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CAS 401 and 402: What You Need to Know

Cost Accounting Standards (CAS) 401 and 402 are all about a U.S. Government contractor’s consistency in its cost accounting practices. While CAS 401 dictates the requirements for contractors to “bid, book, and bill” consistently, CAS 402 focuses on how a contractor ensures that contracts are not inequitably charged for similar costs incurred in like circumstances..

Cost Accounting Standards 401 – Consistency in Estimating, Accumulating and Reporting Costs.

The purpose of CAS 401 as stated: “is to ensure that each contractor’s practices used in estimating costs for a proposal are consistent with cost accounting practices used by [the contractor] in accumulating and reporting costs.”

In its simplest sense the federal government wants to ensure that a contractor can prove that the costs it estimates can, in some meaningful way, be tied to the actual costs they incur. Without this consistency, there is risk a contractor may estimate costs one way without any capability to evidence that their estimated costs were reasonable. An example follows:

Example: A contractor estimates engineering labor hours for five (5) separate engineering labor categories. However, the contractor does not separately track engineering labor hours for its employees in any of its books and records. In such a scenario, a contractor cannot demonstrate the actual number of hours incurred for the labor

CAS 401

categories that they estimated. The key question a contractor should ask themselves is “can I reproduce this cost estimate with actuals once the contract begins?”. Of significance in answering this question is the CAS definition for “accumulating costs”, as follows:

“Accumulating costs means the collecting of cost data in an organized manner, such as through a system of accounts.” (48 CFR 9905.501-30)


Cost Accounting Standards 401 Practice:

Please note that the definition provides for collecting cost data in an “organized manner”. That does not mean that you can’t have supplemental records that corroborate your cost estimates. Extending our example above for cost accounting standard 401, it’s possible the contractor does not differentiate its engineering labor in its General Ledger (G/L). However, it may well have work orders or project accounting records that provides such visibility.

There are even instances where a contractor may maintain the records outside its accounting software. Hence, the CASB DS-1 section 1.5.0 “Identification of Differences Between Contract Cost Accounting and Financial Accounting Records.” The federal government requirements understand that financial accounting and federal cost accounting are not one and the same.

The key is that they be equitable and reconcilable with the ability to reproduce actuals consistent with how you estimated. Best practice is certainly to have your financial accounting and federal cost accounting match one-to-one, but that’s not always practical. Understanding CAS 401 is key to how you establish your cost accounting and cost estimating practices. 

Cost Accounting Standards 402 – Consistency in Allocating Costs Incurred for the Same Purpose

The purpose of CAS 402 as stated: “is to require that each type of cost is allocated once and on only one basis to any contract or other cost objective.” Certain types of costs, such as project management, equipment, project accounting personnel, etc., are prone to inconsistent cost accounting practices where a federal contract may be charged twice for the same, or similar cost, without any additional benefit received.

They key words in Cost accounting standards 402 are that “All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives.” This can be tricky given the innumerable circumstances in which a cost may be incurred (e.g., on-site, remote, etc.). An example follows:

Example: A contractor has a procurement department that supports all purchasing efforts, direct and indirect of the business. The department’s costs are included entirely in G&A. However, it has a new contract award that it bids procurement personnel as direct labor for.

This example is a classic CAS 402 example. The obvious conclusion is that this is a CAS 402 non-compliance because a federal contract would be incurring cost directly for the direct labor of the new procurement individual, as well as the G&A (which includes procurement personnel) resulting in double charging (bad words in government contracting!). Are there examples by which this may be compliant? Beauty is in the eye of the beholder.

Some contractors may be able to demonstrate that the nature of the procurement is different. Perhaps its local procurement overseas whereby they’re purchasing small dollar items for contract-specific needs. This may not in and of itself make it ‘unlike’, but it might. There are many variables to properly defining each cost as direct or indirect.

The question we most often ask a way of translating this is “Is the contract benefitting from both the direct activity and the indirect activity?” This might not answer the question completely, but it’s a start. CAS 402 is one of the most common, if not the most common CAS non-compliance during CAS audits.

Benefits of CAS 401 and CAS 402 Compliance

Complying with CAS 401 and CAS 402 have benefits to contractors that can significantly impact their bottom lines. CAS compliance can lead to:

  • More reliable cost estimating and bidding, resulting in better proposals;
  • Better coordination with bidding and proposal teams, accounting staff, and project teams, leading to a smoother project setup and audit process;
  • More reliable comparisons of incurred costs (“actuals”) to estimated costs;
  • Compliant and consistent indirect cost allocations and profitability measures;
  • More accurate comparisons between projects to better understand which are most profitable;
  • Easier change order negotiations; and
  • More streamlined process for conformity with contract requirements for pricing claims and requests for equitable adjustments (REAs).

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