If you’ve been reading this blog for any length of time, you more than likely have read an article or two on CAS 412. CAS 412 is one of those Cost Accounting Standards that only a very few (possibly psychologically unwell) individuals enjoy delving into. And the truth is, you really don’t need to understand the intricacies of CAS 412 unless you have a defined benefit pension plan. Those many upon many contractors who have defined contribution pension plans instead of defined benefit plans really can afford to stay the heck away from CAS 412, and thus maintain lower blood pressure readings and perhaps a healthier psyche.

For those who enjoy staring into the abyss, we want to recap some of our articles on the topic, in order to establish a historical context.

In May, 2010, we wrote this article, in which we discussed the Pension Protection Act (PPA) and how that public law led to “CAS harmonization”—especially the revisions to CAS 412 and 413. Three years ago, we wrote—

The Standards dealing with defined-benefit pension plans are about to be revised, and contractors will have to change their cost accounting practices in order to comply with the revised CAS requirements.  The changes will lead to an increase in measured pension costs.  A ‘SWAG’ by a DCMA pension expert estimated a 60% increase in pension costs!  Because the cost accounting practice changes are required by the revised Standards, contractors are entitled to an equitable adjustment to contract prices.  They are going to be hitting up their customers for the increased costs.  … The DOD has known about this upcoming day of reckoning for quite some time, and has taken actions that would prevent contractors (and their government customers) from doing anything about it until the CAS Board finishes its rulemaking work.  Yes, you heard that correctly.  The Pentagon has actively prevented DOD programs from creating reserves that would cover the upcoming cost impacts.  … As a result of DOD’s willful blindness, someday soon there is going to be a reckoning, as CAS-covered contractors with defined benefit pension plans notify contracting officers of the contract price increases stemming from the new CAS rules.  DOD has no budget for the price increases and any attempt at proactive planning was effectively halted by the DPAP memo noted above.  Won’t Congress dearly love the upcoming surprises coming its way!

In March, 2012, we wrote an update article, in which we discussed reactions to the news about the costs of contractor pension plans, in which several ostensibly knowledgeable entities and individuals feigned surprise and shock over the additional pension costs stemming from the CAS 412 changes that “harmonized” CAS with the PPA.

About a month later, we discussed a Memo issued by the Honorable Shay Assad, DOD Director of Pricing. That was an important Memo for two classes of contractors: (1) those that had defined benefit pension plans whose cost measurement had been impacted by the CAS 412 and 413 revisions, and who would be submitting Requests for Equitable Adjustment (REAs) associated with their cost increases; and (2) those that had defined benefit plans whose cost measurement had been impacted by the CAS 412 and 413 revisions, but who would not be permitted to submit REAs associated with their cost increases.

Okay, with that background, you are now ready for the latest discussion point: a new Memo issued by Shay Assad, entitled “Guidance on the Cost Accounting Standards Board Equitable Adjustment Process Related to Cost Accounting Standards, December 27, 2011, ‘Final Rule to Harmonize CAS 412 and 413 with the Pension Protection Act of 2006.’”

Whew. With a title like that, you know it’s got to be good!

Notably, the latest Assad Memo states—

Contracting parties have been developing, submitting, reviewing, and negotiating cost impacts since the establishment of the CAS. For these reasons, this well-defined process will serve well in this instant case. However, it must be recognized that the actual impact of CAS Pension Harmonization on affected contracts can be significant even with relatively minor increases/decreases in the interest rate used to compute the minimum actuarial liability and minimum normal cost. Accordingly, included in the attachment [to the Memo] is guidance to ensure that the adjustment to affected contracts is equitable for both contracting parties. This would include an annual assessment and potential adjustment to the negotiated cost impact based upon looking back and comparing the impact between the forecasted and actual interest rates.

Also notably, the Memo states that the contractors who submit REAs will not be entitled to profit/fee on those REAs.

The second point is annoying but perhaps relatively minor. The first point, quoted at length above, is significant and, in our view, inapposite. So we’ll rail a bit on the first point.

The purpose of a cost impact analysis is to establish the cost impact on affected CAS-covered contracts, so that the contracting parties can negotiate a contract modification that acknowledges that cost impact. (Normally, the cost impact is supposed to be a price impact, but see the second point noted above.) The point is, it’s a single negotiation, informed by the cost impact analysis. That impact analysis is really a proposal and it’s audited, more often than not, by the DCAA—just as if it were a cost proposal for new contract work. The parties then sit down and negotiate how the price of one, or more than one, contract will be affected. (See FAR 30.6 and the CAS clause 52.230-6.)

Nowhere does the CAS or FAR anticipate that the negotiation will become an annual affair, with the contract cost impact and resulting modification being adjusted again and again, based on changes to forecasted interest rates. That’s just something created out of whole cloth in order to keep the cost impact to a minimum; it comes from the same place as the notion that a contractor shouldn’t get the profit it would have originally negotiated, had Mr. Assad not forbidden the contracting parties to consider the impact of PPA in their price negotiations.

So in our view it’s kind of an inappropriate approach to negotiating cost impacts. In fact, in our experience, it would take far longer than one year for DCAA to conduct an audit of the interest rates and for DCMA to negotiate contract modifications. Thus, in addition to our philosophical objections, we believe it’s simply unworkable in practice.

Now before you get all worked up, we also consulted other practitioners at affected contractors, at least one of whom attended in person an industry meeting with Mr. Assad to discuss this new guidance Memo. The other folks told us, “it could have been worse.” In other words, they think they can live with it.

And unless you, too, are a fully CAS-covered contractor with a defined benefit pension plan, then it’s their opinion that matters and not yours. And likely not ours, either.