Contributors:
Jeffrey Annessa | Senior Manager, Consulting Services
Artan Ivezaj | Manager, Consulting Services
Government contracts often come with specific requirements, conditions and regulations. Among those regulations are the Cost Accounting Standards (CAS), which are one of the most common challenges faced by emerging government contractors. Compliance with CAS is a contractual obligation, and failure to adhere to these standards can result in financial penalties, contract adjustments and contract termination.
Smaller organizations often are not required to follow some, or all, of CAS requirements due to exceptions related to small businesses. However, emerging lower and middle-market companies in the government contracting space are likely to trigger CAS at some time and must adhere to these additional regulations. Moreover, some of the cost principles in FAR Part 31 incorporate specific standards. Thus, compliance with those standards is a prerequisite to cost allowability in those circumstances.
This article delves into all aspects of government contract Cost Accounting Standards as they apply to commercial organizations, including the history of the standards, exemptions, applicability, consequences of noncompliance, when to prepare for CAS and what you can do before the award of a CAS-covered contract. It should be noted that there are special CAS requirements for educational institutions, which we will not discuss.
Key Takeaways
- Compliance with Cost Accounting Standards (CAS) is a contractual obligation for many government contractors and failure to adhere to these standards can result in financial penalties, contract adjustments and contract termination.
- Although small businesses are exempt from the CAS requirements, emerging lower and middle-market companies in the government contracting space are likely to trigger CAS at some point and must adhere to these additional regulations.
- CAS coverage is contract-by-contract, and there are two types of coverage: modified coverage and full coverage.
- Contractors should thoroughly educate themselves and their teams about the CAS regulations, assess their capabilities, establish clear and well-documented compliance policies and procedures, consider implementing specialized cost accounting software and consult with legal and accounting professionals experienced in government contracting and CAS compliance.
- Compliance with CAS can be costly, time-consuming and require specialized resources, but it can also lead to better control of costs, increased efficiencies, more reliable and consistent information for management and potential for increased profitability.
What Are Cost Accounting Standards?
Cost Accounting Standards are a set of standards and rules established by the government to regulate how covered costs are measured, assigned to accounting periods and allocated to contracts by companies that have CAS-covered government contracts. These standards were put in place to ensure that government contractors use consistent and equitable methods of accounting for the costs of their products and services provided to the government. The CAS require contractors to maintain accurate and complete records of their costs, allocate costs appropriately and disclose any changes in accounting practices. The goal is to ensure that the government is paying a fair price for goods and services while also protecting taxpayers from fraud and abuse.
Learn more: Cost Accounting Standards (CAS): A Comprehensive Overview for Government Contractors
What Are the Differences Between CAS, GAAP and FAR?
While there is some overlap between these three authorities, the main difference between CAS, Generally Accepted Accounting Principles (GAAP) and the Federal Acquisition Regulation (FAR) is their scope and focus. CAS is focused on the allocation of costs to government contracts, GAAP is focused on financial reporting for companies and the FAR is focused on allowability of costs on government contracts.
Here are some of the key differences between them:
Cost Accounting Standards (CAS): CAS is a set of accounting standards that apply to government contracts and subcontracts. These standards are designed to ensure that costs incurred on CAS covered government contracts are treated the same way by all affected contractors. CAS covers a wide range of topics, including cost accounting, cost allocation, cost estimating and cost reporting. Although the CAS are a part of the FAR, they are promulgated by the Cost Accounting Standards Board, not the FAR Councils.
Generally Accepted Accounting Principles (GAAP): GAAP is a set of accounting standards used by companies in the United States. These standards are designed to ensure that financial statements are consistent, transparent and comparable. GAAP covers a wide range of topics, including revenue recognition, inventory accounting and depreciation.
Federal Acquisition Regulation (FAR): FAR is a set of regulations used by the federal government to govern the procurement process. These regulations cover a wide range of topics, including contracting procedures, contract administration and cost accounting. FAR is closely related to CAS, as both aim to ensure that government contracts are awarded and administered fairly and efficiently. In this regard, while the FAR deals primarily with the allowability of costs, it does have some basic allowability rules. If there is a conflict between the FAR and CAS concerning the allocability of a cost, the CAS take precedence.
Why Does CAS Exist?
The Cost Accounting Standards Board (CASB) was established by Congress in the 1970s with a specific purpose to provide uniformity and consistency in the cost accounting principles followed by government contractors. The CASB adopted standards that required contractors to disclose in writing their cost accounting practices while complying with the promulgated cost accounting standards. The standards require specific cost accounting methods to ensure that the government receives consistent and reliable cost information from contractors, making it easier to evaluate contract performance and cost efficiency. There are currently 19 standards that have been adopted at various times since the CASB was established.
When Does CAS Apply?
A common misconception is that CAS applies to contractors. However, CAS is applicable on a contract-by-contract basis. Also, the level of coverage, which we discuss later, established at the time of award generally applies for the life of the contract. For example, during a contractor’s fiscal year, the contractor may receive contracts that fluctuate between full CAS, modified CAS and no requirements for CAS coverage, but each contract will maintain its level of coverage determined at the time of award and generally will never change. Therefore, contractors and subcontractors must understand CAS applicability discussed below.
CAS Exemptions
Before looking at the different levels of CAS coverage, a contractor must first be aware of the criteria that would make the contract exempt from CAS, which includes the following exemptions cited in 48 CFR 9903.201-1:
- Sealed bid contracts
- Negotiated contracts and subcontracts not in excess of the Truthful Cost and Pricing threshold (currently $2M)
- Contracts and subcontracts with small businesses
- Contracts and subcontracts with foreign governments
- Contracts and subcontracts in which the price is set by law or regulation
- Acquisition of commercial products and services
- Contracts or subcontracts of less than $7.5 million while not performing on any CAS-covered awards that exceed $7.5M
- Subcontractors under the NATO PHM Ship program to be performed outside the United States by a foreign concern
- Firm-fixed-price (FFP) contracts or subcontracts awarded on the basis of adequate price competition without submission of certified cost or pricing data
What Are the Types of CAS Coverage?
Unless an exemption applies, there are two types of CAS coverage: modified coverage and full coverage.
Modified Coverage
- Contractor must adhere to only four of the standards: 401, 402, 405 and 406.
- Applicable once a contractor receives a single award of $7.5 million or more but less than $50 million and total net CAS-covered awards in the preceding cost accounting period are less than $50 million (referred to as “trigger” contract).
- Upon triggering CAS, all future awards greater than the Truthful Cost or Pricing threshold (currently $2M) are then subject to CAS unless they meet an exemption.
Full Coverage
- Applicable when a single CAS-covered award of $50 million or more, or a non-exempt award when the net CAS-covered awards in the preceding cost accounting period totaled at least $50 million.
- Contractor must adhere to all 19 standards and maintain a CASB DS-1 disclosure statement:
- The disclosure statement is a contractor’s written description of cost accounting practices and procedures following a specific form (DS-1) provided by the CASB. Contractors are required to submit to the cognizant contract administration office a disclosure statement before the award of a CAS covered contract of $50M or more, or once total CAS covered awards hit $50M or more in a cost accounting period. The CAO will then review the DS-1 for adequacy and compliance.
Learn more: Cost Accounting Standards (CAS): A Comprehensive Overview for Government Contractors
What Are the 19 Standards?
There are 19 CAS standards which measure, assign and allocate costs. The standards do not address allowability of costs. Each of the 19 standards addresses a specific aspect of cost accounting, ranging from cost accounting period to the allocation of indirect costs. These standards also include definitions, fundamental requirements and examples to guide contractors. The standards ensure that all government contractors follow the same rules, creating a level playing field. The CAS standards can be broken down into different topics or areas:
General Cost Accounting Concepts (Modified Coverage)
- 401: Consistency in Estimating, Accumulating and Reporting Cost
- 402: Consistency in Allocating Costs Incurred for the Same Purpose
- 405: Accounting for Unallowable Costs
- 406: Cost Accounting Period
Cost Allocation Methodology
- 403: Allocation of Home Office Expenses to Segments
- 410: Allocation of Business Unit General & Administrative (G&A) Expenses to Final Cost Objectives
- 418: Allocation of Direct and Indirect Costs
- 420: Accounting for Independent Research and Development Costs and Bid and Proposal Costs (IR&D and B&P)
Treatment of Fixed Assets
- 404: Capitalization of Tangible Assets
- 409: Depreciation of Tangible Capital Assets
- 414: Cost of Money as an Element of the Cost of Facilities Capital
- 417: Cost of Money as an Element of the Cost of Capital Assets Under Construction
Cost of Labor & Material
- 407: Use of Standard Costs for Direct Material and Direct Labor
- 408: Accounting for Costs of Compensated Personal Absence
- 411: Accounting for Acquisition Costs of Material
Deferred Compensation
- 412: Composition and Measurement of Pension Costs
- 413: Adjustment and Allocation of Pension Cost
- 415: Accounting for the Cost of Deferred Compensation
Insurance
- 411: Accounting for Acquisition Costs of Material
Learn more: Cost Accounting Standards (CAS): Part 1 – CAS Coverage Types, Common Standards, and CAS Applicability
What Are the Implications of Non-Compliance With CAS?
If a contractor is found to be noncompliant with CAS, the government will notify the contractor of the noncompliance and require a corrective action. This may include a General Dollar Magnitude (GDM) Proposal from the contractor to determine the financial impact to both parties on affected CAS-covered contracts. The government has the authority to withhold payments, apply interest on overpayments and even unilaterally adjust the price of CAS-covered contracts.
When Should Contractors Start Preparing?
Most small businesses do not need to consider CAS since they are currently exempt. However, as these organizations grow and no longer qualify as a small business, compliance with CAS can become an imminent issue. Following the CAS can be a large undertaking that is an administrative burden. To navigate the intricacies of CAS effectively, contractors may need to invest in specialized accounting systems and training for their finance teams while experiencing additional scrutiny by DCAA and other regulatory agencies. Therefore, small businesses with high growth trajectories, and middle-market companies forecasting larger contract awards, should take a proactive approach.
Learn more: Cost Accounting Standards (CAS): Considerations for a Growing a GovCon
What Should Contractors Do Before the Award of a CAS-Covered Contract?
There are steps you can take to be better equipped to meet the compliance requirements prior to pursuing a CAS-covered contract.
Understand CAS – Thoroughly educate yourself and your team about the CAS regulations. Cost Accounting Standards can be complex, so invest time in understanding the specific requirements that apply to your contract(s).
Assess Your Capabilities – Evaluate your organization’s financial and administrative capabilities. Determine whether you have the necessary resources, expertise and infrastructure to effectively comply with the CAS requirements.
Policies and Procedures – Establish clear and well-documented compliance policies and procedures within your organization. Ensure that all employees involved in Cost Accounting Standards government contracts are aware of, and follow, these guidelines. We also recommend developing a CASB DS-1 disclosure statement prior to becoming CAS covered.
Cost Accounting Software – Consider implementing specialized cost accounting software that can help automate and streamline compliance processes. These tools can improve accuracy and efficiency in cost allocation and reporting.
Seek Expert Advise – Consult with legal and accounting professionals experienced in government contracting and CAS compliance. They can provide guidance on regulatory compliance and risk mitigation.
Common Pain Points When Implementing CAS
Resource Constraints – Small and emerging government contractors often have limited resources, both in terms of personnel and financial resources. Complying with CAS may require hiring or training specialized staff, investing in new accounting systems and dedicating significant time and effort to compliance activities.
Compliance Costs – Complying with CAS can be costly. It may involve implementing new accounting systems, supporting regular audits and maintaining detailed records which can strain the finances of smaller contractors.
Subcontractor Management – If your business relies on subcontractors, ensuring their compliance with CAS can be a challenge. You may need to work closely with subcontractors to obtain the required cost data and documentation, which can be time-consuming and complex. Also, understand that the government does not have privity of contract with subcontractors. Therefore, if a subcontractor CAS non-compliance causes the government to pay the prime contractor more money, the government will seek recovery from the prime contractor not the subcontractor.
CAS Audits
There are different types of audits relating to the CAS, such as audits of a contractor’s disclosure statement or audits of the cost impact of a proposed cost accounting practice change. For purposes of this article, CAS audits refer to audits conducted to test the contractor’s compliance with the CAS and the contractor’s disclosed cost accounting practices. The audit process involves a review of the contractor’s cost accounting system, procedures, and practices to determine whether they are consistent with the CAS and the contractor’s disclosed practices.
The audit process includes a review of the contractor’s cost accounting practices, allocation methods and the consistency of the application of these practices.
The objective of the CAS audit is to ensure that contractors are using accurate and consistent cost accounting methods, which are necessary for the determination of the cost of government contracts. The audit results in a report that identifies any deficiencies in the contractor’s cost accounting system, whether these deficiencies have resulted in the government paying increased costs on covered contracts and provides recommendations for corrective action.
CAS Benefits
While complying with CAS might seem intimidating; there are several benefits to be had when incorporating the standards. The biggest benefit is that CAS allows for a better understanding of your costs, which in turn allows for better control of costs. This can result in increased efficiencies and assisting in identifying unnecessary costs, having more reliable and consistent information for management to make better informed decisions and budgets and potential for increased profitability by having a better understanding of costs and margins.
Cherry Bekaert’s team of seasoned and experienced government contracting consultants have years of CAS experience to help you navigate any compliance issues or disclosure statement development.
Related Insights:
- Podcast: Cost Accounting Standards (CAS) Acquisition Implications
- Podcast: Cost Accounting Standard Considerations for a Growing GovCon
- Podcast: Cost Accounting Standards (CAS): A Comprehensive Overview
- On-Demand Webinar: Introduction to Cost Accounting Standards (CAS) – Recording
- On-Demand Webinar: Cost Accounting Changes and Cost Impact Statements – Recording
