Achieving a more equitable outcome?

Introduction

The Defense Contract Audit Agency (DCAA) recently issued a Memorandum for Regional Directors (MRD) titled “Revised Audit Guidance on the Cost Impact Calculations for a Unilateral Cost Accounting Practice Change.” The DCAA made this change in audit guidance to reflect certain Armed Services Board of Contract Appeals (ASBCA) decisions and the application of the board’s decisions to the range of unilateral Cost Accounting Practice (CAP) change scenarios. The DCAA also wanted to highlight the importance of understanding the nature of the unilateral CAP change and how it will affect future measurement, assignment and allocation impacting accumulation and reporting of cost on government contracts and subcontracts. The change in the guidance addresses the auditor’s calculation of the estimated increased cost to the government, in the aggregate, resulting from the CAP change and is intended to ensure that the calculation is more equitable.

Unilateral cost accounting practice changes

A unilateral change in cost accounting practices is a change to its disclosed cost accounting practices made by a contractor. The Federal Acquisition Regulation (FAR) allows a contractor to implement a unilateral CAP change; however, the government will not pay increased cost because of the CAP change. Therefore, it is critical for the auditor to estimate the cost impact to the government resulting from the contractor’s change in accounting practices. The key to estimating the effect of the change is the estimate to complete (ETC) for relevant associated contracts. The estimated impact to the government is calculated by comparing the ETC on affected Cost Accounting Standards (CAS)-covered contracts using the new cost accounting practice to the ETC using the old cost accounting practice. Increased costs, in the aggregate, represent the total amount owed to and to be recovered by the government resulting from the change.

A unilateral CAP change affects fixed price and flexibly priced contracts differently. On a flexibly priced contract, the increased or decreased costs allocated due to a unilateral CAP change are accumulated on the contract and the government actually pays for or receives the benefit of those changes. However, the price of a fixed price contract (the amount paid by the government) does not change absent a modification to the contract.

The audit team should evaluate the unilateral CAP change to understand the type of CAP change, the universe of all affected CAS-covered contracts and subcontracts, the movement of cost among contract 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 performance.