So the Auditor Says You Violated CAS? Bear in mind, Your Organization Judgment Matters When Figuring out Compliance
Contractors usually assume that government auditors have particular authority to interpret the Price Accounting Requirements. That assumption is simple to fully grasp — auditors often take the position that there is just a single “right” way for a firm to do its contract price accounting, primarily based on how other organizations do factors. But contractors ought to know that CAS is versatile and frequently provides them selections about how to comply, primarily based on the situations of their enterprise. In brief, a contractor’s enterprise judgment matters, and contractors can use it to push back on auditors who take an overly rigid view of CAS.
Government procurement officials and auditors have no particular authority to say what CAS signifies, i.e., their interpretations of CAS acquire no deference in a dispute. See Perry v. Martin Marietta Corp., 47 F.3d 1134, 1137 (Fed. Cir. 1995) Raytheon Co., Space & Airborne Sys., ASBCA No. 57801, 15-1 BCA ¶ 36024. Amongst other causes, CAS was promulgated by the Price Accounting Requirements Board, a special federal entity made by statute, and not by federal procurement officials or auditors.
By style, the plain language of CAS frequently provides the contractor discretion to decide on from a variety of selections for structuring its price accounting practices. There are 19 requirements beneath CAS, and every has constructed-in flexibility to let contractors to decide on price accounting practices that align with the sensible realities of their enterprise. No two enterprises are specifically alike, and the requirements recognize that distinctive organizations will decide on distinctive approaches. Auditors usually neglect this aspect of CAS, and they may possibly take a narrow view of what it signifies to comply. But contractors ought to normally ask: Does the relevant CAS give me any options, and if so, is the auditor considering also rigidly about the requirements?
Take into consideration CAS 410, which gives guidelines for allocating the basic & administrative costs of operating a enterprise (“G&A”). CAS 410 calls for a contractor to allocate G&A to a base that “best represents the total activity” of the enterprise, and it sets out 3 selections for reaching that aim: (1) a total price input base, working with all the charges of the enterprise unit (two) a worth-added base, which excludes material and subcontract charges and (three) a single element base, by which the contractor selects an equitable element for allocation, such as direct labor hours or dollars. See CAS 410-50(d).
CAS 410 tends to make clear that there is no “right” process, and that the answer depends on the details of the enterprise. It states that “[t]he determination of which price input base greatest represents the total activity of a enterprise unit ought to be judged on the basis of the situations of every enterprise unit.” Id. The Armed Solutions Board of Contract Appeals (“ASBCA”) has confirmed that the “judgment” at situation is the contractor’s, not the government’s.
In a foundational choice on CAS 410, the ASBCA held that “[i]n our view, an evaluation of which allocation base most accurately distributes G&A expense in relation to positive aspects received may possibly, constant with CAS 410, involve the application by the contractor of affordable judgment.” Ford Aerospace and Commc’ns Corp., ASBCA No. 23833, 83-two BCA ¶ 16813 (emphasis added).
Similarly, contemplate CAS 402, which gives that “[n]o final price objective shall have allocated to it as an indirect price any price, if other charges incurred for the very same goal, in like situations, have been integrated as a direct price of that or any other final price objective.” CAS 402-40. Even though that common may possibly look prescriptive, CAS 402-50(b) tends to make clear that the contractor has a wide measure of discretion to identify what charges are appropriately treated as “indirect,” so extended as the contractor’s Disclosure Statement explains its practices and the contractor regularly applies the common. See CAS 402-50(b). The U.S. Court of Appeals for the Federal Circuit has commented that “CAS 402 provides the contractor considerable freedom in the classification of specific charges[.]” ATK Thiokol, Inc. v. United States, 598 F.3d 1329, 1332 (Fed. Cir. 2010).
Practically all of the CAS requirements consist of related flexibility. E.g., CAS 403-60 (offering a list of “illustrative allocation bases” for house workplace charges, “which could be applied in suitable circumstances”) CAS 406-20 (offering criteria for “selection” of a price accounting period) CAS 418-20 (offering “guidance relating to the choice of allocation measures primarily based on the effective or causal partnership amongst an indirect price pool and price objectives”).
So how can the flexibility of CAS aid a contractor to navigate an audit or dispute? When faced with an auditor who views CAS as a matter of “right/wrong” or “yes/no,” a contractor ought to meticulously evaluation the CAS principle at situation to see if it gives the firm any discretion. The contractor ought to also contemplate the CAS Board’s regulatory history for the common, and may possibly also want to evaluation case law from the Boards of Contract Appeals and Federal Courts. The contractor ought to then appear for strategies to clarify its options to the auditor, which includes by sharing the causes it chosen a distinct strategy and how other approaches could be overly burdensome or could negatively influence the interests of the enterprise or the government.
For instance, is it impractical to treat specific components/components as a direct price, contemplating how they are stored and applied on the shop floor? Would a total price input base fail to reflect the accurate partnership of G&A activity with the company’s enterprise, contemplating how management spends its time and sources? Would the auditor’s G&A strategy lead to volatile swings in price allocation from year to year? Based on the answers, these sensible points can back up a contractor’s options and aid justify them beneath CAS. A contractor may possibly also want to demonstrate that its accounting practices are described in its internal policies and (if applicable) in its CAS Disclosure Statement. Advance written descriptions of accounting policies can also go a extended way toward assisting help a company’s practice.