DCAA Revises Guidance Regarding Cost Impact Calculations

Defense Contract Audit Agency issues memorandum revising audit guidance to DCAA personnel.

On October 3, 2023, the Defense Contract Audit Agency (DCAA) issued a memorandum revising audit guidance to DCAA personnel regarding cost impact calculations for unilateral cost accounting changes. The change in guidance was prompted by Armed Services Board of Contract Appeals (ASBCA) decisions relating to various cost accounting practice (CAP) change scenarios.

A contractor performs a cost impact calculation when it decides to implement a unilateral CAP change. Starting with the effective date of the CAP change, this calculation compares the estimate to complete (ETC) on affected CAS-covered contracts/subcontracts under the old CAP to the ETC on the same contracts/subcontracts under the new CAP. Consistent with FAR 30.604(h)(3)(i)-(iii), cost impact calculations also reflect the impact of CAP changes by contract type (i.e., fixed versus flexibly priced). As such, calculations show the potential cost impact of CAP changes on US government contract work yet to be performed.

FAR 30.604(h)(iv) calls for the calculation of increased cost to the government to be completed “in the aggregate.” DCAA’s memorandum emphasizes that this analysis is more nuanced than a simple addition exercise and requires a full assessment of potential impacts to the government by contract type. For example, CAP changes may result in a shift in indirect costs from fixed-price, CAS-covered contracts to flexibly priced, CAS-covered contracts. The government would effectively have increased costs on both contract types (realized by the contractor as increased margin on the fixed-price contracts); however, increased costs should be accounted for only once to eliminate the potential for “double counting” and/or “windfall profits.” DCAA’s memorandum provides a number of illustrations to outline how DCAA personnel should approach various scenarios.

Further, DCAA will no longer recommend settlement alternatives, and the memorandum identifies the resolution of cost impacts as being the responsibility of the cognizant federal agency official. The updated guidance is now reflected in the DCAA Contract Audit Manual and applies to any ongoing and future CAS cost impact audits.

Find the Memorandum here: MRD 23-PAC-009(R)

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