Cost Accounting Standards – Awareness is the Key to Success

Cost Accounting Standards graphic

Although almost all small to mid-sized government contractors have heard about the Cost Accounting Standards (CAS), many lack a complete understanding of the standards and the relevance to, and potential impact on, their business.  As a leading accounting service provider (audit, tax, compliance, and outsourcing) for small to mid-sized government contractors in the Washington Metropolitan area, we often see the confusion a lack of understanding can foster. Some examples are as follows:

  • Many start-ups and small government contractors believe that they are subject to CAS compliance when, in fact, none of their contracts are “CAS-covered contracts.” Often, these clients waste energy, internal resources, and, perhaps, worst of all, valuable capital, establishing CAS compliant systems.
  • Mid-sized contractors who are unaware that their contracts are, in fact, subject to CAS, i.e., “CAS-covered contracts,” often risk exposing themselves to the consequences of noncompliance. Preparing a cost impact statement to determine the financial implications of non-compliant cost allocation practices is not an activity that any contractor wants to undertake.
  • Government contractors scrambling to define their cost accounting policies for a solicitation – which they are actively pursuing – instead of focusing their efforts on pricing, documenting qualifications, or finding the appropriate teaming partners.

Of course, there are many other reasons for government contractors to increase their CAS awareness, but these examples illustrate the most common dangers of remaining uninformed.

Clearing Up Misconceptions

The most significant misconception we see is the notion that the government contractor (i.e., the entity) is subject to CAS. This is untrue.  Contracts are subject to CAS. Contractors are not.

However, whether a contract is subject to full CAS compliance (i.e., full CAS-coverage) or modified CAS-coverage often turns on the aggregate of the entity’s contracting activity. Thus, the confusion.

Which Contracts Are Covered

Any contract that is not specifically exempted under CFR §9903-201-1(b) is a CAS-covered contract.

Which Contracts Are Exempt

The most common CAS-exempt contracts are:

  • Sealed-bid contracts;
  • Negotiated contracts (and subcontracts), which do not exceed the Truth in Negotiations Act (TINA) threshold, currently $750,000;
  • Contracts and subcontracts with small businesses.
  • Firm fixed-priced contracts, fixed-priced with economic price adjustment contracts (provided that the price adjustment is not based on actual costs incurred), time-and-materials contracts, and labor-hour contracts;
  • Subcontracts for the acquisition of commercial items;
  • Contracts (and subcontracts) of less than $7.5 million, provided that, at the time of award, the business unit of the contractor (or subcontractor) is not performing any other CAS-covered contracts (or subcontracts), valued at $7.5 million or greater; and
  • Firm-fixed-price contracts (or subcontracts) which were awarded on the basis of adequate price competition without submission of cost or pricing data.

Of course, there are several other CAS-coverage exemptions, but these generally do not apply to small and mid-sized government contractors.

Modified vs. Full Coverage

There are two primary levels of CAS compliance, i.e., CAS-coverage. The level of CAS compliance applicable to an entity’s contract(s) depends largely on the value of new business the entity has been awarded within the prior two years.

Full coverage: A contract is subject to full CAS-coverage under the following circumstances:

  • the contract, itself, is an otherwise CAS-covered contract, i.e., not an exempt contract, and the awarded value of the contract exceeds $50 million;
  • if the contractor is awarded a single CAS-covered contract in excess of $50 million, any additional CAS-covered contracts (regardless of the value of the subsequent contract) awarded to that contractor in the same cost accounting period are also subject to full CAS-coverage; or
  • if the contractor received in excess of $50 million in CAS-covered contracts during the immediately preceding cost accounting period, all CAS-covered contracts, without regard to the value of those individual contracts, are also subject to full CAS-coverage.

Modified coverage: A CAS-covered contract  is subject to the modified CAS compliance under the following circumstances:

  • the value of the contract is greater than $7.5 million but less than $50 million and the contractor received less than $50 million in net CAS-covered awards in the immediately preceding cost accounting period; or
  • if the contractor was awarded with a modified CAS-covered contract, all CAS-covered contracts subsequently awarded during that cost accounting period are also subject to modified CAS compliance.

Interested in learning more? Please stay tuned as there is much more to come on the cost accounting standards in our newsletter and on our Resources page. If you miss an installment, be sure to check our website, our Facebook page, or our company LinkedIn page for the information you need!

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