The Federal Acquisition Regulations (FAR 31.201-1/FAR 31.203(d)) and the Cost Accounting Standards (49 CFR 9904.401) require consistency in estimating, accumulating and reporting costs. In other words, the way (i.e. detail) you use in pricing your contracts must be consistent with the way (i.e. detail) in which you account for them and report them. It adds that you may account for them in greater detail than you price them, but not price them in greater detail than you account or report them.
Compliance with this requirement can be facilitated through written policies and procedures that are required for both an adequate accounting system and an adequate cost estimating system. There are two things you can do to help you better understand your accounting practices and assist in ensuring that you develop comprehensive policies and practices and facilitate eventual audit by the Defense Contract Audit Agency (DCAA).
Cost Accounting Standards Board Disclosure Statement
The first thing that should be done is completion of a Cost Accounting Standards Board Disclosure Statement (CASB-DS-1) required on contracts subject to the cost accounting standards. This should be done even if you do not have any contractual requirement to do so. This Disclosure Statement is designed to describe a contractor’s contract cost accounting practices. It is composed of eight parts:
Part I – General Information
Part II – Direct Costs – Defines, based on your own definitions what costs are, or will be, charged directly to contracts, contract line items or other similar cost objectives.
Part III – Direct versus Indirect Costs – Establishes your criteria for determining how costs are treated in your accounting system and establishes your indirect cost pools and their content.
Part IV – Indirect Costs – Describes your various indirect cost allocation bases and your indirect rate structure.
Part V – Depreciation and Capitalization Practices – Defines your practices for determining depreciation methods and application.
Part VI – Other Costs and Credits – Describes your method of charging and crediting vacations, holidays, sick pay, supplemental unemployment benefits, severance pay, early retirement and incidental receipts and proceeds.
Part VII – Deferred Compensation and Retirement Costs – Covers the measurement and assignment of costs for employee pensions, deferred compensation and insurance.
Part VIII – Home Office Expense – Defines your organization structure and the accounting for and allocation of home office expenses.
While all of these parts may not currently apply to your organization and you may need knowledgeable accounting assistance in completing them, their completion will go a long way in helping you understand how costs are accounted for in your accounting system and expediting eventual DCAA’s audit of your accounting and estimating practices.
Incurred Cost Proposal
The second thing is the completion of an Incurred Cost Proposal as required by FAR 52.216-7, Allowable Cost and Payment. This again is only required if you have you have received a cost-type contract (i.e., CPFF, CPAF, CPIF, Cost, Cost-Sharing and Time and Material) containing the Allowable Cost and Payment clause, but is a valuable tool for monitoring your indirect cost performance relative to its allocation bases and assessing your “true” level of profits on all of your contracts, fixed price included.
The Incurred Cost Proposal (generally referred to as the Incurred Cost Submission, ICS) is effectively your proposal to the government for the adjustment of the indirect rates you have used to invoice/bill and report on your cost-type contracts to actual. It is required to be completed and submitted to the government within six months after the end of your fiscal year. The entire submission is composed of 16 schedules. Fortunately, there are only five of these schedules that, when prepared periodically throughout the year, are important management tools for monitoring your accounting cost structure and evaluating your contract pricing.
Schedule B, C & D – These schedules, prepared for each of your indirect rates, detail by account the expenses included in the indirect cost pool and the related allocation base. You can, for management purposes, prepare them for the current month actuals, actuals to-date or budget period. Actuals should tie to the amounts recorded in your accounting records.
Schedule H – Schedule of Direct Costs by Contract/Subcontract and Indirect Expense at the rates calculated in Schedule B, C & D. This schedule includes direct costs for all contracts/subcontracts independent of contract type and application of the actual indirect rates. This will result in the actual cost for each contract/subcontract for the period represented.
Schedule I – Schedule of Cumulative Direct and Indirect Costs Claimed and Billed by Contract/Subcontract. Designed to be used for cost-type contracts/subcontracts, when expanded to include fixed-price contracts/subcontracts as included on Schedule H, it will reflect the accumulated amount billed and actual cost incurred for each contract/subcontract.
This comparison will allow you to make management decisions relative to your contract/subcontract cost estimating and pricing as to what you need to sell them for or even if you want to sell them at all. The completion of these schedules also verifies that all costs incurred are properly accounted for and included in your applicable pricing model.
Utilizing these two tools should provide you with the information needed to help ensure you are complying with the required consistency in estimating, accumulating and reporting costs.