Cost Accounting Standards for Govcon Minecraft Novices

FAR, CAS, GAAP, 809 Panel, CASB, DS, ICS – accounting for costs under Government contracts certainly looks like it can only be done by mathematical geniuses or Minecraft Hardcore Survivors....  

But, in a nutshell, it is just about fair distribution of reasonable costs, which a private business incurs every day to perform Government and non-Government contracts.    This article is a simplified explanation of those rules without the use of scary abbreviations (well, almost without).  

If you are a Government cost accounting lawyer, accountant or an auditor, avert your eyes immediately and stop reading NOW!!!!  There is an actual danger that your head may explode from the simplicity of what I am about to write.   You will probably scream:  No! No! No! it is not that simple!!!!   And you would be right.  BUT…..  I am just trying to explain in layman’s terms why managing Government contracts is not as scary as it looks.  Especially for those, who know how to read, or, how to google or LinkedIn appropriate professional help – i.e. YOU, Govcon lawyers, accountants and auditors!!!!  You are welcome!

Let’s take a real world example.  If you have a business and you operate commercially, let’s say making iPhones, you design your product and then price it in accordance with what you think the market will bear as a competitive price. And if that means that you are making a loss at first, because you had spent $2BIL in R&D and you need to sell 2 MIL iPhones to just break even, that’s okay… Because you know that if your iPhone does what you think it does, you will likely sell over 100MIL iPhones in the first year alone and make a healthy profit margin of 5000%.....

Now, if your business is asked to design an iPhone for US Government use, the Government would likely pay for the $2BIL in R&D through its cost reimbursable contracts, but it wants to know that it is only paying for the costs that you spend on that Government iPhone R&D and that you are not charging the Government for costs of also simultaneously developing Ipads, Flying cars and other products, which the Government does not care about (Cost Allocability).    

Additionally, the Government wants to know that as part of those $2BIL of R&D costs, you are only charging costs, which are necessary and reasonable* and not inflated due to the fact that the Government’s payment is a sure thing (Cost Allowability).  For that purpose the Government has developed standards, which allows them to determine what is reasonable, and therefore allowable.

* Government defines "reasonable cost" as a cost that would be incurred by a prudent business person running a competitive business – i.e. a frugal Scotsman on a tight budget.

This brings us to the two principle ways the Government looks to see if it is paying reasonable costs under its contracts with commercial businesses:

Federal Acquisition regulations (FAR), which is all about allowability. It says WHAT you can charge to the government through a government contract and what you cannot. It defines when, and to what extent, costs can be recovered under a government contract.

And 

Cost Accounting Standards (CAS), which are all about allocability. It says HOW you charge to contracts, what gets charged to which contracts, dictates how you maintain your accounting systems, and tells you how the costs have to flow from incursion to allocation to Government and non-Government contract in a far equitable manner.   It also instructs contractors on how to account for certain types of costs.

If you are a small business and you are just starting to work for the Government, you probably only have to worry about the FAR at first.    That is because the Government thinks that what you charge is important, but how you allocate your costs between Government and non-Government business can be controlled by imposing simple basic allocation rules contained in the FAR.    You read the FAR, understand most of what you need to understand and feel you are home safe…..  

And then, BAM!!!!!  you are successful, you graduate from small business and you get your first modified CAS covered contract (see standards below), and so the Government adds 4 more rules to how you must account for your costs: CAS 401, 402, 405 and 406.

 So, you look at them and think, well it is not so bad, most of this is already covered in the FAR - my system looks pretty good.  The Government does not want to see how I allocate my costs yet in an official disclosure statement, so I am a little more flexible and can make small changes to my practices without having to convince the Government that they are not paying more due to my changes.

And then, BAM BAM!!!!! you are more successful and you get your first full CAS covered contract (or IDIQ – CAS $ limit currently technically applies to IDIQ ceilings EVEN if you do not have any Task Orders).

Now the Government owns you.  You have 19 CAS standards to comply with and the Government wants to know exactly how you allocate and treat your costs in accordance with those standards.  They make you show your CAS compliant system of allocation in colored pictures and tables and make you certify that what you are showing is true (translation: if you lie you may go to jail).  This is called a Disclosure Statement (DS).  If you subsequently make any changes to how you allocate costs (with some exemptions), you need to amend your Disclosure Statement and do an impact analysis for the Government to show them that these changes do not result in higher costs to the Government on CAS covered contracts….

After you submit the DS, the Government is supposed to review it for adequacy and then audit your system to make sure you did not fib about having a fancy CAS compliant system.

What are those CAS standards and how do I know when I have to comply with them?

The purpose of CAS is to promote uniformity & consistency in cost accounting. 

The basic requirements of CAS require contractors to:

·      Disclose accounting practice

·      Follow accounting practice

·      Comply with standards (19 in all).

Some contractors will be subject to full CAS coverage (they must follow all 19 CAS standards), while others will be subject to modified CAS coverage (they must follow only four of the 19 CAS standards). Others may be exempt all together.

The chart below is the best chart to determine if you have a CAS covered contract, whether you are covered for full or modified CAS and whether you need a Disclosure Statement.

As you might imagine, with rules regarding costs and accounting there are many details that are important and complex and are better left to CAS trained accounting professionals to help you comply (here it is, the professional CAS geek plug – if you are still reading!).   Here are the basic explanations of most of the 19 CAS standards and their FAR equivalents….