A CASB Disclosure Statement is a form whereby a US Government Contractor discloses its cost accounting practices, for which it is required to demonstrate CAS compliance for the life of its active CAS (Cost Accounting Standards) covered awards. The CASB Disclosure Statement, otherwise known as DS-1, has a very rigid format with eight different parts:
- Part I – General Information
- Part II – Direct Costs
- Part III – Direct vs. Indirect Costs
- Part IV – Indirect Costs
- Part V – Depreciation and Capitalization Practices
- Part VI – Other Costs and Credits
- Part VII – Deferred Compensation and Insurance Cost
- Part VIII – Home Office Expenses
Each part has numerous sections called items which vary in applicability to the contractor, depending on the contractor’s cost accounting practices. While each item is generally constituted by selection boxes and multiple-choice questions, certain responses require the contractor to detail information in longer narrative form, on “continuation sheets”.
When is a CASB Disclosure Statement Required?
The requirement to submit a CASB Disclosure Statement depends on the CAS covered contracts a contractor maintains. In a nutshell, CAS is applicable to individual contracts and the applicability of CAS is triggered based on dollar thresholds. Whether or not CAS is applicable to a given contract is determined by the contract type, the size of the business receiving the contract, and the amount awarded. A CASB Disclosure Statement is required if Full-CAS coverage applies to a contractor. [Click here] to learn more about types of CAS coverage and CAS applicability.
Any CAS-covered contract of $50 million or more requires a Disclosure Statement prior to the contract award. CASB DS-1 should not be submitted prior to Full-CAS coverage applicability. The solicitation usually provides clarification on when exactly the Disclosure is required. Typically, if the requirement is in the solicitation, and it is the Contractor’s first Disclosure, then submission is due at the time of the proposal.
If a CAS-covered contract under $50 million is awarded, and the Contractor received net CAS-covered awards in the prior accounting period totaling more than $50 million, then the Contractor is required to file a Disclosure Statement prior to the contract award. However, if the award is within the first 90 days of the proceeding accounting period, then the contractor is not required to file until the end of the 90 days.
If a contractor anticipates future Full-CAS coverage, it is prudent to have the Disclosure Statement prepared and ready (i.e., not submitted to the Government).
CASB Disclosure Statement Adequacy and Compliance
When a CASB Disclosure Statement is required, it must be submitted to the Contracting Officer (CO) and the Cognizant Federal Agency Official (CFAO). All Disclosure Statements will be reviewed and audited based on two major factors (1) adequacy, and (2) compliance.
CASB Disclosure Statement Adequacy
The adequacy of a CASB Disclosure Statement is determined by how the DS-1 is formatted and filled out based on the applicability of the 19 Cost Accounting Standards to the contractor. For example, if a contractor accumulates Home Office expenses and allocates such expenses to various business segments, but it does not complete Part VIII of the Disclosure Statement, the Disclosure Statement would be deemed inadequate.
Ensuring adequacy on a CASB Disclosure Statement is not easy, and it can be a grueling process to pass adequacy with DCAA. DCAA’s adequacy checklist evaluates the DS-1 for completeness and proper formatting, oftentimes resulting in many rounds of back and forth before a Disclosure Statement is accepted for audit. This erodes auditor confidence and burns costly time on behalf of the Government and the contractor.
Our experience suggests that at least 50% of inadequacies can be avoided simply by filling the DS-1 out with all the required information in proper format. As a result, we designed a proprietary software – CASB DS-Done – to facilitate an adequate Disclosure Statement. The software is built with control integrity to hit on all the required fields and continuation sheets with user-friendly prompts avoiding the countless hours of formatting and inadequacy rejections. [Click here to learn more about DS-Done].
Contractor Compliance With Disclosed Accounting Practices and Procedures
The Defense Contract Audit Agency (DCAA) maintains eight types of noncompliance based on CASB rules, regulations, and standards, and FAR Part 31:
- Disclosed practices not compliant with CAS;
- Disclosed practices not compliant with FAR;
- Actual practices of estimating costs not compliant with CAS;
- Actual practices of estimating costs not compliant with FAR;
- Actual practices for estimating costs not compliant with the practices disclosed in the Disclosure Statement;
- Actual practices for accumulating or reporting costs not compliant with CAS rules and regulations;
- Actual practices for accumulating or reporting costs not compliant with FAR; and
- Actual practices for accumulating or reporting costs not compliant with the practices disclosed in the Disclosure Statement.
What Are the Penalties of CASB Disclosure Statement Inadequacies or Noncompliance?
Inadequate formatting of CASB DS-1 greatly hampers the progress of a contractor’s Government Contracts program from an operational, accounting, and billing standpoint. To ensure all contract estimates, procurements, and billings are conducted properly under CAS rules, regulations, and standards, and FAR part 31, the accounting practices of Full-CAS covered contracts or companies/business segments are audited via initial Disclosure Statement audit.
Such audits will only be initiated once the CFAO has deemed the CASB DS-1 to be adequate. Delays in Disclosure Statement adequacy translate to delays in Disclosure Statement audits, and delays in Disclosure Statement audits degrade both contractor and Government confidence in the contractor’s cost accounting reliance. It can also result in delayed contract award, in addition to unnecessary resource consumption on both parties to resolve inadequacies that can be avoided with upfront diligence.
Penalties for Noncompliance
Depending on the nature of the non-compliance there can be a variety of penalties for noncompliance. In its simplest sense, the U.S. Government will be entitled to repayment of any material non-compliance if it resulted in increased cost to the Government. If the CFAO determines that noncompliance is material, the contractor is required to submit a description of any accounting practice change needed to bring the practices into compliance, which the auditor will review for adequacy and compliance. If the proposed change is both adequate and compliant, the contractor must submit a cost impact detailing the effect the non-compliance had on all effected CAS covered awards.
The CFAO will evaluate the cost impact and if the result was increased cost to the Government, the CFAO will administer contract and/or billing adjustments, plus applicable fines and interest to repay the amounts due as a result of the noncompliance. Noncompliant cost impacts take time to develop, negotiate, and are a significant burden and expense to both the contractor and the Government to administer. It can require going back years into your historical contract and accounting records to obtain the necessary information to perform a cost impact analysis.
Adding to the risk of CAS non-compliances is the risk of perceived, or actual, False Claim Act (FCA) allegations from the customer. In many instances, the U.S. Government customer may assert that the contractor was aware, or should have been aware, of the non-compliance and, as such, the Government is entitled to False Claim damages up to treble damages. In short, CAS non-compliances only come in 2 varieties: bad and worse.
“CAS noncompliance” is among the short list of bad words you never want associated with your organization; right along with false claims and defective pricing – words that often get attached to CAS noncompliance if the Government feels the noncompliance was purposeful. Be diligent upfront and ensure you can demonstrate compliance with CAS.
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.