Cost Accounting Standards

As a government contractor, you must learn the applicable regulations and comply with them strictly. One such regulation is the Cost Accounting Standards (CAS), which generally applies to contracts exceeding a specified dollar amount. The requirements are complex, so we have prepared this guide to help. You will learn the cost accounting standards thresholds and how different they are from other standards. You will also discover the exemptions and how professionals can assist.

What Are Cost Accounting Standards?

CAS is a set of standards and rules established by the Cost Accounting Standards Board (CASB) to standardize cost account procedures involving contracts with the United States government. In other words, CAS governs the measurements, assignment and allocation of costs to government contracts. The purpose is to promote consistency and transparency in cost accounting practices and ensure contractors’ costs are reasonable, allowable and allocable.

When Does CAS Apply?

CAS applies to certain government contracts, particularly those exceeding specific dollar thresholds. It is relevant for both prime contractors and subcontractors. Generally, contracts may fall under two coverage types — full or modified:

1. Full Coverage

Full coverage applies when the contractor receives a single award of at least $50 million in the current accounting period or multiple CAS-covered contracts in the preceding cost accounting period that cumulatively total $50 million. The contractor must follow all the standards and file a CAS disclosure statement detailing its accounting practices. Two types of CAS disclosure statements exist — DS-1, which applies to commercial companies, and DS-2, which applies to educational institutions.

2. Modified Coverage

Modified coverage applies when the contractor receives a single CAS-covered award of $7.5 million, also known as a trigger contract. The covered contract must be under $50 million, and the total net CAS-covered awards in the preceding cost account period must not exceed $50 million. Modified CAS coverage applies even when the contractor receives a contract subject to full CAS coverage in the future. It applies throughout the contract’s life span. However, the contractor must only follow four rules — 401, 402, 405 and 406. We explain the rules in more detail below.

Cost Accounting Standards vs. Generally Accepted Accounting Principles (GAAP)

CAS and GAAP provide frameworks for accounting practices. Both aim to ensure transparency, accuracy and fairness in financial reporting and promote standardization to facilitate comparability. CAP requires detailed accounting to support cost allocations and estimates, and GAAP requires detailed documentation to support financial statements and disclosures. However, there are differences:

• Scope: CAS focuses on cost accounting, while GAAP focuses on financial accounting. GAAP provides a broad framework for accounting and financial reporting across various industries.
• Applicability: CAS applies to contracts involving the federal government and relevant agencies upon meeting certain thresholds. GAAP widely applies to private companies and some government agencies in various industries.
• Regulatory bodies: CAS is primarily governed by the CASB, whereas GAAP is governed by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).

Companies may comply with both standards where disparities exist and maintain separate books.

Cost Accounting Standards vs. Federal Acquisition Regulation (FAR)

CAS and FAR are two different regulations in government contracting, although they are related and often used together. FAR Part 31 – Contract Cost Principles and Procedures helps government contractors determine reimbursable costs and how to account for them. The focus is on reasonableness and allowability of costs. Conversely, CAS offers prescriptive guidance on cost measurement and allocation. Costs may be allocable under CAS but not reasonable or allowable under FAR.

Again, FAR applies to all government contracts, regardless of contract value. It has a broader scope than CAS, covering the entire procurement process, including contract management and dispute resolution. Yet, these standards are complementary. Under FAR Part 30 – Cost Accounting Standards Administration, certain contractors and subcontractors must comply with CAS. Contractors must report and submit costs according to the CAS to avoid fines and penalties. Where a conflict exists between CAS and FAR regarding allocability, CAS governs.

How Many Cost Accounting Standards Are There?

There are 19 standards, which are periodically revised to reflect changes in government procurement policies and business practices. The cost accounting standards list numbers from 401 to 420, but CAS 419 is reserved. Below is a breakdown:

1. CAS 401 — Consistency in Estimating, Accumulating and Reporting Costs
2. CAS 402 — Consistency in Allocating Costs Incurred for the Same Purpose
3. CAS 403 — Allocation of Home Office Expenses to Segments
4. CAS 404 — Capitalization of Tangible Assets
5. CAS 405 — Accounting for Unallowable Costs
6. CAS 406 — Cost Accounting Period
7. CAS 407 — Use of Standard Costs for Direct Material and Direct Labor
8. CAS 408 — Accounting for Compensated Personal Absence
9. CAS 409 — Depreciation of Tangible Capital Assets
10. CAS 410 — Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
11. CAS 411 — Accounting for Acquisition Costs of Material
12. CAS 412 — Composition and Measurement of Pension Cost
13. CAS 413 — Adjustment and Allocation of Pension Cost
14. CAS 414 — Cost of Money as an Element of the Cost of Facilities Capital
15. CAS 415 — Accounting for the Cost of Deferred Compensation
16. CAS 416 — Accounting for Insurance Cost
17. CAS 417 — Cost of Money as an Element of the Cost of Capital Assets Under Construction
18. CAS 418 — Allocation of Direct and Indirect Costs
19. CAS 420 — Accounting for Independent Research and Development Costs and Bid and Proposal Costs

Cost Accounting Standards Exemptions

Specific contracts are exempted from CAS. These include:

1. Contracts involving small businesses
2. Contracts less than $750,000
3. Contracts below $7.5 million where the contractor has not received a contract above that amount in the past
4. Sealed-bid contracts
5. Contracts set by law or regulation
6. Contracts awarded to foreign governments
7. Fixed-firm price (FFP) contracts that are awarded based on adequate competition without submission of cost or pricing data

Why You Need a Professional for CAS Compliance

CAS can be complex, yet compliance is crucial. Given how intricate the standards are and the possible implications, engaging professionals in this area is essential. They can help you:

• Understand the regulations: Professionals can help you navigate the complex CAS requirements and nuances.
• Ensuring compliance: Professionals have the technical knowledge and industry experience to help you comply with CAS.
• Risk mitigation: Professionals can help you prepare for audits and reduce penalties due to noncompliance.
• Training and development: Professionals can provide training and ongoing support to your staff or internal CAS compliance team.

Professionals can bring value to your company through CAS compliance services.

Contact BOOST LLC for Your Cost Accounting Needs

To comply with CAS, you must first identify whether it applies to the contract. Then, establish an accounting system and follow each applicable standard. Remember to maintain records and ensure compliance when working with subcontractors. Finally, consult a trusted professional for ongoing support.

BOOST provides accounting services to government contractors. We help companies comply with regulations like CAS and FAR, leveraging advanced digital solutions and an experienced consulting team. We also provide compliance training to small and large businesses involved in government contracts. Contact us now to learn more!