Proposed CAS and DFARS Business Systems Changes

The regulatory landscape for government contractors is constantly evolving. Recent proposed updates from the Cost Accounting Standards (CAS) Board and amendments to the Defense Federal Acquisition Regulation Supplement (DFARS) underscore the significance of these shifts. In this week’s regulatory roundup, BRG’s Government Contracts team discusses the proposed CAS and DFARS updates.  

Proposed CAS changes 

Background 

The Cost Accounting Standards, established by the CAS Board, provide a framework to create uniformity and consistency in cost accounting principles followed by covered contractors. If a current award is equal to or greater than $7.5 million, or a business unit is performing a CAS covered contract/subcontract valued at $7.5 million or more, the award triggers CAS coverage.  

There are two types of CAS coverage: full CAS and modified CAS. Full CAS coverage is triggered when a contractor receives a single CAS-covered contract award of $50 million or more or if the business unit received $50 million or more in net CAS-covered awards in the preceding cost accounting period. Full CAS coverage requires compliance with all standards in effect on or after the award date, regardless of changes in the business unit’s CAS coverage status, and submission of a business unit disclosure statement. If the contractor does not meet the criteria for full CAS coverage after being awarded a CAS covered contract, the contractor likely must comply with modified CAS, which requires compliance with CAS 401, 402, 405, and 406.  

Highlights of the proposed changes to CAS 

In June, the CAS Board proposed several changes aimed at refining existing standards. Highlights of these proposed changes include: 

1. CAS coverage for indefinite delivery/indefinite quantity (IDIQ) contracts:

• The CAS Board is seeking comments regarding amending the CAS to address its application to IDIQ contracts. Comments on how to apply CAS to indefinite delivery, indefinite quantity  contracts must be received in writing by August 19, 2024. No specific position or proposed language has been published to date. 

2. Conformance of operating revenue and lease accounting from CAS to generally accepted accounting principles (GAAP):

• The CAS Board proposes to change the current definition of “operating revenue” to conform to the definition provided by GAAP. 

3. Assets and Facilities Capital Cost of Money (FCCM) calculations: 

• Since the initial promulgations of CAS 414 and 417, changes made to GAAP related to lease accounting have caused confusion about which assets should be included in the calculations of FCCM calculations. 
• The Board is proposing to revise the definition of intangible and tangible capital assets to make clear that GAAP requirements to classify ‘‘right of use’’ assets on an entity’s balance sheet should not be recognized as assets when computing FCCM for CAS purposes. 

4. Proposed elimination of CAS 408 and 409: 

• The CAS Board proposed changes to CAS 408 and 409 to generally align with GAAP. 
• The Board has provisionally concluded that CAS 408 can be eliminated as the corresponding requirements in GAAP are not materially different.  
• The Board has provisionally concluded that CAS 409 compliance issues that involve a significant impact of cost to the government are rare and often related to extraordinary events. Additionally, in the specific areas where issues of noncompliance have arisen, GAAP, FAR, and other standards can protect the interest of the government. 
• Therefore, the Board is considering a proposed rule that would eliminate CAS 409, except for requirements related to changes in service life, residual value, or method of depreciation, which would be integrated into other CAS standards. 

All these changes may be classified as “required changes” and subject to cost impacts. In addition, with CAS 414 definitions of tangible and intangible assets changed to align with GAAP, and in conjunction with elimination of CAS 409, the recovery of the imputed cost should still be an allowable cost per FAR 31.205-10 on contracts.  

Proposed DFARS changes 

DFARS 252.242-7005, Contractor Business Systems, requires contracting officers to determine whether a contractor’s business systems are “adequate” or “approved.” The six systems are: 

1. Accounting System Administration  
2. Contractor Purchasing System Administration 
3. Cost Estimating System 
4. Contractor Property Management System Administration 
5. Material Management and Accounting System 
6. Earned Value Management System 

The government can withhold payments for periods on a covered contract if the business has a significant deficiency in one or more of these systems. The Department of Defense is seeking public comment in its proposal to replace the term “significant deficiency” with “material weakness.” Material weakness refers to a deficiency or combination of deficiencies in the internal control over information in contractor business systems. The proposed change to material weakness implies a reasonable possibility that a material misstatement of such information will not be prevented, detected, or corrected promptly. This change aligns more closely with Generally Accepted Auditing Standards. The determination of what is “reasonable” is subject to auditor discretion, which has led to debates following the issuance of audit reports. 

Business systems require contractors to maintain internal controls that the US Government Accountability Office has noted “act as the first line of defense against fraud, waste and abuse of federal funding.” In recent years, the Defense Contract Audit Agency and Defense Contract Management Agency have increased their focus on contractor business systems. 

How can BRG help? 

Contractors must stay informed of changes in the regulatory environment to ensure continuous compliance and mitigate audit risk. BRG Government Contracts experts offer insights to navigate the complex federal regulatory landscape, including CAS and DFARS requirements. Our team can perform compliance assessments, business system reviews, and mock audits; implement remediation activities; and guide contractors through the unique government contracting regulatory environment.