Defining CAS Coverage and What Constitutes a CAS Covered Contract
In its simplest sense, a CAS covered contract is any U.S. Government contract that does not meet an exemption from the Cost Accounting Standards (CAS) and includes the CAS clause (FAR 52-230-2 Cost Accounting Standards). While that sounds simple, what is not is navigating whether a contract meets a CAS exemption, and if it does not, knowing which CAS coverage is applicable to the contract; modified CAS or full CAS.
CAS applicability is one of the most common challenges faced by a growing U.S. Government contractor. Once a contractor has triggered CAS through the award of a CAS covered contract, its compliance profile changes significantly with increased cost accounting requirements and audit interest from the Defense Contract Audit Agency (DCAA).
Compliance with CAS can be complex and confusing to many Contractors, so it is crucial for Contractors to understand CAS applicability and determine whether they have any CAS Covered Contracts. It is also crucial, based on the type of CAS Coverage, to understand CAS implications in their organization. Many contractors lack the formal procedures and internal controls to effectively track their US Government Contract awards against CAS Coverage. This can result in major compliance challenges downstream that are expensive to untangle.
CAS is applicable to negotiated contracts greater than $2M, unless the contract meets one of the following CAS exemptions:
- Contract is less than $7.5M and the contractor is not currently performing under any CAS Covered contracts of $7.5M or greater at the time of award
- Contract is awarded to a small business
- Contract is awarded under sealed-bid procedures
- Award is firm-fixed price (FFP) contract for commercial item(s)
- Price is set by law or regulation
- Award is a firm-fixed-price contract awarded on the basis of adequate price competition without submission of cost or pricing data
- Awardee is a foreign concern (must comply with CAS 401 and 402 only)
- If none of the above CAS exemptions apply, then it is a CAS Covered Contract subject to either modified CAS-coverage or full CAS-coverage. This $7.5M award is often referred to as a “trigger contract”. Upon triggering CAS, all future awards greater than the Truthful Cost or Pricing threshold (currently $2M) are then subject to CAS unless they meet an exemption.
The trigger contract often results in contractors amassing multiple CAS covered contracts. Losing track of which contracts are subject to CAS and which are not is significant, as the U.S. Government has certain rights under CAS covered contracts that it does not under non-CAS covered contracts. This includes retroactive price adjustments should a contractor not comply with CAS.
CAS Coverage – Modified vs. Full CAS Coverage
Modified CAS Coverage is triggered when a contractor receives a CAS Covered Contract greater than $7.5M but less than $50M in its current cost accounting period. Modified CAS Coverage requires the contractor to comply with four of the 19 standards (CAS 401, 402, 405, and 406).
Full CAS Coverage, which requires compliance with all 19 standards, is triggered when either:
A. A contractor receives a CAS covered award over $50M in the current cost accounting period; OR
B. A contractor received an accumulation of CAS covered awards in the previous cost accounting period that total $50 or more.
As required by cost accounting standards, a CASB disclosure statement is required if full CAS coverage applies (and in some cases, modified coverage). Disclosure Statements are a form whereby a contractor discloses its cost accounting practices, for which it is required to demonstrate compliance throughout the life of its active CAS covered awards.
A CAS coverage flowchart that illustrates applicability, coverage, and disclosure statement requirements can be found here.
A common misconception held by many contractors is that a contractor is either CAS-covered or not CAS-covered. While a simple way to think of it, it is important to recognize that CAS applies at a contract level, not at a contractor level. Every U.S. Government contract should be evaluated on its date of award to determine if and how CAS applies.
How Long Does CAS Coverage Last?
The CAS applicability on the date of the contract award is the applicability for the life of the contract. Hence, some contractors can have a combination of exempt, modified CAS, and full CAS covered contracts.
The CAS status of a contract or subcontract remains the same throughout its life. For example, if a contractor holds a contract subject to Modified CAS Coverage, and then receives a contract subject to Full CAS Coverage, the initial contract does not become subject to Full CAS, and remains subject to Modified CAS.
Making Cost Accounting Practice Changes Under CAS
Once CAS is triggered, contractors must monitor its cost accounting practices for any changes as they require disclosure to the U.S. Government pursuant to FAR 52.230-3 Disclosure and Consistency of Cost Accounting Practices. Contractors that fail to realize this significant requirement, applicable under both modified and full CAS covered contracts, may make a change that results in increased cost to the U.S. Government for which it will not pay.
Generally, the U.S. Government will not pay increased costs due to changes in a contractor’s cost accounting practices. One of the easiest, and expensive, ways to get in trouble with CAS covered contracts is to make changes to cost accounting practices that seem benign but change the way the U.S. Government participates in cost. Examples of common changes in cost accounting practice that are natural for a contractor but impact cost allocation include:
- Changing the treatment of a cost from indirect to direct (e.g., program management historically treated as overhead, but growth has resulted in a need to have dedicated program managers who now charge direct)
- Changing the treatment of a cost from direct to indirect
- Facilities allocation changing from headcount to square footage
- Home office allocations change from revenue to 3 factor formula
All changes to cost accounting practice are likely to result in some cost impact to CAS covered contracts. Changes to cost accounting practice require disclosure prior to adopting them. In most instances the U.S. Government will require a contractor to submit a cost impact proposal, either through a Detailed Cost Impact (DCI) or General Dollar Magnitude (GDM).
Not realizing this requirement can result in significant cost impacts to the U.S. Government whereby a contractor may have to pay large sums of money back to the U.S. Government for years of undisclosed changes in cost accounting practice. This is a massive difference from commercial and non-CAS covered contracts. In its simplest sense, once a contractor is CAS covered, it really needs cooperation in order to change its cost accounting practices.
Monitor Your Contracts and Protect Your Organization!
If you are a contractor, it is important to evaluate every award for CAS applicability and maintain a CAS tracker so that you know the CAS applicability at the contract level. And it is something every executive team, not just accounting and contracts, needs to be familiar with. Changes in organizations bring changes to cost accounting; and those changes need to be considered prior to making the change. If the entire organization is not aware of these risks, it can easily result in changes that cost the contractor money.