To Do or Not To Do an External Restructuring

With the final acquisition of NewCo (a target company), there are opportunities for MyCo (the acquiring company) to structure NewCo for future growth from a government-accounting costing perspective. This would involve restructuring, consolidating, and improving the indirect rate structure between the combined companies. Contractors should consider preparing an external restructuring proposal that will enable implementation of cost accounting practice changes without having to quantify cost impact calculations.  

How does a company determine if it is a candidate for external restructuring? 

We will assume MyCo:  

• operates subject to full Cost Accounting Standards (CAS) coverage 

• possesses an adequate and compliant CAS Board Disclosure Statement 

• was not previously under common control with NewCo 

• performs on Department of Defense contracts 

• is contemplating major changes to its cost structure 

What are the requirements? 

The prerequisites for a successful external restructuring agreement are outlined within the Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), and CAS. The government expects to realize cost savings from the restructuring to achieve a minimum savings-to-cost ratio of 2:1. Examples could involve reduction in workforce, facility or location closures, elimination of redundant information technology applications (such as accounting systems), or cancellation of redundant liability insurances. For instance, if eliminating Office Space A saves $100,000 annually but incurs an early exit fee of $50,000, the savings ratio is 2:1. 

It is crucial to exclude allowable costs related to the restructuring from annual indirect cost submissions since they will be recovered over time within the final restructuring agreement. Procedures outlined in the FAR and DFARS are critical to follow. Deviation from these guidelines can derail the agreement and lead to non-approval, cost impact studies on the accounting practice changes, and loss of cost recovery. 

What is the benefit?  

An external restructuring agreement benefits both the government and the contractor. The contractor can implement CAS practice changes and, with savings exceeding the 2:1 threshold, meet the criteria outlined in CAS 9903.201-8. These changes are not subject to cost and price adjustments on contracts. For example, practice changes such as transitioning the general and administrative base from total cost input to value-added, altering the method of allocating facility costs, or consolidating fringe benefits or overhead rates would not lead to cost and price adjustments on contracts. 

Additionally, the allowable costs involved are amortized over five years, ensuring consistency in indirect rates and preventing significant rate fluctuations. If this scenario aligns with your situation, please reach out to BRG Government Contracts professionals. We can help your company to capture costs and savings, develop the proposal, and navigate complexities of the agreement, as well as advise through the Defense Contract Audit Agency audit of the proposal to minimize questioned costs. 

BRG’s costs to assist in preparing an external restructuring proposal are typically recoverable by the contractor. If you have questions about the preparation, process, and effort to accomplish, please reach out to BRG to see how our team members can help you achieve maximum cost recovery.