After publishing a proposed rule more than five and a half years ago, the Cost Accounting Standards (CAS) Board on July 17, 2018 issued a final rule revising the CAS exemption for contracts or subcontracts for the acquisition of commercial items. The final rule clarifies that the current CAS exemption for commercial items extends to all contract types listed in Federal Acquisition Regulation (FAR) 12.207. However, in doing so, it also creates a potential audit issue arising out of the conditions levied by FAR 12.207 on certain contract types.
FAR lists contract types the government may use to acquire commercial items, including firm-fixed-price (FFP) contracts in conjunction with award fee incentives or performance/delivery incentives, known as fixed-price incentive (FPI) contracts. The relevant CAS commercial item exemption states that certain types of contracts for the acquisition of commercial items are exempt from all CAS. CAS 9903.201-1(b)(6) lists various contract types, including FFP, fixed-priced with economic price adjustment, time-and-materials (T&M) and labor-hour (LH), but makes no mention of FPI contracts. This inconsistency is the result of various amendments over time by the FAR Council to FAR 12.207. The final rule amends the language in CAS 9903.201-1(b)(6) to exempt commercial item contracts and subcontracts authorized in FAR 12.207 from all CAS requirements. Look for this change to CAS 9903.201-1(b)(6) when the final rule becomes effective on August 16, 2018.
Although the reference in the CAS commercial item exemption to FAR 12.207 resolves the prior inconsistency, the new rule does create potential audit issues. When analyzing CAS, auditors may question whether the contract type is valid for commercial item acquisitions. This is based on the additional conditions levied by FAR 12.207 on the use of T&M and LH contracts to acquire commercial items, which are not currently specified in the CAS commercial item exception. The reference to FAR 12.207 provides fodder for auditors to argue, for example, that a T&M commercial item subcontract is not exempt from CAS in situations where a prime contractor did not follow all of the prerequisites in FAR 12.207(b)(1) for acquiring a commercial item through the use of a T&M subcontract. This concern is not without precedent. We have observed similar audit issues with respect to interdivisional transfers under FAR 31.205-26, the material costs principle, because of its reference to FAR 15.403-1(b)'s requirements.
These audit allegations—if they materialize—seem dubious at best because the conditions levied by FAR 12.207(b) apply specifically to government contracting officers. Contractors also may point to the relevant CAS regulatory history in response to auditor demands. Nevertheless, contractors planning to use T&M subcontracts to acquire commercial items should be aware of these potential audit issues. When making such awards, contractors should also consider proactive steps based on FAR 12.207 requirements to prevent inappropriate audit challenges.
The CAS Board's final rule helps contractors by resolving the apparent inconsistency between FAR 12.207 and CAS 9903.201-1(b)(6). Nevertheless, prime contractors should take care when using a T&M subcontract to acquire commercial items and consider adopting appropriate subcontracting processes that take into account the policy pertinent to comparable government transactions.
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