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Welcome to Apogee Consulting, Inc.

Problems with Text Messages

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Long time readers may recall that use of text messages can be problematic for wrong-doers. We’re not talking about FAR 52.223-18 which, when inserted into a solicitation or contract, “encourages” a contractor to “adopt and enforce policies that ban text messaging while driving.” No, we’re talking about people engaged in criminal activity who think that using text messages to communicate is somehow going to shield them from law enforcement attention.

In 2011, we wrote about a NAVSEA Program Manager who “regularly sent … text messages and e-mails seeking weekly payments of $3,500” as part of a scheme to solicit corrupt payments in return for awarding a contractor “millions of dollars” of Navy contracts. The Program Manager (as well as the other participants in the scheme) pleaded guilty and he was sentenced to 10 years in Federal prison. The contractor employee who made the payments was sentenced to three years.

So maybe text messages and emails aren't the best way to conduct your corruption. Just sayin' ….

In today’s article we want to discuss an individual who got into trouble for deleting text messages. Would you like to know more? Let us offer some information from the inevitable Department of Justice press release.

To understand the situation, you need to know that William Thompson, of Sneads Ferry, North Carolina ran a company called C&D Painting and Construction. C&D did work at Marine Corps Base Camp Lejeune (MCBCL), located in Jacksonville, North Carolina. Somebody called Public Official 1 (PO1) was a civilian employee of the U.S. Marine Corps who directed the procurement of information technology services and equipment to be used by the Marine Corps at MCBCL and elsewhere.

In March 2018, agents of the Naval Criminal Investigative Service (NCIS), FBI, and IRS-Criminal Investigation (IRS-CI) interviewed Thompson. During the interview, law enforcement agents informed Thompson that they were investigating an alleged bribery conspiracy concerning work that C&D Construction completed as a subcontractor at MCBCL, and about renovations that Thompson performed at PO1’s residence. At the time of the interview, the investigation was covert and not known to all subjects, including PO1.

On the same evening of the interview and the following morning, Thompson exchanged several text messages with PO1 in which Thompson informed PO1 that the FBI, NCIS, and IRS-CI were investigating PO1’s involvement in contracting matters while PO1 was employed by the Marine Corps.

Here’s the kicker:

After informing PO1 of the ongoing federal investigation, Thompson deleted the relevant text messages from his phone, despite knowing that the messages constituted evidence related to the federal investigation into bribery and procurement fraud at MCBCL.

Thompson pleaded guilty to one count of obstruction of justice, for destroying records in connection with a federal investigation of bribery and procurement fraud. He was sentenced to serve 18 months in prison.

Eighteen months in prison for deleting text messages from his phone. Bad messages to be sure, but still.

The next time you want to win a wager in a bar, just assert that somebody can be sentenced to prison for deleting text messages. See who wants to bet you.

Last Updated on Monday, 22 February 2021 19:18

Why Won’t Contracting Officers Settle Questioned Direct Costs? (Part 2)

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We were discussing a recent Department of Defense Inspector General audit report that criticized DCMA contracting officers for not settling direct costs questioned by DCAA auditors during their audits of contractor “incurred cost” submissions.

Readers may recall that DoDIG Audit Report No. DODIG-2021-047 (“Evaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs”) opined that “DCMA contracting officers may have reimbursed DoD contractors up to $231.5 million in costs that may be unallowable on Government contracts in accordance with the FAR.”

When the DoD IG auditors say “DCMA contracting officers,” they are pointing the finger at an amorphous group of contracting officers in a Contract Administration Office (CAO), a group that includes ACOs, DACOs, and perhaps CACOs. We noted in the previous article that the roles and responsibilities for each of those positions is fairly opaque and undefined. About the only thing we know is that “According to DCMA Manual 2201-03, DCMA administrative contracting officers (ACOs) must settle any questioned direct costs.” One problem is that DCMA Manual 2201-03 does not indicate whether DCMA DACOs have the authority to settle direct costs. It only states that the DCMA DACO must coordinate and obtain settlement results from DCMA ACOs, DoD Component contracting officers, and Government agency contracting officers, who have the actual responsibility for settling DCAA questioned direct costs relating to one or more of their contracts.

Thus, DACOs/CACOs are expressly responsible for (1) coordinating and (2) obtaining settlement results from other contracting officers, but they do not have express responsibility and/or authority to settle questioned direct costs on their own. That’s the job of the other contracting officers—typically an ACO. The DACOs and CACOs are busy settling indirect cost rates, negotiating Forward Pricing Rate Agreements, and administering CAS.

One problem here is that DCAA issues one “incurred cost” audit report that covers both indirect cost rates and direct costs. The findings in that audit report must be bifurcated so that each contracting officer can adjudicate, negotiate, and/or settle the questioned costs. One (or more!) ACO looks at the questioned direct costs while another ACO looks at questioned indirect costs.

We ended the previous article by asking whether DCAA should have been looking at both direct and indirect costs in the same audit? Should DCAA really be conducting two separate audits and issuing two separate audit reports to two (or more!) groups of contracting officers?

The Section 809 Panel thought so, and they recommended that DCAA change course. Had DoD adopted that recommendation, we’d have a lot less confusion about settlement roles and responsibilities, in our view. We discussed the relevant Section 809 Panel recommendations in this article.

To be clear, here is what the Section 809 Panel had to say about DCAA’s audit of contractor incurred costs. (Reference Panel Report, Volume 1, Recommendation 15.)

The term incurred cost proposal is not defined within federal acquisition regulations, the effect of which has been to create unnecessary burdens on both the Government and contractors. Incurred cost proposal is the government contracting community’s shorthand way of referring to a contractor’s final indirect cost rate proposal. An annual final indirect cost rate proposal, the elements of which are defined in FAR 52.216‐7(d), is necessary for the contractor and the government to establish final indirect cost rates for purposes of settling provisionally billed (i.e., estimated) indirect costs on flexibly priced contracts. The government’s responsibilities for negotiating or establishing final indirect cost rates is set forth in FAR42.705.

Although the final indirect cost rate proposal necessarily includes details regarding all contract costs (indirect and direct), direct costs are included because (a) the government needs to verify the completeness and accuracy of the contractor’s total costs to avoid double‐counting and (b) direct costs are the most common means by which contractors allocate indirect costs to contracts. A final indirect cost rate proposal is not a claim for direct costs incurred and billed during contract performance. FAR 42.702 indicates that an audit of the final indirect cost rate proposal is performed for the sole purpose of negotiating final indirect cost rates.

In recent years, DCAA began auditing direct costs, as well as indirect costs, during its incurred cost audits. Before then, DCAA’s audit procedures concerning direct costs were limited to verifying their completeness such that final indirect cost rates are calculated accurately. In general, expanding the scope of incurred costs audits may increase the time it takes DCAA to complete incurred cost audits and increase the time it takes contracting officers to address and resolve the results of DCAA’s audits.

The allowability of contractor direct costs is also an important compliance requirement. It is not, however, the purpose of DCAA’s evaluation of contractor final indirect cost rate proposal. Rather, a contracting officer may request DCAA to audit the direct costs of a contract pursuant to FAR 52.216‐7(g), which is an entirely different oversight request than a final indirect cost rate proposal audit. If DCAA performs adequate voucher reviews, which has always been one of DCAA’s important responsibilities, there should be no cause for concern.

(Emphasis added.)

The Section 809 Panel recommended that DCAA perform two separate audits—one on the contractor’s indirect cost rates, and the other on the contractor’s claimed direct costs. Had DoD implemented that recommendation, we don’t think there would be the current level of confusion regarding which contracting officer is responsible for settling what.

Exactly what confusion are we talking about? Well, back to the DoD IG report ….

  • DCMA contracting officers did not comply with DoD Instruction 7640.02 and DCMA policy because they did not settle, or coordinate the settlement of, $231.5 million in questioned direct costs.

  • The DCMA DACOs closed the associated records in the CAFU system for the 12 audit reports even though the $231.5 million of the $258 million in reported questioned direct costs were not settled.

Why? Let’s quote from the audit report:

  • DCMA lacks adequate guidance for identifying and coordinating with other contracting officers who are responsible for settling questioned direct costs. Although DCMA Manual 2201-03 requires the DCMA DACO who receives a DCAA audit report to coordinate with other contracting officers who are responsible for settling the questioned direct costs, it does not provide any guidance on how to identify all responsible DoD contracting officers. Furthermore, DCMA Manual 2201-03 does not provide any guidance for addressing situations when the other DoD contracting officers do not respond to the DCMA contracting officer’s repeated requests to provide settlement results of the questioned direct costs.

  • DCMA Manual 2201-03 states that DCMA ACOs (which does not include DCMA DACOs) must settle questioned direct costs. DCMA Manual 2201-03 does not indicate whether or not DCMA DACOs have the authority to settle questioned direct costs. We spoke to several DCMA DACOs who stated that, based on their interpretation of DCMA Manual 2201-03, the DCMA has not granted them the authority to settle questioned direct costs. DCMA Manual 2201-03 does not authorize DCMA DACOs to settle questioned direct costs based on the DCMA’s interpretation of FAR 42.302(a)(9). FAR 42.302(a)(9) states that the contracts administration office (typically the DCMA) is responsible for establishing final indirect cost rates; however, the FAR does not specifically identify who is responsible for settling direct costs. The DCMA typically tasks DCMA DACOs with the responsibility for establishing indirect cost rates in accordance with FAR 42.302(a)(9). However, because the FAR lacks specificity for establishing responsibility over direct costs, DCMA Manual 2201-03, section 3.11, implements policy that only allows the DCMA ACOs assigned to each contract to settle questioned direct costs. When the DCAA questions a contractor’s direct costs, the questioned costs can involve dozens of contracts and several different DCMA ACOs. Additionally, questioned direct costs can involve contracting officers from the DoD and other Government agencies.

According to the IG auditors—

FAR 42.302(a)(9) does not prohibit DCMA DACOs from having the authority to settle direct costs. The [DPC] representatives explained that direct costs are an integral part of an indirect cost rate because the direct costs are used as the base (denominator) to calculate the indirect cost rate. Therefore, the representatives stated that when a DCMA DACO settles indirect cost rates, the DACO should give due consideration to the DCAA questioned direct costs.

Well, that’s a bit misleading, isn’t it? We mean, since all direct costs must bear their proportionate share of indirect costs, it really doesn’t matter at all whether those direct costs are allowable or unallowable. The indirect cost rate is exactly the same, either way. Thus, either the DoD IG auditors do not understand the requirements of CAS 405 and FAR 31.201-6, or they chose to ignore those requirements when writing the audit report.

The DCMA Director disagreed with the audit findings. The audit report states—

The DCMA Director agreed that the current version of DCMA Manual 2201-03 does not adequately clarify the different contracting officer roles and authority in settling DCAA questioned direct costs. However, the DCMA Director maintained that DCMA contacting officers only have the authority to settle DCAA questioned direct costs when delegated the authority by a DoD Component contracting officer.

In addition, the DCMA Director does not interpret FAR 42.302(a)(9) as conferring DCMA contracting officers the authority to settle or negotiate DCAA direct costs. The DCMA Director stated that the FAR grants DCMA ACOs and DACOs only the authority to establish final indirect cost rates and billing rates. The DCMA Director further stated that the FAR does not extend questioned direct costs settlement authority to DCMA contacting officers because DoD Component contracting officers are better suited to settle DCAA questioned direct costs because they negotiate the contract terms with the contractor, award the contract, and understand the expectations of the parties. Finally, the DCMA Director stated that this report unfairly implies that DCMA ACOs are responsible for the failure to settle direct costs questioned by the DCAA.

Naturally, the DoD IG auditors disagreed with DCMA’s position, citing to FAR 1.102-4(e), which basically states that any action in the best interests of the Government may be taken unless expressly prohibited. Since the FAR does not expressly prohibit DCMA ACOs and DACOs from settling DCAA questioned direct costs, they should do so.

More importantly, the DoD Inspector General believes that the failure of those DCMA “contracting officers” to use their implied authority to settle questioned direct costs is a valid reason to criticize them.

Last Updated on Wednesday, 03 February 2021 17:34

2021 NDAA Analysis

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Somebody I follow asserted that 2021 didn’t actually start until January 21, 2021. I want that to be true, because January 6th belongs with 2020, doesn’t it? Regardless of your position on the matter, for defense contractors 2021 could be said to have started on January 1, 2021, which is a nice alignment with the calendar. That’s the date when the William M. (Mac) Thornberry National Defense Authorization Act (NDAA) for Fiscal Year 2021 became public law.

The 2021 NDAA became public law on that date because that’s the date Congress voted to override the President’s veto of the bill. It was President Trump’s tenth veto of a bill during his four-year term, but the first veto to be overridden by Congress. The date of the override becomes the date of the public law, or so we’re told.

For the twentieth year in a row, Bob Antonio at WIFCON.com published his invaluable analysis of the NDAA, section by section. As has become tradition here, we’ll take a look at his analysis and bring certain highlights to your attention. But if you want to know more, there is no better source than his analysis, and we encourage you to go read it.

The most relevant section for compliance folks would be Section 806. In that Section, Congress directed significant changes to the contractor business system administration regime. Well, we think they’re significant. You be the judge. Anyway, Congress make revisions to the 2011 NDAA language that first established the contractor business system administration rules, replacing the term “significant deficiency” with “material weakness” to better align audit/review findings with other audits/reviews of internal controls, thus reducing confusion among practitioners and (hopefully) reducing confusion among those who have to deal with audit/review reports and findings.

We’ve spent a decade dealing with “significant deficiencies” and most of us have learned that a significant deficiency inexorably leads to a contractor business system being determined to be inadequate. During that decade, contractors have argued (largely unsuccessfully) with auditors and contracting officers about whether or not a deficient is actually “significant” or not. So what’s changing?

Here’s the official definition of “material weakness” from the NDAA:

The term `material weakness' means a deficiency or combination of deficiencies in the internal control over information in contractor business systems, such that there is a reasonable possibility that a material misstatement of such information will not be prevented, or detected and corrected, on a timely basis. For purposes of this paragraph, a reasonable possibility exists when the likelihood of an event occurring--

(A) is probable; or

(B) is more than remote but less than likely.

The linkage to the more traditional audits/reviews of contractor internal controls should be obvious. But let’s break that definition down a bit more:

  • A single deficiency or a combination of deficiencies

  • In internal control over information in contractor business systems

  • Leading to a reasonable possibility

  • That a material misstatement

  • Will not be prevented

  • Or detected and corrected

  • On a timely basis

  • Where “reasonable possibility” cannot mean a remote possibility

Points likely to lead to a disagreement include: (1) What is a “material misstatement” and (2) what is a “timely basis”. With respect to “material misstatement” we have fairly recent DCAA guidance on how to quantify materiality. While that guidance only applies (formally) to contractor’s incurred costs, informally most people (including DCAA leadership) agree it can—and should be—applied more broadly. We see no reason that the materiality guidance could not be extended to DCAA audits of contractor business systems. As for DCMA, there is materiality guidance found in FAR Part 30, which is applicable to CAS cost impact proposal analysis and related determinations. Again, there is no reason that materiality guidance couldn’t be extended to DCMA reviews of contractor business systems. We very much hope it will be.

Which leaves “timely basis.” What does that mean in the context of government contracting? We don’t have much in the way of authoritative answers, and the correct answer will probably depend on the context. For example, with respect to calculating indirect cost rates, we would hazard the position that “timely” means “before the end of the contractor’s fiscal year.” But with respect to complying with Limitation of Cost/Limitation of Funds requirements, “timely” could well mean something else. There are other contexts to consider as well, including Truthful Cost or Pricing Data requirements (aka “TINA”). So we’ll just have to wait and see what the contracting parties make of it.

Getting back to the NDAA, Congress continues to play with the increase in the TINA threshold. Section 814 formally increased the threshold at which certified cost or pricing data must be submitted to “a standard $2.0 million threshold for application of the requirements of the Truthful Cost or Pricing Data statute (commonly known as the Truth in Negotiations Act) with respect to subcontracts and price adjustments.” (Of course, this is the value assuming no exception applies.)

There are dozens of other Sections to be reviewed, but most of those are pointed at the Department of Defense in general, and we expect any impacts to contractors will be primarily indirect in nature. The two above are the ones that struck us as being most worthy of discussion. That being said, you shouldn’t rely on our judgment; you should follow the link we provided and do your own research.

Last Updated on Monday, 01 February 2021 18:02

Why Won’t Contracting Officers Settle Questioned Direct Costs? (Part 1)

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A couple of friends and I will be starting a podcast soon, discussing government contracting things. Looks like it will be available every two weeks. The other two participants are former contracting officers and former DAU instructors. I think the only reason they asked me to participate is for comic relief.

I’m supposed to bring “two or three topics” to each podcast. We’ll see how that goes. I may be like the SNL castmember who doesn’t return after their first season. Anyway, one of my topics for the first podcast will be the recent Department of Defense Inspector General audit report where – once again – the offer criticism of DCMA contracting officers for not doing what DoDIG thinks they should be doing. In this case, it concerns settlement of direct costs questioned by DCAA during their “incurred cost” audits (which should really be called audits of “proposals to establish final billing rates,” but we’ll get into that later in this article.)

In DoDIG Audit Report No. DODIG-2021-047 (“Evaluation of Department of Defense Contracting Officer Actions on Questioned Direct Costs”), the auditors offered a conclusion regarding whether “the actions taken by DoD contracting officers on questioned direct costs reported by the Defense Contract Audit Agency (DCAA) complied with the Federal Acquisition Regulation (FAR), DoD Instructions, and agency policy.”

Before we get into the audit report, though, you need to know that the DoD IG has a long history of sniping at DCMA contracting officers—most of which has been documented on this blog. This particular audit report noted that it was following-up on a 2017 audit report. We discussed that audit report in this article. As with the prior audit report, in this audit report the DoD IG accepted DCAA findings as being accurate, and criticized DCMA contracting officers for not addressing DCAA’s findings timely and therefore “DCMA contracting officers may have reimbursed DoD contractors up to $231.5 million in costs that may be unallowable on Government contracts in accordance with the FAR.” May have being the key phrase. The IG auditors don’t know. But it sure makes a good headline, right?

Here’s some other stuff you need to know before we get into the audit report:

Each contract has a cognizant contracting officer (often called the “procuring contracting officer” or PCO), but contract administration functions may be “assigned” (or delegated or transferred) to a Contract Administration Office (CAO). The entire post-award contract administration function, or portions of it, or “specialized services” may be assigned from the PCO to the CAO. Contract administration functions are listed in the FAR, at 42.302. There are 82 of them. In addition, DFARS 242.302 lists a few more contract administration functions.

There are certain functions that are “normally delegated” to a CAO (71 out of 82) and there are certain functions that must be delegated to a CAO. Functions that are mandatory for delegation include:

  • Negotiation of forward pricing rate agreements

  • Establish final indirect cost rates and billing rates for those contractors meeting the criteria for contracting officer determination

  • Administer Cost Accounting Standards (CAS) matters

  • Determine the adequacy of the contractor’s accounting system

Those functions must be performed by a CAO contracting officer, and not by a PCO. The rationale should be fairly obvious: those are cross-cutting issues that affect all contracts (perhaps contracts awarded by another agency) and administration of those issues requires a bigger picture than a PCO would typically get. The CAO contracting officers that handle those issues are typically called “Administrative Contracting Officers” (ACOs). But there are different flavors of ACO; some ACOs are called ACOs but others are called Divisional Administrative Contracting Officers (DACOs) and still others are called Corporate Administrative Contracting Officers (CACOs). A DACO handles cross-cutting issues for a contractor segment or division or sector (or whatever the contractor calls it) whereas a CACO handles cross-cutting issues across an entire corporation, and coordinates the activities of multiple DACOs and/or ACOs.

One thing we’ve noticed is that neither the FAR nor the DFARS actually describes the role of a DACO or ACO. The regulations are silent on what those functions do and how they differ from each other. As we will see, that gap gave the DoD IG auditors some wiggle room to create audit findings.

The DoD IG audit report states, “For DCAA incurred cost audit reports, the DCMA is generally responsible for determining whether the DoD contractor’s claimed indirect and direct costs are allowable in accordance with contract terms and FARs Subpart 31.2 and for negotiating a final indirect cost rate agreement that will be used to close the contractor’s contracts.” Now we are going to quote from the audit report because what follows is the central thesis of the DoD IG auditors:

DCMA Manual 2201-03 [“Final Indirect Cost Rates,” February, 14, 2019] requires DCMA divisional administrative contracting officers (DACOs), who are usually the primary recipients of a DCAA incurred cost audit report, to settle any questioned indirect costs and prepare the final indirect cost rate agreement. According to DCMA Manual 2201-03, DCMA administrative contracting officers (ACOs) must settle any questioned direct costs. DCMA Manual 2201-03 does not indicate whether DCMA DACOs have the authority to settle direct costs. However, the Manual does state that the DCMA DACO must coordinate and obtain settlement results from DCMA ACOs, DoD Component contracting officers, and Government agency contracting officers, who have the responsibility for settling DCAA questioned direct costs relating to one or more of their contracts. The DCMA DACO and DCMA ACO are collectively referred to in this report as DCMA contracting officers.

(Emphasis added.)

Because the regulations (and DCMA guidance) are silent on the varying roles of ACOs, DACOs, and CACOs, the IG auditors felt free to lump them all together and call them, collectively, “DCMA contracting officers.” When that happens, then an opportunity arises to criticize the “contracting officers” for not following guidance.

The issue is who has the authority to settle questioned direct costs. There is no question that an ACO or DACO or CACO must settle indirect cost rates. There is no question that an ACO must settle questioned direct costs. There is no question that a DACO (or CACO, we assume) must “coordinate” the activities of the ACOs in effectuating settlement of questioned direct costs. But do DACOs (or CACOs) have the authority to settle direct costs on their own? The guidance doesn’t say. But the IG auditors will assert that they do have that (unwritten) authority, and will then criticize them for not exercising it.

The DoD looked at DCAA audit reports and examined how DCMA “contracting officers” dispositioned or settled the audit findings. The audit report stated:

We selected 26 DCAA audit reports from a universe of 68 DCAA audit reports that each questioned over $1 million in direct costs and were reported as settled in the CAFU system by DoD contracting officers between October 2017 and September2018. The DCAA issued the 26 DCAA audit reports for settlement between February 2006 and September 2017. In total, the 26 DCAA audit reports identified $597.4 million in questioned direct costs because the auditors determined that the costs were unallowable in accordance with FAR subpart 31.2. Common reasons for the DCAA questioning the direct costs included instances where contractors did not provide sufficient supporting documentation of the costs or where DCAA auditors determined that the costs were unreasonable in accordance with FAR 31.201-3.

DCAA questioned nearly $600 million in direct costs through issuance of 26 audit reports over a nearly 11-year period. But wait! Should they have? Should those audit reports have been issued?

Let’s ask the question “should DCAA have been looking at both direct and indirect costs in the same audit?” This would seem to be a reasonable question, because of the bifurcated settlement process discussed above. Some CAO contracting officers settle indirect cost rates, and others settle questioned direct costs. Given the disparate nature and responsibilities associated with dispositioning DCAA audit findings, one might reasonably think that two audit reports would be created, addressed to the appropriate contracting officer. Such is not the case.

But should it be the case? At least one distinguished body thought so, and made that recommendation.

In the next blog article, we’ll explore the Section 809 Panel’s recommendations in this area, and continue our criticism of the DoD IG criticism of the DCMA contracting officers who, the auditors asserted, had failed to execute their (unwritten) responsibilities.

Last Updated on Tuesday, 02 February 2021 19:49

Re: CASB 2020–02

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Apogee Consulting, Inc.

P.O. Box 759

Poway, CA 92074

(949) 705-9773


January 2, 2021

Mr. Mathew Blum

Office of Federal Procurement Policy

725 17th Street NW,

Washington, DC


Re: CASB 2020–02

Advanced Notice of Proposed Rulemaking

Conformance of the Cost Accounting Standards

to Generally Accepted Accounting Principles for

Operating Revenue and Lease Accounting

Dear Mr. Blum,

This letter provides comments in response to the subject Advanced Notice of Proposed Rulemaking (ANPRM) published in the Federal Register November 5, 2020. The proposed rule discusses potential changes to the definition of “operating revenue” and the treatment of certain leases. I understand that, in promulgating the ANPRM, the CAS Board is implementing the direction of Congress as provided by Section 820 of Public Law 114-328, which directed the CAS Board to conform CAS to GAAP to the maximum extent practicable.

Apogee Consulting, Inc., is a boutique consultancy focused on the administrative needs of government contractors. Our clientele includes both large and small contractors, selling to diverse Federal agencies including the Department of Defense, the Department of Energy, and the Federal Transportation Administration.

That being said, I provide these comments as an individual. My opinions are my own and do not reflect those of any client or other entity.

  1. Operating Revenue

The Board proposes “to rely on a definition of operating revenue that is more closely aligned to GAAP.” In doing so, the Board further proposes to modify the GAAP definition to be inserted at 9904.403-50(c)(1)(2) so as to restrict the calculation of operating revenue to only fee earned “for management contracts under which the contractor essentially acts as an agent of the Government in the erection or operation of Government-owned facilities.” The rationale provided for this limitation is that “government-owned, contractor operated (GOCO) facilities ‘receive little or no benefits from home office activities’; and, without the limitation to fee, some contractors would be ‘forced to make greater allocations to GOCO’s than would be reimbursed to them under the terms of some GOCO contracts.’”

I appreciate the Board’s concerns in this area, and I agree that contractors should not be “forced” to allocate home office costs for which they will not receive reimbursement. That being said, the modification of the GAAP definition of “operating revenue” with respect to CAS 403-50(c) is unnecessary. The existing Cost Accounting Standards and regulations have sufficient flexibility to accommodate the GAAP definition—without modification—while protecting the contracting parties from having to make excess home office allocations to certain segments.

  1. Residual expenses are those home office expenses that are not otherwise allocable to segments. If a beneficial or causal relationship between home office expenses and segments could be established, then such expenses already would have been allocated to segments either directly to the segment, pursuant to 403-40(a)(1), or via an allocation base specified by 403-40(b)(1) – (b)(5). These home office allocations correspond to a contractor’s Disclosure Statement (CASB DS-1) at Part VIII, 8.3.1 (“Directly Allocated”) and 8.3.2 (“Homogeneous Expense Pools”). Thus, by definition, residual expenses are those home office expenses that are not susceptible to being allocated on a beneficial or causal basis; if they could be so allocated, then CAS 403-4(a)(1) requires that they must be. Consequently, the notion that some GOCO segments would receive excess allocations, based on a beneficial analysis of those allocations, seems to be contradicted by the very definition of residual home office expenses.

  1. Standard 403 already protects the Government from home office allocations where a segment receives little or no benefit from a particular home office function or activity.

  1. 403-50(a)(2) states that “Where the expense of a given function is to be allocated by means of a particular allocation base, all segments shall be included in the base unless … [a]ny excluded segment did not receive significant benefits from, or contribute significantly to the cause of the expense to be allocated …”

  2. 403-40(c)(3) states that “Where a particular segment receives significantly more or less benefit from residual expenses than would be reflected by the allocation of such expenses pursuant to paragraph (c) (1) or (2) of this subsection … the Government and the contractor may agree to a special allocation of residual expenses to such segment commensurate with the benefits received.”

  3. 403-50(d) establishes rules for determining when a segment has received significantly less benefit in relation to other segments. In particular, 403-50(d)(2) identifies segments that may require special allocation as being “foreign subsidiaries, GOCO's, domestic subsidiaries with less than a majority ownership, and joint ventures.” (Emphasis added.)

Therefore, the notion that contractors would be “forced to make greater allocations to GOCO’s than would be reimbursed to them under the terms of some GOCO contracts” seems to be unfounded. To the extent that a GOCO (or other segment) received less benefit from a home office activity or function than would be commensurate with the normal allocation of residual home office expenses, the contractor and the government should agree on a special allocation, as provided by 403-40(c)(3).

In addition to the foregoing, I note that the issue of excess residual home office allocations has been exacerbated by the Board’s failure to modify the thresholds at which the three-factor allocation formula found at 403-50(c) must be used. If the thresholds had been raised—for example, to take into account the impact of cumulative inflation experienced since original promulgation in 1972, which has been estimated to be more than 600 percent—then fewer contractors would be forced to use the three-factor allocation formula found at 403-50(c)(1), which includes the current definition of “operating revenue.” Thus, one simple fix to address the Board’s concern with potentially excessive residual home office allocations is to raise the 403-40(c)(2) thresholds to levels more appropriate for the twenty-first century.

2. Should changes to cost accounting practices to conform Operating Revenue to ASC 606 be considered to be a required change, a unilateral change, or desirable change?

In the ANPRM, the Board stated “The Board believes that the definition in GAAP is essentially equivalent to the CAS definition….” If the two definitions are essentially equivalent, it is difficult to envision what changes to contractor cost accounting practice might flow from the revision of the definition of Operating Revenue in Standard 403.

The Board may be asking a broader question—i.e., will any contractor changes to cost accounting practice made as a result of conforming CAS and GAAP be required changes, unilateral changes, or desirable changes? If that is the question, I suggest it should be the subject of a separate Staff Discussion Paper. It is not clear why the Board would be asking such far-reaching questions in an ANPRM, rather than in an SDP. Nonetheless, I will attempt to respond to the question.

As a threshold matter, the Board should be aware that the CAS contract clauses found in 9903.201-4 (dated JUL 2011) appear to be obsolete when compared to the FAR contract clauses 52.230-2 through 52.230-5 (dated JUN 2020). This is based on a comparison of the clauses found at www.acquisition.gov, which is the official regulatory repository for the U.S. Government. This is an issue that the Board may wish to address in a future rule-making action.

To address the Board’s question, when a contractor changes a cost accounting practice solely because of changes to GAAP requirements (absent any changes to a Standard), that would seem to be a unilateral change (i.e., “a change in cost accounting practice from one compliant practice to another compliant practice that a contractor with a CAS-covered contract(s) elects to make that has not been deemed desirable by the cognizant Federal agency official and for which the Government will pay no aggregate increased costs.”) I believe this is the case because a required change is defined as “a change in cost accounting practice that a contractor is required to make in order to comply with applicable Standards, modifications, or interpretations thereto,” or “a prospective change to a disclosed or established cost accounting practice when the cognizant Federal agency official determines that the former practice was in compliance with applicable CAS and the change is necessary for the contractor to remain in compliance [with CAS].” Since CAS is not changing—i.e., there is no change to an applicable Standard or interpretation thereto—then it seems clear that any change in cost accounting practice solely driven by changes in GAAP requirements do not meet the definition of a required change. They must therefore be unilateral changes.

Some unilateral changes may be found to be desirable changes (i.e., “a compliant change to a contractor's established or disclosed cost accounting practices that the cognizant Federal agency official finds is desirable and not detrimental to the Government and is therefore not subject to the no increased cost prohibition provisions of CAS-covered contracts affected by the change.”) But the determination and finding that a unilateral change is a desirable change is solely within the discretion of the cognizant Federal agency official and is to be decided based on the individual facts and circumstances of the change. The Board need not provide any further direction.

There are two use cases where the Board’s question poses a challenge. First, when conformance with GAAP results in a change or modification to an existing Standard that compels a contractor to then make a change in cost accounting practice. Second, when conformance with GAAP results in an elimination of a Standard, such that a contractor must now comply solely with GAAP—and that situation compels a contractor to then make a change in cost accounting practice. The second case seems probable if CASB Case 20-001 (the SDP regarding potential elimination of Standard 404 and/or 411) results in the elimination of one Standard or both.

    1. In the first case, the requirements of an existing Standard have been modified. Therefore, any contractor change in cost accounting practice that becomes necessary in order to comply with the modified Standard would seem to meet the definition of a required change. Consequently, the parties would need to negotiate an equitable adjustment as required by 9903.201-4(a)(4) and the contract’s Changes clause.

b. In the second case, there is no modification to an existing Standard; indeed, a Standard will be eliminated in its entirety. If the contractor must now change a cost accounting practice in order to comply with GAAP, then it follows that it was the requirements of the original Standard that compelled the contractor’s original cost accounting practice. In other words, the original cost accounting practice was required to comply with CAS. With the elimination of the Standard, the contractor must now comply with GAAP. (See 48 CFR 31.201-2(a): “A cost is allowable only when the cost complies with all of the following requirements … (3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the circumstances.”) (Emphasis added.)

The elimination of a Standard that compels a contractor to make a change to cost accounting practice in order to comply with GAAP would seem to be a required change. Although the change in this use case does not meet the exact regulatory definition of “required change,” it was the contractor’s original cost accounting practice that was required to comply with the Standard. The requirements of the Standard distorted what the contractor’s cost accounting practice would otherwise have been. Therefore, if the elimination of that distortion requires a change in cost accounting practice in order to comply with GAAP, then that change should be treated as a required change, just as in the first use case.

3. Lease Accounting

I have no comment on the Board’s proposed clarification that right-of-use leases are neither tangible nor intangible capital assets for purposes of complying with CAS requirements. In its ANPRM, the Board wrote “Before right-of-use assets are considered for inclusion on balance sheets, the Board would need to further analyze the impact of these changes.” I would encourage the Board to proceed with its analysis. Conformance of CAS and GAAP may require some flexibility on the Board’s part with respect to traditional US-GAAP accounting treatment, and it is important to understand consequences associated with any changes that may come from conformance.

I am pleased to see the Board address these (and other) issues. However, in this comment letter I have also tried to point out other related areas that seem overripe for the Board’s attention. Among those issues are: (1) increase of the thresholds at 9904.403-40(c)(2) to address (if nothing else) actual inflation experienced since they were first promulgated, and (2) analysis and comparison of the 2020 FAR CAS-related clauses with the 2011 clauses found in the CAS regulations. Both of these areas would seem to be “low-hanging fruit” that would be worthy of the Board’s attention.

Thank you for considering these comments to the Advance Notice of Proposed Rulemaking.


Nicholas Sanders

President and Principal Consultant

Apogee Consulting, Inc.


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Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.