Mon. Mar 27th, 2023

Contractors normally assume that government auditors have particular authority to interpret the Price Accounting Requirements. That assumption is uncomplicated to recognize — auditors regularly take the position that there is just one particular “right” way for a business to do its contract expense accounting, primarily based on how other businesses do points. But contractors need to know that CAS is versatile and normally offers them selections about how to comply, primarily based on the situations of their small business. In brief, a contractor’s small business judgment matters, and contractors can use it to push back on auditors who take an overly rigid view of CAS.

Government procurement officials and auditors have no particular authority to say what CAS implies, i.e., their interpretations of CAS obtain no deference in a dispute. See Perry v. Martin Marietta Corp., 47 F.3d 1134, 1137 (Fed. Cir. 1995) Raytheon Co., Space &amp Airborne Sys., ASBCA No. 57801, 15-1 BCA ¶ 36024. Amongst other motives, CAS was promulgated by the Price Accounting Requirements Board, a one of a kind federal entity produced by statute, and not by federal procurement officials or auditors.

By design and style, the plain language of CAS normally offers the contractor discretion to pick from a variety of selections for structuring its expense accounting practices. There are 19 requirements below CAS, and every has constructed-in flexibility to enable contractors to pick expense accounting practices that align with the sensible realities of their small business. No two firms are precisely alike, and the requirements recognize that distinctive businesses will pick distinctive approaches. Auditors normally neglect this aspect of CAS, and they could take a narrow view of what it implies to comply. But contractors need to normally ask: Does the relevant CAS give me any selections, and if so, is the auditor pondering as well rigidly about the requirements?

Contemplate CAS 410, which gives guidelines for allocating the basic &amp administrative costs of operating a small business (“G&ampA”). CAS 410 needs a contractor to allocate G&ampA to a base that “best represents the total activity” of the small business, and it sets out 3 selections for reaching that objective: (1) a total expense input base, employing all the expenses of the small business unit (two) a worth-added base, which excludes material and subcontract expenses and (three) a single element base, by which the contractor selects an equitable element for allocation, such as direct labor hours or dollars. See CAS 410-50(d).

CAS 410 tends to make clear that there is no “right” system, and that the answer depends on the information of the small business. It states that “[t]he determination of which expense input base most effective represents the total activity of a small business unit should be judged on the basis of the situations of every small business unit.” Id. The Armed Solutions Board of Contract Appeals (“ASBCA”) has confirmed that the “judgment” at situation is the contractor’s, not the government’s.

In a foundational selection on CAS 410, the ASBCA held that “[i]n our view, an evaluation of which allocation base most accurately distributes G&ampA expense in relation to positive aspects received could, constant with CAS 410, involve the application by the contractor of affordable judgment.” Ford Aerospace and Commc’ns Corp., ASBCA No. 23833, 83-two BCA ¶ 16813 (emphasis added).

Similarly, contemplate CAS 402, which gives that “[n]o final expense objective shall have allocated to it as an indirect expense any expense, if other expenses incurred for the identical goal, in like situations, have been integrated as a direct expense of that or any other final expense objective.” CAS 402-40. Even though that common could look prescriptive, CAS 402-50(b) tends to make clear that the contractor has a wide measure of discretion to establish what expenses are appropriately treated as “indirect,” so extended as the contractor’s Disclosure Statement explains its practices and the contractor regularly applies the common. See CAS 402-50(b). The U.S. Court of Appeals for the Federal Circuit has commented that “CAS 402 offers the contractor considerable freedom in the classification of unique expenses[.]” ATK Thiokol, Inc. v. United States, 598 F.3d 1329, 1332 (Fed. Cir. 2010).

Practically all of the CAS requirements contain related flexibility. E.g., CAS 403-60 (supplying a list of “illustrative allocation bases” for household workplace expenses, “which could be utilized in proper circumstances”) CAS 406-20 (supplying criteria for “selection” of a expense accounting period) CAS 418-20 (supplying “guidance relating to the choice of allocation measures primarily based on the useful or causal partnership among an indirect expense pool and expense objectives”).

So how can the flexibility of CAS aid a contractor to navigate an audit or dispute? When faced with an auditor who views CAS as a matter of “right/wrong” or “yes/no,” a contractor need to meticulously assessment the CAS principle at situation to see if it gives the business any discretion. The contractor need to also contemplate the CAS Board’s regulatory history for the common, and could also want to assessment case law from the Boards of Contract Appeals and Federal Courts. The contractor need to then appear for methods to clarify its selections to the auditor, like by sharing the motives it chosen a particular strategy and how other approaches could be overly burdensome or could negatively effect the interests of the small business or the government.

For instance, is it impractical to treat particular components/components as a direct expense, taking into consideration how they are stored and utilized on the shop floor? Would a total expense input base fail to reflect the accurate partnership of G&ampA activity with the company’s small business, taking into consideration how management spends its time and sources? Would the auditor’s G&ampA strategy lead to volatile swings in expense allocation from year to year? Based on the answers, these sensible points can back up a contractor’s selections and aid justify them below CAS. A contractor could also want to demonstrate that its accounting practices are described in its internal policies and (if applicable) in its CAS Disclosure Statement. Advance written descriptions of accounting policies can also go a extended way toward assisting assistance a company’s practice.

By Editor

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