluntary

change to a contractor's established cost accounting practices should

be treated under the Board's rules when the practice change is directly

associated with management actions undertaken to improve the economy

and efficiency of the contractor's operations. It is the Board's

continuing belief that the Government should be informed of any changes

made to the contractor's established cost accounting practices that are

being used to accumulate and report the costs of performing existing

CAS-covered contracts. Such notification facilitates the contract

administration process and beneficially reduces the potential for

disputes, particularly if a disclosure statement is required. However,

in cases where a change in cost accounting practice is made in

conjunction with contractor restructuring activities that are

undertaken to reduce personnel or facilities in order to significantly

lower the contractor's overall costs of operations, the contract price

and cost adjustment process contractually required for changes in cost

accounting practices under existing CAS-covered contracts may not be

necessary or appropriate.

For example, assume that after contractor restructuring activities

and associated practice change(s) are implemented concurrently, a

reduction in the contractor's future overall operating costs is

expected and the aggregate costs accumulated for existing covered

contracts are also expected to be less than the aggregate costs that

would have been accumulated if the restructuring activities had not

been made by management. In such cases, it would generally be

inappropriate to separately adjust existing contract prices or costs

only for the cost impact of the change in cost accounting practice.

That is because the aggregate CAS cost impact calculation for a

practice change is based on the application of the original and changed

cost accounting practices to the contractor's lower level of costs

expected to result after restructuring changes are implemented. It does

not give consideration to the impact that the lower overall operating

cost levels (cost savings) expected to result from the restructuring

activities will have, in the aggregate, on accumulated contract costs

for existing covered contracts. Nor would the CAS cost impact

adjustments give consideration to the effects of any resulting contract

ceiling or target price adjustments or decisions that may otherwise be

made by the Government based on the expected aggregate reductions in

accumulated costs for the existing contracts as reported in the

contractor's restructuring cost savings submissions or contract cost

performance status reports. For such actions, the Government's

decision(s) would be based on reported cost information that already

reflects the application of the new changed cost accounting practices

to the lower level of costs expected to occur after the restructuring

changes are made by management. Consequently, an independent CAS

contract price or cost adjustment made for the shift in costs

attributable only to the cost accounting practice change(s) might

alter, in part, the contractor's reported cost savings estimates and/or

any resultant actions otherwise taken by the Government.

After considering this matter at length, the Board proposes to

establish contractor notification requirements for any changes made to

the contractor's established cost accounting practices (at 9903.405-2).

The Board also proposes to establish an exemption from its contract

price and cost adjustment requirements for certain voluntary changes

made to a contractor's cost accounting practices (at 9903.201-6). The

proposed exemption would become applicable when the cognizant Federal

agency official determines that the Board's promulgated criteria for

granting the exemption has been met: i.e., when a contractor adequately

demonstrates that a planned restructuring activity is expected to

result in cost savings to the Government; the practice change would not

occur but for the planned restructuring activity; reductions in

contractor personnel or facilities will occur; and reduced contract

cost accumulations are expected to occur, in the aggregate, for

existing flexibly priced contracts, and all expected future CAS-covered

contracts and subcontracts.

If a change in cost accounting practice directly associated with

planned restructuring activities were exempted, existing flexibly

priced contracts would, however, remain subject to applicable contract

terms and conditions prescribed in agency procurement regulations.

Accordingly, the Contracting Officer may still make individual contract

cost ceiling and/or target cost adjustments or otherwise take action to

address any potential contract cost overrun and/or underrun conditions

that are expected to result due to the restructuring activities.

The administrative process for requesting the exemption and

granting an exemption is also proposed at 9903.405-2 and 9903.405-3.

When a contractor requests an exemption, the submission of some

contractor information is necessary concerning the contract cost

accumulation changes and cost savings that are expected to result from

the planned restructuring activities. Otherwise, the cognizant Federal

agency official would not have a reasonable basis for determining, in a

meaningful manner, if a planned cost accounting practice change meets

the Board's specified exception criteria, and should be exempted, or if

the practice change should be subjected to the Board's standard

contract price and cost adjustment process.

Comment: A Federal agency supported the establishment of an

exemption for improved management efficiency and effectiveness. It

recommended, however, that the exemption only be granted when the

contractor meets the Board's stated requirements and the cognizant

Federal agency official makes a determination, based on the facts and

circumstances of the situation, to grant the exemption. A related

concern was that flexible contract adjustment provisions were needed so

that adjustments can be made for shifts in contract costs resulting

from changes made in cost accounting practices to ensure that

contractor completion of flexibly priced contracts would not be

jeopardized.

Response: In considering the establishment of an exemption, the

Board did not expect to establish a mandatory exemption provision that

would obviate the need for determinations, on a case-by-case basis, by

the cognizant Federal agency official on whether a cost accounting

practice change should be exempted. A unilateral exemption decision by

the contractor was not envisioned, e.g., the draft ``Option B''

language included in the SNPRM-I provided that the contractor would

request an exemption and the cognizant Federal agency official would

notify the contractor if the Board's exemption criteria had been met

and that the voluntary change would be exempt.

The Board's objective is to not discourage restructuring

activities. Consequently, the Board is proposing an exemption provision

so that cognizant Federal agency officials will not be required to

apply the Board's contract price and cost adjustment process for

certain changes in cost accounting practice that are directly

associated with certain restructuring activities. The exemption would

only apply when a

[[Page 45708]]

cognizant Federal agency official finds that contract price and cost

adjustments otherwise required under the Board's regulations for

existing contracts are not considered necessary to protect the

Government's interest. This would occur where the cognizant Federal

agency official determines that a contractor has met the Board's

proposed exemption criteria which includes a demonstration that

aggregate reductions in contract cost accumulations for existing

flexibly priced CAS-covered contracts and future CAS-covered contracts

are expected to result from the planned restructuring activity.

However, when such ``cost savings'' to the Government are expected to

occur in the aggregate due to restructuring and a voluntary cost

accounting practice change is made concurrently with the restructuring

change, then the two changes made in unison may produce cost underrun

and/or overrun conditions for some individual flexibly priced type

contracts. In such cases, the Board would expect that, as a normal

contract administration matter, the contracting parties would mutually

agree to concurrently decrease or increase the affected contract

ceiling or target prices, and revise funding obligations, as necessary,

to reflect the lower cost accumulations (cost savings), expected in the

aggregate, for all affected flexibly priced contracts. The overall

objective of such actions would be to recognize the aggregate ``cost

savings'' and to address (correct) any individual contract cost overrun

conditions that might result under existing CAS-covered contracts and

subcontracts.

When the aggregate cost accumulations for existing flexibly priced

contracts are expected to increase due to planned restructuring

activities, then the cognizant Federal agency official may grant the

exemption if a determination is made that the ``cost savings'' expected

to result under future covered contract awards exceed the aggregate

increase for such existing contracts. However, the resulting cost

overrun conditions for such exempted CAS-covered contracts would remain

subject to the same Contracting Officer actions that are normally taken

to address cost overruns in accordance with the existing contracts'

other terms and conditions that are prescribed in applicable agency

procurement regulations.

The Board's intent is to provide flexibility to cognizant Federal

agency officials administering CAS-covered contracts and subcontracts

while also providing assurance to contractors that requests for the

proposed exemption will generally be granted when the Board's specified

criteria are applied. The granting or use of the Board's proposed

exemption should not otherwise disrupt the Government's ongoing

administration of CAS-covered contracts.

In response to the commenter's concerns, the Board proposes to

establish a ``finding'' requirement at 9903.201-6 to clarify that a

cognizant Federal agency determination is needed before a voluntary

change in cost accounting practice can be considered exempt from a CAS-

covered contract's contract price and cost adjustment provisions. The

establishment of an adjustment provision for flexibly priced contracts

to address the potential cost overrun conditions attributable to a

change in cost accounting practice associated with a planned

restructuring activity was not considered necessary.

Comment: A number of commenters advocated that if an exemption

provision is promulgated, the coverage should not be limited to

``transfers of functions'' or ``merger of cost pools.'' Several

commenters recommended that the exemption language not be limited to

cost accounting practice changes resulting from ``organizational

changes.'' Conversely, some commenters objected to the promulgation of

an exemption based on their belief that an exemption for economy and

efficiency changes would be abused. They opined that virtually every

change in cost accounting practice could be covered as a change made

for ``improved management efficiency and effectiveness.''

Response: The exemption criteria being proposed today has been

expanded to include any changes in the ``allocation of cost to cost

objectives'' (9903.201-6(c)) that occur within a cost accounting

period, i.e., ``intra-period'' cost shifts. Changes involving the

``measurement of cost'' or the ``assignment of cost to cost accounting

periods'' are not subject to exemption.

The Board also shares the concerns expressed by those commenters

advocating that no exemption be provided in order to avoid the

potential for abuse. In that regard, the SNPRM-I ``Option B'' exemption

criteria has been modified to require an adequate contractor

demonstration that the planned restructuring activities, when

implemented, are expected to result in cost savings to the Government,

in the aggregate. With regard to the latter, this proposed rule also

requires a demonstration of the expected impact on projected cost

accumulations for existing CAS-covered FFP contracts. Contract price

adjustments normally required to resolve the cost impact resulting

solely from a voluntary change in cost accounting practice would not,

however, be required for existing CAS-covered FFP contracts, if the

practice change is exempted. But the data submission in a FFP

environment would provide support for the determination that similar

offsetting ``cost savings'' can be reasonably expected to occur in

future CAS-covered contracts.

The Board will revisit this matter if subsequent events reveal that

the proposed exemption is ``abused'' after promulgation as a final

rule.

Comment: A commenter opined that the proposed language would limit

the exemption only to organizational changes that involve ``physical''

actions. The commenter recommended that a clarifying revision be made

to permit changes that make more efficient use of existing facilities

and personnel or increase productivity of those facilities and

personnel.

Response: The proposed requirement for physical actions to evidence

that a significant nonrecurring management change was being made to

improve the economy and efficiency of operations has been retained in

the exception being proposed today. The Board's intent is to provide a

clear distinction between management actions taken to lower overall

operating cost levels through reductions in personnel or facilities

(physical changes) where any associated voluntary change to a cost

accounting practice should be exempted, and other management actions

taken to otherwise improve the economy and efficiency of operations

where any associated voluntary change in cost accounting practice would

remain subject to the cost impact process required for existing CAS-

covered contracts. The proposed provisions are intended to facilitate

overall contract administration activities, protect the Government's

interests and reduce the potential for disagreements over whether a

particular management change resulting in a voluntary change to an

established cost accounting practice is an ``exempt'' or a

``desirable'' change under the Board's rules.

Comment: The draft Option B exemption should be applicable to all

organizational changes (both internal and external) that meet the

benefit test.

Response: The exemption criteria being proposed today applies to

all restructuring activities as defined by the Board at 9904.406-61(b).

It is not limited to ``external restructuring activities'' as currently

defined in the Defense Federal Acquisition Regulation

[[Page 45709]]

Supplement (DFARS) at DFARS 231.205-70(b)(2).

Contract Price and Cost Adjustment Exemption for Changes in the

Composition of Overhead and General an Administrative Expense Pools

Comment: A number of commenters felt the CASB staff's draft

``Option C'' presented for the Board's consideration was not useful. A

few commenters believed that the draft ``Option C'' exemption concept

was feasible and that it provided adequate protection to the

Government.

Response: The Board has not incorporated this concept in this

proposed rule.

Desirable Changes

Comment: Several commenters who supported the draft ``Option B''

exemption provision also advocated that the Board retain the proposed

SNPRM-I mandatory ``desirable change'' provisions requiring the

cognizant Federal agency official to find as ``desirable'' all

voluntary cost accounting practice changes made to improve the

efficiency and effectiveness of a contractor's operations.

A Federal agency recommended that the proposed mandatory desirable

change criteria for changes in cost accounting practice that result in

``cost savings'' be deleted because the proposed criteria precludes

consideration of other relevant facts and circumstances. In addition,

if ``cost savings'' form the basis for granting a requested exemption,

as advocated by the commenter, then contractors should not have the

ability to choose between an exemption or a desirable change provision.

A Federal agency, with oversight responsibilities, recommended

deletion of the SNPRM-I proposed amendment mandating desirable change

findings for contractor changes made to improve the economy and

efficiency of operations, and strongly supported the draft exemption

provisions included as ``Option B'' because it offered ``* * * controls

to protect the Government * * *'' The commenter felt that the proposed

SNPRM-I amendments for desirable changes, at 9903.201-6(c)(2), did not

offer adequate protection to the Government.

Response: A desirable change determination permits the contracting

parties to increase existing CAS-covered contract prices, in the

aggregate, to reflect the aggregate increased costs to the Government

(as defined by the Board) that are expected to result from a

contractor's voluntary change in cost accounting practice. In such

cases, equitable contract price adjustments are negotiated to resolve

the cost impact of the changes in contract cost accumulations that are

estimated to result for the existing CAS-covered contracts due to the

practice change. Where the cost impact of a practice change on existing

CAS-covered contracts does not result in increased costs to the

Government, in the aggregate, a desirable change determination is not

needed to effect the required contract price and/or cost adjustments,

in the aggregate. Only if the cost impact of a practice change on

existing contracts results in aggregate ``increased costs'' after the

change is made, would a desirable change determination serve a useful

purpose.

In the SNPRM-I, the proposed mandatory desirable change

determination criteria included changes in cost accounting practices

attributable to organizational changes where ``cost savings'' were

expected to occur under existing and/or future CAS-covered contracts.

That provision was proposed as a stand alone amendment in the SNPRM-I,

on the premise that the proposed mandatory provision would not be

accompanied by an exemption provision for changes in cost accounting

practices associated with management changes that are expected to

result in more economical and efficient operations or cost savings (see

the introduction to item 2 of the draft ``Option B'' provisions, in the

SNPRM-I, which indicated that the desirable change criteria proposed at

9903.201-6(c)(2) for economy and efficiency improvements would be

deleted or modified if the ``Option B'' draft exemption were

established (62 FR 37671, 7-14-97)).

The Board believes the underlying merits of cost accounting

practice changes that result in aggregate ``increased costs'' to the

Government, as defined by the Board, need to be evaluated on a case-by-

case basis. It would be inappropriate to mandate that ``all'' voluntary

practice changes made ostensibly for improved economy and effectiveness

reasons be deemed desirable changes that are not detrimental to the

Government if expected cost savings to the Government cannot be

demonstrated for existing and/or future contracts.

As specified under ``Contract Price and Cost Adjustment

Exemption,'' the Board concluded that contract prices and costs should

not be separately adjusted to only reflect the cost impact of a change

in cost accounting practice when that practice change is associated

with planned restructuring activities that are expected to produce cost

savings to the Government. Furthermore, it would be inappropriate to

establish two provisions, an exemption provision and a desirable change

provision to cover cost accounting practice changes made for the same

reason, i.e., restructuring changes that produce cost savings. The

contracting parties would undoubtedly experience endless debate over

which one of the two provisions should be applied in a particular

circumstance.

The Board has therefore concluded that one consistent approach is

needed for cost accounting practice changes that are associated with

management actions which are expected to produce costs savings. In

consideration of the comments received, the Board's current proposal is

to require the following:

Where the cognizant Federal agency official finds that cost savings to

the Government are expected to result from planned restructuring

activities in accordance with the Board's prescribed criteria, the

changes in cost accounting practice directly associated with such

restructuring activities will be exempted from the CAS contract price

and cost adjustment requirements, unless a determination is made that

the exemption would otherwise be detrimental to the Government's

interests.

--Where the cognizant Federal agency official finds that cost savings

to the Government are expected to result from planned management

changes, including planned restructuring activities that do not result

in an exemption determination in accordance with the Board's proposed

exemption criteria at 9903.201-6, the changes in cost accounting

practice directly associated with such management changes will

generally be treated as a ``desirable change.'' In such cases, the CAS

contract price and cost adjustments normally required to resolve the

resulting cost impact of the practice change may be otherwise resolved,

without requiring the submission of additional data in the form of a

cost impact proposal, provided a determination is made that an

alternative resolution (based on the contractor's previously submitted

expected ``cost savings'' and contract cost accumulation changes data

(see 9903.405-2(e)) is not detrimental to the Government's interests.

The Board believes that the proposed ``cost savings'' demonstration and

alternative resolution determination requirements should provide

adequate controls to protect the Government's interests.

[[Page 45710]]

--All other voluntary changes in cost accounting practices made for any

other reason will remain subject to the Board's voluntary change ``no

increased cost'' prohibition and other related desirable change

provisions (see proposed 9903.201-7(c)(3)).

In conjunction with the exemption being proposed today, the Board

has modified the mandatory desirable change amendment that was proposed

in the SNPRM-I at 9903.201-6(c)(2). Essentially, the Board's current

proposal is to amend its existing desirable change criteria to provide

that a voluntary change to a cost accounting practice, including those

associated with restructuring activities but not exempted under

9903.201-6(a), shall be deemed to be desirable change if the contractor

can demonstrate cost savings to the Government, in the aggregate, for

existing flexibly priced and all future CAS-covered contracts or

otherwise demonstrate desirability of the practice change (see

9903.201-7(c) (2) and (3)).

Comment: A Federal agency responded that contract disputes have

arisen as to when a voluntary change in cost accounting practice can be

considered to be a desirable change. The agency recommended that the

rule state a voluntary change is not to be considered desirable until

the cognizant Federal agency official notifies the contractor the

change has been determined to be a desirable change.

Response: Proposed provisions have been added, at 9903.201-7(b), to

clarify the purpose of a desirable change determination and that until

the cognizant Federal agency official determines that a change is

desirable and not detrimental to the Government, the change shall be

considered to be a voluntary change for which the Government will pay

no increased costs.

Comment: A Federal agency recommended that more flexibility would

be provided for making desirable change determinations if the phrase

``provided there is a reasonable expectation that benefits will accrue

to the Government in future awards'' were deleted from the last

sentence proposed in the SNPRM-I at 9903.201-6(d).

However, many industry commenters argued that the cost impact on

future CAS-covered contracts should be considered by the cognizant

Federal agency official in determining how to resolve the cost impact

of a voluntary change in cost accounting practice that results in

``increased'' cost to the Government. The commenters opined that

inequitable results that penalize a contractor may occur if decreased

cost accumulations expected to result for future CAS-covered contracts,

after the voluntary change is made, are not considered.

Response: One of the Board's statutory mandates is to preclude the

payment of increased costs, as defined by the Board, under CAS-covered

contracts due to voluntary changes in cost accounting practices made by

contractors after contract award. Under the terms and conditions of the

Board's implementing contract clauses, a contractor agrees to

consistently follow its established cost accounting practices when

accumulating and reporting the costs of contract performance after

contract award. A contractor also agrees that if a voluntary change is

made, the Government will not pay any aggregate increased cost for

existing covered contracts whose negotiated prices were predicated on

cost estimates that were premised on the consistent application of the

contractor's previously established cost accounting practices.

The Board's voluntary change--no increased cost prohibition, limits

potential contract price and/or cost adjustments, so that any resultant

increased costs to the Government under existing contracts are not

paid, i.e., after the change, the amounts paid by the Government in the

form of adjusted contract prices and/or increased contract cost

accumulations, in the aggregate, can not be more than the aggregate

amount the Government would have paid under the terms of the existing

CAS-covered contracts if the contractor had continued to consistently

apply its established cost accounting practices for the accumulation

and reporting of contract costs. In essence, the Board's no increased

cost prohibition provides that the Government's liability to pay

contractually specified sums, in the aggregate, can not be increased

unilaterally by a contractor that makes a voluntary change to its

established cost accounting practices after contract award. The

objective is to encourage the consistent application of a contractor's

established cost accounting practices and to discourage voluntary

changes that would otherwise result in the payment of increased costs

by the Government under existing covered contracts. It would therefore

be inappropriate for the Board to mandate that the cost impact expected

to occur on potential future covered contracts, which may or may not be

awarded, be considered when determining the cost impact that a

voluntary change will have on existing contracts for purposes of

mitigating the application of the prescribed no increased cost

prohibition provisions to existing contracts.

Since future contract prices will reflect estimated costs that are

already based on the application of the new cost accounting practice,

they require no adjustments and there is no cost impact calculation

required for such contracts. The cost impact calculation due to changes

in cost accounting practices is limited to existing covered contracts.

The calculation is based on the differences in accumulated contract

costs that are expected to result for the existing covered contracts

based on the application of the old and new cost accounting practices

to the projected ongoing level of costs expected to occur after the

practice change is made. For voluntary changes, the no increased cost

prohibition is then used to limit any upward contract price or cost

adjustments, in the aggregate, to the aggregate amount of downward

adjustments being made for the existing CAS-covered contracts.

The Board believes, however, that equitable solutions can be

achieved under the rules being proposed today. In cases where a

continuing long term relationship between the Government and a

contractor is evident and when a voluntary change in cost accounting

practice is not otherwise determined to be exempt from contract price

or cost adjustment (9903.201-6), a contractor may request the cognizant

Federal agency official to determine that the voluntary change is not

detrimental to the Government (9903.201-7) so that the affected

existing covered contracts and subcontracts desirable change provisions

can be applied (9903.405-2(e) and 9903.405-2(f)(3)). To support the

request, a contractor should demonstrate to what extent cost

accumulations for projected new CAS-covered contract work included in

the contractor's forecasted business base are expected to decrease as a

result of the voluntary change. The calculations should also be based

on the differences in accumulated contract costs that are expected to

result for the anticipated future CAS-covered contracts based on the

application of the old and new cost accounting practices to the same

projected ongoing level of costs expected to occur after the practice

change is made that is used to determine the cost impact on existing

contracts.

The cognizant Federal agency official may consider such data, from

an equity standpoint, when determining if the existing contract prices

should be increased, in the aggregate, under a contract's desirable

change provisions.

In consideration of the commenters' expressed concerns, the

proposed proviso of concern to the Federal

[[Page 45711]]

commenter has been deleted. In addition, paragraph 9903.201-7(d) has

been expanded to clarify that a desirable change determination may be

appropriate to the extent there is a reasonable expectation that the

costs of anticipated future CAS-covered contract awards will decrease

after a voluntary change is made by a contractor.

Cognizant Federal Agency Responsibilities

Comment: A Federal agency recommended that the SNPRM-I proposed

responsibilities at

9903.201-7(d)(1) and (2) for the cognizant Federal agency official

involving the processing of contract price modifications be deleted

because it duplicates and conflicts with existing coverage currently

included in FAR Part 30, at FAR 30.601(a) and 30.602-1(c).

Response: A change in cost accounting practice made by a contractor

may affect some or all existing CAS-covered contracts awarded by one or

more agencies, e.g., agencies within the Department of Defense or other

defense or civilian agencies. The proposed responsibilities in question

are premised on the concept that a cognizant Federal agency approach

shall be followed to resolve the cost impact that a particular change

in cost accounting may have on all affected CAS-covered contracts

regardless of the number of awarding agencies involved. The proposed

requirements recommended for deletion would, if finalized, require the

cognizant Federal agency official to coordinate all actions needed to

implement the negotiated cost impact settlement on behalf of the

Government with the contractor.

When the cognizant Federal agency official negotiates contract

price adjustments to resolve a cost impact, the current FAR provisions

cited by the commenter do not establish a coordinated systematic

approach to effect the necessary contract price adjustments. The

cognizant Federal official is excused from any further actions after

the negotiation memorandum is distributed to affected agencies. No

follow up action by the cognizant Federal official is required if all

the contract prices that the contractor and cognizant Federal agency

official have agreed to modify are not so modified. The contractor

would have to follow up with the other agencies on an individual basis

in order to obtain the necessary contract price adjustments. This could

prove to be a difficult task, particularly in cases where the other

agencies are expected to increase the price of their CAS-covered

contracts. Additionally, the FAR does not require the other agencies to

support the cognizant Federal agency official. The proposed provisions

are considered appropriate in the circumstances and have been retained

at 9903.201-8.

Contract Clauses

Comment: Federal agencies suggested that the proposed provisions on

interest should be conformed throughout the rule to cite Section

6621(a)(2) of the Internal Revenue Code and that the contract clause

interest provisions through out the proposed rule be conformed.

Response: The suggestions were adopted. The proposed contract

clause provisions were conformed for consistency with the interest

provisions specified in proposed 9903.4 for estimating noncompliances

and cost accumulation noncompliances.

Comment: Why was the provision in the contract clause paragraph

(a)(4) at 9903.201-4(a) that reads ``* * * agree to an equitable

adjustment as provided in the Changes clause * * *'' deleted?

Response: The CAS contract clauses' equitable adjustment provisions

are not dependent upon another contract clause. The Board's proposed

amendments provide for equitable adjustments in accordance with the

contract clause and part 9903.

Comment: A Federal agency recommended that the contract clauses for

educational institutions and United Kingdom contracts be updated and

conformed with the amended Full and Modified contract clauses.

Response: The Clause 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 one commenter responded to the

NPRM and the SNPRM-I on this matter. Accordingly, the Board believes

that such amendments are not currently warranted.

Intermediate Cost Objective Definition

Comment: Commenters suggested that the definition of the term

``intermediate cost objective'' would be easier to implement and

understand if the phrase ``* * * included in specific indirect cost

pools * * *'' were deleted from the proposed definition.

Response: The concept of an intermediate cost objective evolved

from the Board's promulgation of CAS 9903.402, in 1972, when a

definition of the term ``indirect cost'' was promulgated. That

definition introduced the concept that a cost was not direct if it was

identified with two or more final cost objectives or with at least one

``intermediate cost objective.'' The latter term, however, remained

undefined. How costs are grouped for cost accumulation purposes and

their subsequent allocation to intermediate and final cost objectives

constitutes a cost accounting practice, i.e., the ``accounting methods

or techniques used to accumulate costs'' (9903.302-1(c)). Also, it is

recognized that at times, for reasons of economy and efficiency,

certain costs of a direct nature may be accumulated in cost pools that

are subsequently allocated to final cost objectives as direct cost.

In view of the commenters' concerns, the proposed definition was

revised to clarify that different cost elements and the costs of

various functions can be accumulated in a varying number of

intermediate cost objectives that are included in specific cost pools,

e.g., overhead cost pools, G&A expense pools, service center expense

pools and other expense pools, and/or cost pools that are allocated as

direct costs. All such pooled costs are subsequently allocated to other

intermediate and/or final cost objectives in accordance with applicable

CAS and/or the contractor's established, and, if required, disclosed

cost accounting practices.

Cost Accounting Practice Change Definitions and Illustrations

Comment: A number of commenters stated that the proposed amendments

have improperly expanded the meaning of the term ``cost accumulation''

and that such expansion is unfortunate since almost any change in the

flow of cost to contracts will be treated as a cost accounting practice

change.

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

To accumulate cost, a contractor must apply its established, and, if

required, disclosed cost accounting practices, i.e., the accounting

methods or techniques used to accumulate cost for CAS-covered

contracts. The Board's definition at 9903.302-1(c) presently states

that one of the examples of a cost accounting practice involving the

allocation of cost to cost objectives are ``the accounting methods or

techniques used to accumulate cost . . .'' The Board has not expanded

the definition or proposed a new requirement. The reason for the

Board's proposed

[[Page 45712]]

amendments is that under the present definition, some contractors have

concluded that the methods or techniques used to accumulate costs in

cost pools are not a cost accounting practice and that changes made to

the methods or techniques used to accumulate costs in cost pools are

not a change in cost accounting practice. Some contractors, in their

responses to the SNPRM-I, specified that they do not believe that a

change in cost accounting practice occurs when cost pools are combined

or split-out, or when ongoing functions are transferred from one cost

pool to another cost pool; based, presumably, on their interpretation

of the Board's existing definition. With regard to changes which alter

the flow of costs to contracts, the commenters' inferences appear

contrary to the basic consistency requirements of CAS 9904.401 or

9905.501, as applicable, which require that a contractor's established

cost accounting practices be applied consistently when estimating,

accumulating and reporting costs.

The Board's proposed amendments would make it explicit that the

methods or techniques used to accumulate costs in cost pools are to be

considered a cost accounting practice when a contractor estimates,

accumulates and reports costs, and that a change made to the methods or

techniques used to accumulate cost in cost pools is a change in cost

accounting practice under the Board's rules. In response to the

commenters' expressed concerns, some editorial changes were made to

clarify the Board's stated concepts regarding use of the phrase

``accumulate cost.''

Comment: A Federal agency recommended that the words ``item of cost

or a group of items of cost'' proposed for inclusion at 9903.302-1(c)

be replaced with the words ``accumulate and distribute.'' They believe

that the proposed wording might be interpreted, by some, to mean that

the transfer of one direct labor employee from one plant to another

plant could be viewed as a change in cost accounting practice. Some

contractor representatives also expressed concern that the SNPRM-I

proposal introduced uncertainty with regard to the transfer of

personnel from one functional activity to another.

Response: The agency's suggestion was adopted. The words

``accumulate and distribute'' were previously proposed in the NPRM and

appear to more clearly convey the primary cost accounting concept being

addressed in this rulemaking, i.e., that the methods and techniques

used for the allocation of cost to cost objectives include the

selection and use of specific cost pools to accumulate costs for

subsequent distribution to other intermediate and final cost

objectives.

Comment: A Federal agency agreed with the proposed provision at

9903.302-1(c)(2), but recommended that the words ``elements of cost''

be deleted since the composition of cost pools does not include

specific elements of cost. This comment also relates to the concern

that an individual employee could be an ``element of cost'' and if

transferred to another segment might be construed to be a change in

cost accounting practice, which would conflict with the proposed

illustration at 9903.302-(4)(h). The word ``specific'' in the phrase

``the accumulation of specific costs'' was also recommended for

deletion.

Response: Cost pools accumulate costs by elements of cost and if

required to disclose their cost accounting practices in a disclosure

statement, a contractor performing a CAS-covered contract is required

to disclose if an element of cost is to be treated as a direct cost or

an indirect cost and which elements of cost are included in each

indirect cost pool.

With the revised language change, made in response to the preceding

comment made by the same agency, and the retention of the cited

illustration, it should be clear that the Board does not expect the

contracting parties to treat employee transfers as a change in cost

accounting practice. This matter was also addressed in the SNPRM-I

preamble comments (62 FR 37660, 7/14/97). Accordingly, the words of

concern to the commenter were retained.

Comment: A Federal agency recommended deletion of the word

``measure'' from the proposed provision used to describe the

``allocation measurement activity'' at 9903.302-1(c)(3) to avoid

potential conflict with the cost ``measurement'' term found at

9903.302-1(a). Some contractor representatives recommended similar

changes.

Response: The words ``measurement,'' ``measure'' and ``activity''

were deleted as suggested in 9903.302-1(c)(3) and where they were used

in a similar manner in the illustrations proposed under 9903.302-3(c).

Comment: At 9903.302-2(a)(3), the proposed coverage on functional

transfers should not be limited to costs in indirect cost pools, and

intra-segment transfers.

Response: The proposed coverage was revised to address the

commenter's concerns.

Comment: A Federal agency recommended that the words ``home

office'' be added to the exception provision in the last sentence

proposed at 9903.302-2(b)(1), because functional transfers to or from

intermediate home offices were excluded from the proposed coverage.

Response: The recommended change was adopted.

Comment: Some commenters objected to the proposed reference to each

contract at 9903.302-2(c)(1) and recommended deletion of the proposed

coverage.

Response: The reference to each CAS-covered contract refers to the

terms and conditions contained in each contract. The proposed coverage

was retained.

Comment: A Federal agency and some contractors commented that the

proposed language at 9903.302-2(c)(2) referencing a noncompliant

practice change was not clear.

Response: The proposed coverage was revised to separately address

compliant and noncompliant actions.

Comment: Several commenters recommended a number of clarifying

edits to the proposed language included at 9903.302-3(c)(4), (6), (7),

(8), and (9).

Response: Where deemed appropriate, the referenced illustrations

were revised for clarity, and to reflect the use of consistent language

in similar circumstances.

Comment: Delete or revise the illustrations that mention

``intermediate cost objectives'' as the intent of the purpose of the

illustration may not be clearly understood.

Response: The primary purpose of the illustrated changes was to

clarify that a cost accounting practice change results if the costs of

an ongoing function (which were accumulated in an intermediate cost

objective established for that function) that are originally included

in one cost pool are subsequently transferred to and included in a

different cost pool. That concept can also be illustrated by stating if

the costs of an ongoing function are or are not included in the same

cost pool before and after a change is made. The illustrations at

9903.302-3(c)(7) and (9), and at 9903.302-4(h) were therefore so

revised. The references to intermediate cost objectives were deleted.

Comment: A Federal agency suggested deletion of the comment that

the change in cost accounting practice depicted in the proposed

illustrations at 9903.302-3(c)(8)(i) and (9)(v) are subject to the

acquired CAS-covered contract's contract price and cost adjustment

provisions. They opined that incorporation in the proposed

illustrations may cause potential confusion and disputes since similar

statements were not included in all of

[[Page 45713]]

the proposed illustrations of changes in cost accounting practices.

Response: All changes in cost accounting practice are subject to

the applicable contract clause provisions governing changes in cost

accounting practices. In the case of an acquired contract, the

additional comment was incorporated to emphasize that an acquiring

contractor must abide with the acquired CAS-covered contract's terms

and conditions governing changes in cost accounting practices in the

event any changes in cost accounting practices are made after the

effective date of the acquisition. If the commenter's suggestion were

adopted, an acquiring contractor might argue that the referenced

contract price and cost adjustment provisions do not apply since they

were subsequently deleted from the Board's proposed amendments. The

proposed provisions were retained.

Comment: A commenter recommended a number of clarifying edits to

the proposed language included at 9903.302-4(h), (i), and (j).

Response: Where deemed appropriate, the referenced illustrations

were revised for clarity.

Comment: Some commenters inquired if the use of a ``special

allocation'' method (e.g., 9904.410-50(j)) is an initial adoption of a

cost accounting practice or a change in cost accounting practice.

Response: If a contractor's established cost accounting practices

do not include the use of a special allocation methodology when

estimating and accumulating costs for CAS-covered contracts, and

subsequently the contractor decides to apply a special allocation

methodology while performing ongoing CAS-covered contracts, the

contractor would no longer be in compliance with the consistency

requirements of CAS 9904.401 and 9905.501. However, under the contract

clause terms of CAS-covered contracts, the contractor can make a

voluntary change to its established cost accounting practices. If

material, the resultant cost impact due to the change in cost

accounting practice could result in contract price or cost adjustments,

at no aggregate increased cost to the Government.

The Cost Impact Process

Comment: One commenter suggested changes to the definition for

``Increased cost to the Government due to a change in compliant cost

accounting practices' included at 9903.403 on the basis that, as

proposed, the definition incorrectly implies that increased costs exist

only when no action is taken to preclude payment of increased costs.

Response: The Board has revised the proposed language to clarify

that increased costs resulting from a voluntary change in cost

accounting practice represent the increase in cost to the Government

that occurs after a change is made, before any actions are taken to

preclude the payment of the resultant increased cost by the Government.

After a voluntary change in cost accounting practice is made, increased

cost to the Government occurs only when a greater amount of costs are

accumulated and claimed as contract costs under existing flexibly

priced contracts. For existing firm-fixed-price contracts, increased

costs to the Government only occur if a lesser amount of cost is

accumulated after the practice change is made, before the negotiated

contract prices are adjusted downward to reflect the aggregate

reduction in accumulated costs. If a downward adjustment is not made,

the Government will be charged the resultant increased cost in the form

of a higher fixed contract price that provided for the higher

allocation of cost to the contract that would have resulted had there

not been a change in cost accounting practice.

Comment: A Federal agency requested that the Board clearly state in

both the preamble and the rule which provisions represent mandates and

which provisions are intended to be applied at the discretion of the

cognizant Federal agency official.

Response: The Board has used the word ``shall'' when referring to

an action that is mandatory, and the terms ``may'' and ``should'' when

referring to an action that is discretionary.

Comment: A Federal agency requested that the Board provide more

flexibility with regard to the adjustment of individual contract prices

that exceed established materiality thresholds.

Response: The Board has eliminated use of words that suggest

absolute mandates such as ``required'', ``requirements'' and

``necessary.'' These words have been replaced with terms that make it

clear that the provisions included in the rule for adjusting individual

contract prices should be followed only when the cognizant Federal

agency official decides to resolve a cost impact action by modifying

contract prices.

Comment: A Federal agency requested that the Board add a provision

at 9903.405-2 covering ``Notification of changes in cost accounting

practices'' which would require that contractors notify the Government

of the proposed effective and applicability dates of a change in cost

accounting practice.

Response: The Board adopted the suggested change. The addition of

the ``effective date'' notification requirement will help clarify which

contracts were proposed and/or negotiated after the effective date of

the change in cost accounting practice and should therefore not be

subject to contract price and/or cost adjustment.

Comment: Many industry commenters requested that the Board

eliminate the proposed requirement, at 9903.405-4(a), that some

individual contract data be included in the General Dollar Magnitude

(GDM) settlement proposal. They suggested that the contracting parties

attempt to resolve the cost impact action based on the GDM aggregate

estimate before requiring the submission of any individual contract

data.

Response: The Board rejects this suggestion.

Under current Government procurement regulations governing the cost

impact process, the required GDM estimate is used solely to determine

whether or not the cost impact of a change in cost accounting practice

is not material and, therefore, no detailed cost impact proposal will

be required. If such an immateriality determination cannot be made,

then the contractor must submit a detailed cost impact proposal for all

existing covered contracts and subcontracts affected by the change in

cost accounting practice or the estimating noncompliance. Originally,

the procurement regulations required the submission of a GDM estimate

by contract type and Federal agency, with no instruction as to what

action the agencies should take based on the contractor's GDM estimate

data. Furthermore, the GDM estimate is currently required to be

submitted at the same time as the notification of the change in cost

accounting practices, with a cost impact proposal to be submitted at a

later date. Thus, it appears that the GDM estimate was never intended

to serve as the basis for making contract price or cost adjustments to

resolve a material cost impact action.

Under the Board's proposal, the contracting parties can resolve a

cost impact action based on a three step process. The cost impact

resulting from a change in cost accounting practice can be resolved

without the submission of any contract cost data if the change is

obviously immaterial (9903.405-3(d) in the SNPRM-I), or if not

obviously immaterial by the submission of a GDM Settlement Proposal or

a detailed cost impact proposal.

When not obviously immaterial, the cost impact of a practice change

can be

[[Page 45714]]

resolved by the submission of a GDM estimate and some individual

contract data, without having to resort to a detailed cost impact

proposal. The GDM estimate and Contractor Settlement Proposal were

previously proposed as two separate submission requirements in the

ANPRM. Based on a public commenter's suggestions, the two submission

requirements were proposed in the SNPRM-I as a combined ``GDM

Settlement Proposal.'' The Board continues to believe that when

material changes result in the amounts of accumulated contract costs,

either in the aggregate or for individual contracts, due to a change in

cost accounting practice, then the aggregate cost data included in the

GDM estimate is insufficient for the cognizant Federal agency official

to make an informed judgment on how to best resolve the cost impact. If

no individual contract data were required at the time of the GDM

estimate submission, the cognizant Federal agency official would need

to obtain individual contract data in order to protect the interests of

the Government, e.g., in order to: (1) evaluate the accuracy of the GDM

estimate amounts by contract type; (2) determine what adjustments may

be needed to resolve any resultant contract cost overrun and/or

underrun conditions, and/or (3) ascertain if a detailed cost impact

proposal should be requested.

The Board believes that the proposed three step process included in

this proposed rule provides the contracting parties with the best

opportunity to resolve the cost impact action with a minimum of

contract data. Under the GDM Settlement Proposal concept, a contractor

is expected to make the initial decision as to the number of individual

contracts, within each contract type, for which contract data is needed

to settle the cost impact action. If the cognizant Federal agency

official accepts the contractor's settlement proposal, no further

contract data need be submitted. Of course, if agreement to resolve the

cost impact action does not occur based on a contractor's proposed

settlement approach, then the cognizant Federal agency official may

still request data for some additional contracts or a detailed cost

impact statement, if deemed necessary. The Board's objective is to

permit the contracting parties to resolve the cost impact action

without having to resort to the current process which requires the

submission of detailed cost impact data for all contracts.

The Board believes that the commenter's suggested approach would

only serve to delay the proper resolution of the cost impact for CAS-

covered contracts. The suggestions were not adopted. However, the

provision at 9903.405-3(f) was revised to emphasize that a GDM

Settlement Proposal is not required if the cost impact of a change in

cost accounting practice is determined to be obviously immaterial.

Comment: One Federal agency recommended revising the provisions for

the offset process included at 9903.405-5(b) to be ``general

guidelines'' rather than ``rules.'' They stated that general guidelines

should normally be followed, but the cognizant Federal agency official

should be permitted to deviate from the guidelines, provided the

application of the offset process results in adjustments that

approximate, in the aggregate, the cost impact that would have resulted

had individual contracts been adjusted.

Response: Since all of the provisions promulgated by the CASB are

in essence and in fact ``rules,'' the Board has deleted the reference

to ``rules of offset'' from 9903.405-5(b). The Board believes that this

proposal when considered in its totality, including the offset

provisions, provides the cognizant Federal agency official with

sufficient flexibility to resolve a cost impact action in a manner

deemed most appropriate considering both individual circumstances and

protection of the Government's interests. The provisions which the

Board has included for use of the offset process are designed to insure

that the process, whenever used, is applied consistently and in such a

way that material cost impact amounts, both in the aggregate and for

individual contracts, are appropriately calculated in the prescribed

manner.

Comment: One commenter suggested that the Board sanction the use of

the final indirect expense rate settlement process rather than contract

price adjustments as a method to resolve the cost impact action. The

commenter expressed the opinion that contract adjustments should only

be used as a final resort.

Response: The Board's proposed rules provide significant

flexibility with regard to the method used by the cognizant Federal

agency official to resolve a cost impact action by inclusion of the

phrase ``other suitable technique.'' However, the Board would caution

the contracting parties with regard to use of any method which results

in further inconsistency between the contract price amounts and

accumulated contract costs due to the cost accounting practices used to

estimate proposed costs and to accumulate costs during contract

performance.

Adjustment of indirect expense rates to settle a cost impact action

can result in the adjustment of the wrong contracts for the impact of

the change in cost accounting practices. This method also results in

the establishment of final indirect expense rates that are not

consistent with a contractor's established and disclosed cost

accounting practices for allocating indirect costs to final cost

objectives. Adjusting indirect expense rates to resolve the cost impact

would in most cases require an adjustment to the indirect expense pool

that exceeds the amount of the actual cost impact adjustment amount in

order to ensure that the aggregate cost impact amount calculated for

all affected CAS-covered contracts is recovered on the open flexibly-

priced contracts being performed during the particular cost accounting

period to which the ``adjusted'' rates apply. Use of this approach

distorts the accumulation of costs used for contract cost and pricing

purposes, in that the resultant accumulated costs recognized for CAS-

covered contracts will be greater or less than the costs that would

have been accumulated as actual ``booked'' costs in accordance with a

contractor's established cost accounting practices had the indirect

cost pools, and the indirect cost rates used to allocate such costs to

final cost objectives, not been adjusted to reflect the cost impact of

a change in cost accounting practice. Such pool adjustments may further

distort the difference between the costs that would have originally

been allocated to the affected CAS-covered contracts as actual

``booked'' costs and the costs that will be allocated to those

contracts for contract costing purposes based on the adjusted final

rates if multiple cost accounting periods are involved and/or if the

Government's percent of participation in the allocation base is not

consistent. The Board therefore disagrees with the position presented

by the commenter. Adjustment of contract prices is the method which

most consistently reflects the requirements of both the applicable

contract clause and CAS 9904.401 or 9905.501, as applicable, regarding

consistency in the cost accounting practices used to both estimate and

accumulate costs on CAS-covered contracts. The Board finds

inappropriate the commenter's suggestion that the Board endorse a

position which holds that such adjustments should only be used as a

last resort. To the contrary, the Board believes that any method that

further distorts the Board's consistency requirements, such as the

adjustment of

[[Page 45715]]

indirect expense rates, should be a method that is only used as a last

resort. If the cognizant Federal agency official determines that

adjustment of contract prices is not warranted to resolve the cost

impact action, the Board is of the view that a transfer of funds

between the Government and a contractor is the most appropriate ``other

suitable technique'' that can be used to settle the action.

Comment: Federal agency and industry commenters expressed concerns

regarding the SNPRM-I prefatory comments stating that:

The Board is of the opinion that modification of contract and

subcontract prices * * * 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 * * *

The Federal agency advocated that maximum flexibility be provided

for the resolution of the cost impact resulting from a change in cost

accounting practice. The contractor commenters recommended that no

``preference'' be stated in the final rule.

Response: The Board's contract clauses included in individual CAS-

covered contracts require contractors to consistently apply their

established cost accounting practices when accumulating and reporting

the costs of performing CAS-covered contracts. However, the CAS

contract clause provisions also permit a contractor to make a voluntary

change to its established cost accounting practices, provided the cost

impact resulting from the change is addressed. For voluntary changes,

the contractor agrees to contract price and/or cost adjustments which

are limited to a no increased cost to the Government provision. If the

cognizant Federal agency official determines that the practice change

is desirable and not detrimental to the Government, the contract prices

can be adjusted to reflect the aggregate change in the amount of

accumulated contract costs that is expected to result due to the

practice change.

After contract price adjustment and/or actions taken to preclude

the payment of increased costs, the cost-based contract prices (FFP or

cost ceiling) are once again comparable with the increased or decreased

contract costs that will be accumulated consistently in accordance with

the changed cost accounting practices, after a voluntary practice

change is made. Such actions taken to resolve the cost impact of a

practice change also resolve any resultant potential contract cost

overrun or cost underrun conditions that are attributable to the

practice change. Thus, contract price and cost adjustments are

generally the required, not preferred, method for resolving the cost

impact resulting from a change in cost accounting practice.

In the SNPRM-I, the Board concluded that ``* * * the decision on

how to best achieve an equitable solution, in the aggregate, remains a

cognizant Federal agency official responsibility.'' The Board's

comments were intended to acknowledge that there may be circumstances

where the required contract price and/or cost adjustments need not be

made. For example, this might be the case where the cost impact, in the

aggregate, is considered material in and of itself, but the cognizant

Federal agency determines contract price and/or cost adjustments are

not warranted because contract performance would not be jeopardized (no

significant cost overrun condition resulted) and the increase or

decrease in expected cost accumulations would not distort or adversely

impair the usefulness of the contractor's reported contract cost

information (actual costs and estimated costs to complete) that is

included in contract status reports. However, to achieve equity, some

consideration for the cost impact should be obtained or granted. In

such cases, another suitable technique may be used to resolve the cost

impact, e.g., a monetary exchange between the contracting parties. This

alternate approach would also produce administrative cost savings since

the contracting parties would not have to process contract

modifications or take further actions to preclude the payment of

increased costs on individual contracts.

On the other hand, in a case where the cost impact, is considered

material and, by not processing contract price and/or cost adjustments,

the Government would pay increased costs (as defined by the Board), the

contractor's ability to perform the contract is adversely affected,

and/or the cost data included in the contractor's status reports would

not be meaningful, then the required contract price and/or cost

adjustments should be processed.

To address the commenters' expressed concerns, the Board is

proposing additional provisions at 9903.405-5(e) to emphasize that the

cognizant Federal agency official does have the flexibility to resolve

a cost impact due to a change made to a compliant cost accounting

practice by use of alternative actions, i.e., other than contract price

adjustment or actions taken to preclude the payment of increased costs.

Cautionary provisions pertaining to the use of such alternative actions

were also included.

Comment: A Federal agency recommended deleting the phrase ``and

negotiate'' from the description of a cost estimating noncompliance at

9903.406-1(a). They explained that an estimating noncompliance results

when the contractor estimates costs using a noncompliant accounting

practice. They further stated that under the proposed provision, an

estimating noncompliance would exist only if the noncompliance was used

for both estimating and negotiating the contract. Such a definition,

they believe, will result in significant disputes as to whether a

contractor's final price negotiation included or excluded the impact of

the change in cost accounting practice.

Response: Only those contracts that had their contract price based

on a noncompliant practice can be included in the universe of contracts

subject to adjustment as a result of an estimating noncompliance.

Therefore, it must be demonstrated that not only did the contractor

estimate costs using a noncompliant practice for a potential CAS-

covered contract, but also that the contract price was established

using data that was based on the use of a noncompliant practice. There

may be situations in which a contractor estimates costs using a

noncompliant practice, but either the Government rejects the use of

that practice to negotiate the contract amount or the contractor

voluntarily changes to a compliant practice prior to the negotiation of

the contract price. In such situations, the negotiated contract price

or cost ceiling would not have been based on the use of a noncompliant

cost accounting practice. Hence, it would not be appropriate to include

these contracts in a cost impact proposal for an estimating

noncompliance. For those contracts that were estimated using a

noncompliant practice and that noncompliant practice was used to

determine the contract price, the contracting parties must determine

the impact on those contracts as a result of the noncompliant practice.

In order to clarify the Board's position on this matter, the Board has

revised the proposed language at 9903.406-1(a).

Comment: One commenter recommended that, in order to avoid

duplication, the provision regarding situations where a noncompliant

practice is used for both cost estimating and cost accumulation

purposes be moved to 9903.406-1 rather than including this provision at

both 9903.406-3(g) and 9903.406-4(b).

[[Page 45716]]

Response: The Board agrees and has adopted this recommendation

(9903.406-1(b)).

Comment: One Federal agency recommended that the proposed table at

9903.406-3(d) address a cost impact due to a noncompliance in terms of

the change in allocation that resulted from using a noncompliant cost

accounting practice rather than in terms of the change in allocation

that would have resulted had a compliant accounting practice been used.

Through discussions with contracting officers, they determined that

most contracting officers address the cost impact in terms of the

change in allocation that resulted from using a noncompliant practice.

Response: The Board adopted this recommendation and has revised the

table at 9903.406-3(d) accordingly.

Comment: One commenter recommended adding the concept of computing

interest based on the midpoint of the period for a cost accumulation

noncompliance described at 9903.406-4(e) to cost estimating

noncompliances at 9903.406-3.

Response: Upon further review of this provision, the Board has

concluded that inclusion of a method to be used to calculate the amount

of interest due to increased costs paid as a result of a noncompliant

practice is overly instructional and prescriptive in nature and

therefore should not be included in this rule. The Board therefore has

deleted the prescribed method of computing interest from the rule.

Federal agencies should establish reasonable methods for determining

the amount of interest to be recovered based on increased costs paid

due to a noncompliant practice.

Comment: Several commenters recommended the deletion of the term

``technical'' from the provision at 9903.406-5 describing immaterial

noncompliances. A Federal agency recommended deletion of the proposed

provision at 9903.406-5(a)(2) which provides that a contractor is not

excused from the obligation to comply with the applicable Standards or

rules and regulations involved when an immaterial noncompliance exists.

An industry commenter further requested deletion of the proposed

requirement at 9903.406-5 which requires a contractor to notify the

cognizant Federal agency official within 60 days of when the technical

noncompliance becomes material.

Response: The Board has adopted all of the suggested revisions. The

Board agrees that a cost accounting practice is either compliant with

applicable Cost Accounting Standards or it is not. The term ``technical

noncompliance'' has acquired an accepted usage by various groups that

deal with CAS administration matters in referring to noncompliant

practices that do not result in material increased costs. However, in

order to avoid any confusion by parties not familiar with this

terminology, the Board has replaced the term ``technical'' with the

term ``immaterial'' in this proposed rule.

Since it should be apparent that, absent the granting of a waiver

or exemption, contractors are never ``excused'' from the obligation to

comply with applicable CAS Board rules and regulations, the Board

proposes to delete the SNPRM-I provision at 9903.406-5(a)(2). The

provision retained within 9903.406-5, which allows the cognizant

Federal agency official to recover any subsequent increased costs plus

applicable interest that may result from the currently immaterial

noncompliance, provides adequate protection to the Government in these

situations.

Comment: A Federal agency recommended deleting the specific reason

used by the contractor in the illustration at 9903.407-1(a)(1) as

justification for requesting a retroactive applicability date for the

change. They explained that inclusion of a specific reason could be

interpreted to mean that this specific reason should be determined

appropriate justification for approval of a retroactive applicability

date in all cases.

Response: The Board has deleted the specific reason included in the

illustration.

Educational Institutions

Comment: A Federal agency recommended that the last sentence

proposed at 9903.401-2(e) be revised to reflect a one time notification

requirement.

Response: The suggested language was adopted.

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 document. All comments must be in writing and submitted timely to

the address indicated in the ADDRESSES section of this document.

The Board is considering the establishment of certain new

``exemption'' and ``desirable changes'' provisions that it believes

would facilitate the overall process governing compliant changes in

cost accounting practices. Therefore, the Board invites interested

parties to specifically comment on the following amendments being

proposed today:

--Proposed 9903.201-6, Findings--Voluntary changes exempt from contract

price and cost adjustment, which proposes to exempt certain voluntary

changes to a cost accounting practice from contract price and cost

adjustment when specified criteria are met. 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.

--Proposed 9903.201-7, Findings--Desirable changes, which proposes to

establish criteria for determining when a voluntary change to a cost

accounting practice, not otherwise exempt from contract price and cost

adjustment under 9903.201-6, can be deemed to be desirable and not

detrimental to the Government. Such determinations would permit the

equitable adjustment of existing CAS-covered contracts that are

materially affected by aggregate ``increased costs'' resulting from a

voluntary change made to a cost accounting practice.

--Proposed 9903.201-7(c)(2) which includes a proposal to establish

alternative processes for resolving the cost impact associated with a

``desirable'' change.

List of Subjects in 48 CFR Part 9903

Cost accounting standards, Government procurement.

Richard C. Loeb,

Executive Secretary, Cost Accounting Standards Board.

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

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

forth below:

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

follows:

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

PART 9903--CONTRACT COVERAGE

Subpart 9903.2--CAS Program Requirements

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

paragraphs (a)(1) and (c) and the contract clauses immediately

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

9903.201-4 Contract clauses.

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

officer shall insert the following clause, Cost Accounting Standards--

Full Coverage,

[[Page 45717]]

in negotiated contracts, unless the contract is exempted (see 9903.201-

1), the contract is subject to modified coverage (see 9903.201-2), or

the clause prescribed in paragraphs (d) or (e) of this subsection is

used.

(2) * * *

Cost Accounting Standards--Full Coverage (August 1999)

(a) The provisions of part 9903 of 48 CFR chapter 99, including

the definitions and requirements contained therein, are incorporated

herein by reference and the Contractor, in connection with this

contract, shall--

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

accounting practices by submission of a Disclosure Statement as

required by 9903.202. The cost accounting practices disclosed for

this contract shall be the same cost accounting practices currently

disclosed and applied to all other contracts and subcontracts being

performed by the Contractor and which contain a Cost Accounting

Standards (CAS) contract clause. If the Contractor has notified the

Contracting Officer that the Disclosure Statement contains trade

secrets, and commercial or financial information which is privileged

and confidential, the Disclosure Statement shall be protected and

shall not be released outside of the Government.

(2) Changes in Cost Accounting Practices. Follow consistently

the Contractor's cost accounting practices in accumulating and

reporting contract performance cost data concerning this contract.

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

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

applied prospectively from the date of applicability to this

contract and the Contractor's Disclosure Statement must be amended

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

affected by such changes, adjustment shall be made in accordance

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

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

part 9904, including any modifications and interpretations thereto,

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

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

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

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

with any CAS, including any modifications or interpretations

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

CAS-covered contract or subcontract to the Contractor. Such

compliance shall be required prospectively from the date of

applicability to such contract or subcontract.

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

by subpart 9903.4, provide timely notification of changes in

disclosed or established cost accounting practices, provide data

concerning the cost impact of such changes and:

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

price of this contract as provided under this provision if the

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

cost accounting practice which, pursuant to subparagraph (a)(3) of

this clause, the Contractor or a subcontractor is required to make.

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

cost of this contract as provided under this provision if contract

cost is affected by a voluntary change made by the contractor or a

subcontractor; provided that no agreement may be made under this

provision that will result in the payment of any increased costs by

the United States in the aggregate for all of the contractor's or a

subcontractor's CAS-covered contracts and subcontracts affected by

the change.

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

price of this contract as provided in this provision if contract

cost is affected by a change in cost accounting practice made by the

contractor or a subcontractor that the cognizant Federal agency

official finds to be a desirable change.

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

action to correct any noncompliance, provide data concerning the

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

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

comply with an applicable Cost Accounting Standard, including any

modifications or interpretations thereto, or to follow any cost

accounting practice consistently and such failure results or will

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

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

together with interest thereon computed at the annual rate

established under section 6621(a)(2) of the Internal Revenue Code of

1986 (26 U.S.C. 6621(a)(2)) for such period, from the time the

payment by the United States was made to the time the increased cost

payment is recovered by the United States. In no case shall the

Government recover costs greater than the increased cost to the

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

price or cost adjustment, unless the contractor made a change in its

cost accounting practices of which it was aware or should have been

aware at the time of price negotiations and which it failed to

disclose to the Government.

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

Contractor disagree as to whether the Contractor or a subcontractor

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

modifications or interpretations thereto, an applicable provision or

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

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

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

601).

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

authorized representatives of the Government to examine and make

copies of any documents, papers, or records, regardless of type and

regardless of whether such items are in written form, in the form of

computer data or in any other form, relating to compliance with the

requirements of this clause.

(d) Flowdown to Subcontracts. The Contractor shall include in

all negotiated subcontracts which the Contractor enters into, the

substance of this clause, except paragraph (b), and shall require

such inclusion in all other subcontracts, of any tier, including the

obligation to comply with all applicable CAS in effect on the

subcontract's award date or if the subcontractor has submitted cost

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

the subcontractor's signed Certificate of Current Cost or Pricing

Data. If the subcontract is awarded to an entity which pursuant to

9903.201-2 is subject to other types of CAS coverage, the substance

of the applicable clause set forth in 9903.201-4 shall be inserted.

This requirement shall apply only to negotiated subcontracts in

excess of $500,000, except that the requirement shall not apply to

negotiated subcontracts otherwise exempt from the requirement to

include a CAS clause as specified in 9903.201-1.

(End of clause)

* * * * *

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

contracting officer shall insert the following clause, Cost Accounting

Standards--Modified Coverage, in negotiated contracts when the contract

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

certifies it is eligible for and elects to use modified CAS coverage

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

of this subsection is used.

(2) The following clause requires the contractor to comply with

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

certain requirements) actual cost accounting practices, and to follow

disclosed and established cost accounting practices consistently.

Cost Accounting Standards--Modified Coverage (August 1999)

(a) The provisions of part 9903 of 48 CFR chapter 99, including

the definitions and requirements contained therein, are incorporated

herein by reference and the Contractor, in connection with this

contract, shall--

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

accounting practices by submission of a Disclosure Statement, if it

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

Statement, pursuant to 9903.202. The cost accounting practices

disclosed for this contract shall be the same cost accounting

practices currently disclosed and applied to all other contracts and

subcontracts being performed by the Contractor and which contain a

Cost Accounting Standards (CAS) contract clause. If the Contractor

has notified the Contracting Officer that the Disclosure Statement

contains trade secrets and commercial or financial information which

is privileged and confidential, the Disclosure Statement shall be

protected and shall not be released outside of the Government.

(2) Changes in Cost Accounting Practices. Follow consistently

the Contractor's cost accounting practices in accumulating and

[[Page 45718]]

reporting contract performance cost data concerning this contract.

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

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

applied prospectively from the date of applicability to this

contract and the Contractor's Disclosure Statement must be amended

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

affected by such changes, adjustment shall be made in accordance

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

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

9904.401, Consistency in Estimating, Accumulating and Reporting

Costs; 9904.402, Consistency in Allocating Costs Incurred for the

Same Purpose; 9904.405, Accounting For Unallowable Costs; and

9904.406, Cost Accounting Period; including any modifications or

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

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

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

signed Certificate Of Current Cost Or Pricing Data. The Contractor

shall also comply with any modifications or interpretations to such

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

covered contract or subcontract to the Contractor. Such compliance

shall be required prospectively from the date of applicability to

such contract or subcontract.

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

by subpart 9903.4, provide timely notification of changes in

disclosed or established cost accounting practices, provide data

concerning the cost impact of such changes and:

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

price of this contract as provided under this provision if the

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

cost accounting practice which, pursuant to subparagraph (a)(3) of

this clause, the Contractor or a subcontractor is required to make.

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

cost of this contract as provided under this provision if contract

cost is affected by a voluntary change made by the contractor or a

subcontractor; provided that no agreement may be made under this

provision that will result in the payment of any increased costs by

the United States in the aggregate for all of the contractor's or a

subcontractor's CAS-covered contracts and subcontracts affected by

the change.

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

price of this contract as provided in this provision if contract

cost is affected by a change in cost accounting practice made by the

contractor or a subcontractor that the cognizant Federal agency

official finds to be a desirable change.

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

action to correct any noncompliance, provide data concerning the

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

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

comply with an applicable Cost Accounting Standard, including any

modifications or interpretations thereto, or to follow any cost

accounting practice consistently and such failure results or will

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

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

together with interest thereon computed at the annual rate

established under section 6621(a)(2) of the Internal Revenue Code of

1986 (26 U.S.C. 6621(a)(2)) for such period, from the time the

payment by the United States was made to the time the increased cost

payment is recovered by the United States. In no case shall the

Government recover costs greater than the increased cost to the

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

price or cost adjustment, unless the contractor made a change in its

cost accounting practices of which it was aware or should have been

aware at the time of price negotiations and which it failed to

disclose to the Government.

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

Contractor disagree as to whether the Contractor or a subcontractor

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

modifications or interpretations thereto, an applicable provision or

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

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

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

601).

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

authorized representatives of the Government to examine and make

copies of any documents, papers, or records, regardless of type and

regardless of whether such items are in written form, in the form of

computer data or in any other form, relating to compliance with the

requirements of this clause.

(d) Flowdown to Subcontracts. The Contractor shall include in

all negotiated subcontracts which the Contractor enters into, the

substance of this clause, except paragraph (b), and shall require

such inclusion in all other subcontracts, of any tier, including the

obligation to comply with all applicable CAS in effect on the

subcontract's award date or if the subcontractor has submitted cost

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

the subcontractor's signed Certificate of Current Cost or Pricing

Data. If the subcontract is awarded to an entity which pursuant to

9903.201-2 is subject to other types of CAS coverage, the substance

of the applicable clause set forth in 9903.201-4 shall be inserted.

This requirement shall apply only to negotiated subcontracts in

excess of $500,000, except that the requirement shall not apply to

negotiated subcontracts otherwise exempt from the requirement to

include a CAS clause as specified in 9903.201-1.

(End of clause)

* * * * *

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

9903.201-6 Findings--Voluntary changes exempt from contract price and

cost adjustment.

(a) Prior to making any contract price or cost adjustment under the

provisions of paragraph (a)(4)(ii) of the contract clauses set forth in

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

agency official shall make a finding that the voluntary change in cost

accounting practice can or can not be exempted from contract price and

cost adjustment under the exemption criteria specified in this

subsection. The cognizant Federal agency official may, however, make a

finding that the voluntary change in cost accounting should not be

exempted from contract price and cost adjustment under the exemption

criteria specified in this subsection when such action would otherwise

be detrimental to the Government's interests.

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

cost accounting practice should be exempted from contract price and

cost adjustment requirements specified in CAS-covered contracts and

subcontracts shall be made on a case-by-case basis in accordance with

the exemption criteria specified in paragraph (c) or (d) of this

subsection.

(c) Exemption For Voluntary Cost Accounting Practice Changes

Associated With Contractor Restructuring Activities That Are Made By

Management To Reduce Personnel or Facilities. Changes in the methods

and techniques used for the ``allocation of cost to cost objectives,''

including the transfer of functions from an existing cost pool, cost

pool split-outs or cost pool combinations, that are associated with

restructuring activities (see 9904.406-61(b)) which are undertaken to

improve future operations and reduce overall cost levels in future

periods through work force reductions and/or physical realignment or

reduction of facilities, including plant relocations, shall not be

subject to the contract price or cost adjustment requirements of part

9903, the cognizant Federal agency official determines, in writing,

that:

(1) The voluntary change in cost accounting practice is being made

concurrently with planned restructuring activities and would not be

made but for the restructuring actions being taken.

(2) Future ``cost savings'' to the Government (i.e., the

accumulation of less contract costs), in the aggregate, for existing

flexibly priced CAS-covered contracts and anticipated and reasonably

predictable future CAS-covered contracts, are expected to result from

the planned restructuring activities.

(3) The ``cost savings'' calculation(s) represented the difference

between:

(i) The total amount of costs that would be accumulated for

existing flexibly priced CAS-covered contracts

[[Page 45719]]

and reasonably predictable future CAS-covered contracts, in accordance

with the contractor's established cost accounting practices, at the

estimated operating cost levels that would continue if the planned

restructuring activities were not made, and

(ii) The total amount of costs that would be accumulated for such

CAS-covered contracts, in accordance with the contractor's new changed

cost accounting practices, at the estimated new cost levels that would

result if the planned restructuring activities were made.

(d) An agency ``cost savings'' determination, made in accordance

with the agency's promulgated regulations, resulting in the approval of

proposed contractor restructuring activities may be used in lieu of the

cost savings determinations required under paragraph (c) of this

subsection.

(e) When a determination is made to grant an exemption, the

cognizant Federal agency official shall notify the contractor that the

voluntary change(s) to established cost accounting practices required

to implement the planned restructuring activities will be exempt from

the contract price and cost adjustment provisions contained in existing

CAS-covered contracts that are affected by the changes.

(f) When the cognizant Federal agency official determines that a

voluntary change to the contractor's cost accounting practices does not

meet the exemption criteria specified in this subsection or is

otherwise determined detrimental to the Government's interests, the

cognizant Federal agency official shall inform the contractor of the

determination and initiate the cost impact process in accordance with

9903.405-3 or otherwise proceed to resolve the cost impact pursuant to

9903.201-7(c)(2), if applicable. The contractor may request a desirable

change determination in accordance with 9903.201-7 and subpart 9903.4

prior to the submission of a requested cost impact submission.

(g) If a voluntary change in cost accounting practice is made for

any reason, even if the voluntary change is exempted from contract

price and cost adjustment, the resultant changed cost accounting

practices 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.

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

9903.201-7 Findings--Desirable changes.

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

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

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

official shall make a finding that the voluntary change in cost

accounting practice is desirable, as defined at 9903.403, i.e.,

desirable and not detrimental to the interests of the Government, and,

if the voluntary change in cost accounting practice is associated with

contractor restructuring activities, a finding that the change in cost

accounting practice should not be exempted from contract price or cost

adjustment process under the provisions of 9903.201-6(a).

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

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

basis in accordance with, but not limited to, one or more of the

criteria specified in paragraph (c) of this subsection. The cognizant

Federal agency official may, however, determine that a change in cost

accounting practice is not desirable under the criteria specified in

this subsection when such action would otherwise be detrimental to the

Government's interests. Normally, a desirable change determination is

only necessary if a voluntary change results in aggregate increased

costs to the Government, for existing CAS-covered contracts, and the

cognizant Federal agency official contemplates making potential

contract price adjustments that would increase, in the aggregate, the

existing contract prices that the Government would be obligated to pay.

Pending receipt of a written notification that the cognizant Federal

agency official has determined that a voluntary change in cost

accounting practice will or will not be treated as desirable and not

detrimental to the Government, the change shall be considered to be a

voluntary change for which the Government will pay no increased costs,

in the aggregate.

(c) A voluntary change in cost accounting practice shall be deemed

to be desirable and not detrimental to the interests of the Government

if the cognizant Federal agency official determines that:

(1) For a Cost Accounting Standard with which the contractor has

complied, the change is necessary in order for the contractor to remain

in compliance with that Standard.

(2) Cost savings to the Government, in the aggregate, will occur

under existing flexibly priced and reasonably predictable future CAS-

covered contracts and subcontracts as a result of management changes,

and associated cost accounting practice changes where there is a

reasonable expectation that more efficient and economical operations

will result. In such cases, the contracting officer may proceed to

equitably resolve the cost impact of the practice change on all

existing individual CAS-covered contracts (i.e., shifts in accumulated

contract costs attributable to the practice change) by obtaining a

contractor cost impact proposal and negotiating equitable contract

price and/or cost adjustments pursuant to 9903.4. Alternatively, the

contracting officer may otherwise resolve the matter based on the

contractor's previously submitted contract cost accumulation data that

was included in the contractor's written request for a desirable change

determination (see 9903.405-2(e)). In that case, the contracting

officer may forgo the submission of a cost impact proposal and related

adjustments of individual contract prices and/or cost allowances,

provided a determination is made that an alternate resolution

adequately protects the Government's interests.

(3) Circumstances, other than those listed in paragraph (c)(1) and

(c)(2) of this subsection, included as justification in the

contractor's written request for a desirable change determination,

which clearly demonstrate that the change in cost accounting practice

is otherwise desirable and not detrimental to the interests of the

Government.

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

made solely because of the cost impact that a proposed practice change

will have on a contractor's or subcontractor's current CAS-covered

contracts. A voluntary change in cost accounting practice may be

determined to be desirable and not detrimental to the Government's

interest even though existing contract prices and/or cost allowances

may increase. However, the amount of increased costs recognized by the

Government when making equitable adjustments under paragraph (c)(2) of

this subsection will be limited to the estimated amount of cost

accumulation reductions that are expected to occur under reasonably

predictable future CAS-covered contracts because of the practice change

(See illustration at 9903.407-1(h)). To what degree such expected cost

accumulation reductions for forecasted CAS-covered contracts may be

considered requires case-by-case determinations. Such consideration

should be based on data that fully supports such a condition and

discussions held with the contractor, the cognizant auditor and

affected Federal agency officials. Cognizant Federal agency official

determinations of expected future contract cost

[[Page 45720]]

reductions shall not be subject to the disputes provisions of CAS-

covered contracts.

5. Section 9903.201-8 and is proposed to be added to read as

follows:

9903.201-8 Cognizant Federal agency responsibilities.

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

extent practicable, be administered by the cognizant Federal agency

responsible for a particular contractor organization or location,

usually the Federal agency responsible for negotiating indirect cost

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

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

coordinating CAS administrative actions with all affected Federal

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

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

official and affected agencies shall coordinate their activities in

accordance with applicable agency regulations. Coordinated

administrative actions will provide greater assurances that individual

contractors follow their cost accounting practices consistently under

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

cost adjustments required under CAS-covered contracts for changes in

cost accounting practices or CAS noncompliance issues are determined

and resolved, equitably, in a uniform overall manner.

(b) Federal agencies shall prescribe regulations and establish

internal policies and procedures governing how agencies will administer

the requirements of CAS-covered contracts, with particular emphasis on

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

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

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

regulations.

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

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

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

subcontracts at each contractor and subcontractor business unit and the

delegation of necessary contracting authority to agency individuals

authorized to negotiate cost impact settlements under CAS-covered

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

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

that capacity.

(d) Processing changes in cost accounting practices. (1) The

cognizant Federal agency official shall, in accordance with applicable

agency regulations:

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

and subcontracts affected by a change in cost accounting practice,

including cost impact materiality determinations, in the aggregate.

(ii) Coordinate with affected agencies on the potential

modification of CAS-covered awards, prior to actual negotiations.

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

all CAS-covered contracts and subcontracts materially affected by the

change in cost accounting practice.

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

distribution of the negotiation memorandum.

(v) When contract and/or subcontract price adjustments are

negotiated:

(A) Request affected agencies to prepare implementing contract

modifications and to obtain implementing subcontract modifications from

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

shall be predicated on the negotiated cost impact settlement reflected

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

the contractor through the cognizant Federal agency official.

(B) Concurrently, obtain contractor signatures for all contracts

and subcontracts to be modified and distribute the executed

modifications to the awarding agencies.

(2) Awarding agencies shall, in accordance with applicable agency

regulations:

(i) Coordinate with and support the cognizant Federal agency

official.

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

implement negotiated cost impact settlements, as requested by the

cognizant Federal agency official.

(iii) When the cognizant Federal agency official has properly

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

every effort to provide funds required for increased contract price

modifications to affected Contracting Officers for obligation so that

the cognizant Federal agency official can concurrently execute all the

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

action in a timely manner.

(3) If the cognizant Federal agency official makes a written

determination that funding needed to execute required modifications is

not expected to be available, an equitable solution by use of any other

suitable technique which resolves the negotiated cost impact settlement

may be used (see 9903.405-5(c)(3)).

Subpart 9903.3--CAS Rules and Regulations

6. Section 9903.301 is proposed to be amended by adding two

definitions in alphabetical order to read as follows:

9903.301 Definitions.

(a) * * *

* * * * *

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

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

accomplished. Examples of functions include activities such as

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

inspection and field services.

* * * * *

Intermediate cost objective means a cost objective that is not a

final cost objective. Intermediate cost objectives are used to

accumulate the costs of specific functions or groups of functions.

Costs allocated to specific intermediate cost objectives are

accumulated in specific cost pools that include overhead pools, general

and administrative expense (G&A) pools, and service center or other

expense pools. These accumulated costs are then allocated as pooled

cost to other intermediate and/or to final cost objectives.

Intermediate cost objectives may also be used to accumulate direct

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

objectives as a direct charge.

* * * * *

7. Section 9903.302-1 is proposed to be amended by revising

paragraph (c) to read as follows:

9903.302-1 Cost accounting practice.

* * * * *

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

refers to the cost accounting methods or techniques used to accumulate

and distribute costs to intermediate and final cost objectives. The

allocation of cost to cost objectives includes both the direct and

indirect allocation of costs.

(1) Examples of cost accounting practices involving the allocation

of cost to cost objectives are the accounting methods and techniques

used to:

(i) Accumulate cost for cost objectives and cost pools,

(ii) Determine whether a cost is to be directly or indirectly

allocated to intermediate or final cost objectives,

(iii) Determine the selection and composition of cost pools, and

[[Page 45721]]

(iv) Determine the selection and composition of the appropriate

allocation bases.

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

establish one or more cost pools for the accumulation of specific costs

to be allocated to other intermediate and/or to final cost objectives

for a particular segment, home office, or business unit. The

composition of cost pools involves the determinations to accumulate, by

elements of cost, the costs of the specific functions or groups of

functions to be included within each established cost pool.

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

on what type of allocation base for a cost pool (e.g., labor hours,

square footage, labor dollars, total cost input) will be used as the

basis for the allocation of the total costs accumulated in each

selected pool to intermediate and/or final cost objectives for a

particular segment, home office, or business unit. The composition of

an allocation base involves the determination to accumulate the

selected allocation base data associated with each selected pool that

was established. The composition of an allocation base includes the

specific functional groupings within the base. The composition of a

home office allocation base includes the grouping of segments within

the applicable base. Examples of allocation bases include direct

engineering labor hours for a specific direct engineering function

performed at a specified location, total cost input of a particular

segment, total payroll costs for specific segments reporting to the

same group or home office.

8. Section 9903.302-2 is proposed to be revised to read as follows:

9903.302-2 Change to a cost accounting practice.

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

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

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

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

including the following changes in cost accumulation:

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

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

indirect cost pool into two or more pools.

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

function in its entirety from an existing cost pool to another cost

pool, segment or home office.

(b) Exceptions. (1) The initial adoption of a cost accounting

practice for the first time a cost is incurred, or a function is

created, is not a change in cost accounting practice. This exception

shall be applied at the segment or home office level, depending upon

the nature of the cost or the function involved. At the segment level,

different segments can establish different cost accounting practices

for the same type of cost when the cost is incurred for the first time

or a function is created by each segment. This exception does not apply

to transfers of ongoing functions, e.g., from one pool, segment, or

home office to another pool, segment or home office.

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

function is not a change in cost accounting practi

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