Revised DCAA Audit Guidance on the Cost Impact Calculation for a Unilateral Cost Accounting Practice Change
On October 3, 2023, the Defense Contract Audit Agency (“DCAA”) issued a Memorandum for Regional Directors (“MRD”) describing revised audit guidance for calculating the impact of a single unilateral cost accounting practice change (“CAP”). The change in guidance reflects certain Armed Services Board of Contract Appeals (ASBCA) decisions and how they are applied to the range of unilateral contractor CAP change scenarios. The new guidance is also intended to help DCAA auditors better understand the nature of unilateral CAP changes and how they affect future costs on government contracts/subcontracts. The new guidance only applies to a single unilateral CAP change. The cost impact methodology for required and desirable CAP changes and Cost Accounting Standards (CAS) noncompliances has not changed.
A contractor may choose to implement a unilateral CAP change; however it is important to understand the impact of the change on affected CAS-covered contracts/subcontracts, as the government will not pay increased cost because of the CAP change (FAR 30.603-2 and 48 CFR 9903.201-4). That estimated impact to the government is calculated by comparing 1.) the estimate to complete (ETC) on affected CAS-covered contracts/subcontracts using the new cost accounting practice to 2.) the ETC using the old cost accounting practice. Increased costs in the aggregate represent the total amount owed to the government resulting from the CAP change.
A unilateral CAP change affects fixed-price and flexibly priced contracts differently. On a flexibly priced contract, actual costs incurred are allocated to the contract, and the government pays for or receives the benefit from the CAP change. However, the price of a fixed-price contract does not change as a result of CAP change. Historically, the government has argued that in cases where a unilateral CAP change results in an increase to the ETC for flexibly priced contracts and a decrease for fixed-price contracts, the sum of the increase for flexibly priced and the decrease in fixed-price contract costs equaled the increased cost to the government. Contractors have argued that this approach may result in double-counting of the same costs, as the CAP change may shift those same costs from the affected fixed-price contracts/subcontracts to the affected flexibly priced contracts/subcontracts. This would inflate the impact to the government.
The MRD directs auditors to only count those same costs as increased costs once to eliminate the potential for double-counting (noted above) and includes several scenarios as examples using different contract/subcontract type groups. The MRD includes specific guidance to DCAA auditors on three important points that contractors should be aware of:
- When calculating the increased cost to the Government “in the aggregate” for a unilateral cost accounting practice (CAP) change, auditors should not automatically combine impacts of fixed-price and flexibly priced contract and subcontract groups.
- Special consideration is needed when a unilateral CAP change results in increased cost to both the flexibly priced and/or fixed-price contract/subcontract groups to ensure the estimated increased cost to the government “in the aggregate” is equitable.
- DCAA will no longer recommend settlement alternatives. It is the Cognizant Federal Agency Official’s (CFAO) responsibility to administer the resolution of cost impacts.
We do recommend that contractors explicitly make these “same” costs that are shifting between contract/subcontract type groups clear in their proposal, as it is unclear how DCAA would identify them in audit.
The MRD further directs DCAA audit teams to “evaluate the unilateral CAP change to understand the type of CAP change, … the universe of all affected CAS-covered contracts/subcontracts, the movement of cost among contract/subcontract groups and customers, and all business units impacted by the unilateral CAP change. The contractor’s basis for the ETC amounts for the new cost accounting practice and the old cost accounting practice must be applied prospectively from the effective date of the change through the end of contract/subcontract performance.” The DCAA Contract Audit Manual (CAM) Section 8-503 Guidance on Evaluation of Cost Impact Proposals and the Cost Impact Statement (Price Adjustment) audit program have been updated to reflect the change in guidance.
The changes are effective as of the date of the memorandum (October 3). Any ongoing CAS cost impact audits would be subject to the new guidance.
How BDO Can Help
Cost accounting practice changes can be complex. It is important for contractors to understand how those changes impact their contracting portfolio to minimize any negative impacts to contract cost recovery and/or profitability. Our skilled team of government contracts professionals can assist contractors in navigating those complexities.