Welcome to the Cost Corner. This is the first in a series of articles exploring the complex cost and pricing regulations that apply to government contractors. This article provides an overview of the regulatory framework and its rationale. Subsequent articles will explain specific aspects of the regulations in further detail and provide periodic updates on new developments.
Volume X – Accounting for the Cost of Business Combinations Under Government Contracts
Mergers and acquisitions create additional costs and complex accounting issues for government contractors. There are fees for accounting, legal, and business consultants. There may be restructuring costs associated with combining business operations. Segments may be closed and retirement plans may be terminated. Golden handcuffs and golden parachutes are also common. Assets may be revalued, goodwill may be created, and there may be changes in cost accounting practices.
Last month we wrote about a provision in the proposed 2013 National Defense Authorization Act (“NDAA”) that would have given the Defense Contract Audit Agency (“DCAA”) statutory authority to demand a company’s internal audit reports in order to audit the efficacy of a company’s internal business systems. Surprisingly, the authorization, as originally proposed, was modified in the final legislation. While Congress directed DCAA to issue new guidance regarding auditor access to internal audit reports, Congress stopped short of giving DCAA actual authority to demand such reports. As such, contractors will remain at loggerheads with DCAA auditors who try to exceed their statutory authority.
The Defense Contract Audit Agency (“DCAA”) has long sought access to contractors’ internal audit reports in connection with the routine audit of contractors’ business systems. Contractors have, in most cases, successfully resisted requests for such access on the grounds that DCAA has no statutory authority to request such documents. But that may soon change. Section 843 of the Senate version of the 2013 National Defense Authorization Act (S. 3254) would grant DCAA broad access to contractor internal audit information.
Continue Reading Smash & Grab – DCAA Poised to Gain Access to Contractor Internal Audit Reports
By David S. Gallacher and Kerry O’Neill
Last April, we wrote about proposed changes to Department of Defense ("DoD") reporting requirements for independent research and development ("IR&D"), raising concerns about how the proposed change would tie recoverability of IR&D costs to new reporting and disclosure requirements. Recently, Defense Federal Acquisition Regulation Supplement ("DFARS") 231.205-18(c) was finalized, with changes. See 77 Fed. Reg. 4632 (Jan. 30, 2012). This final rule is a mixed bag that got some things right, but also leaves some of the most serious issues unresolved.
Continue Reading Final Rule for IR&D Reports Fails to Address Most Serious Questions
By David Gallacher and John Bonn
On January 2, 2011, the President signed the James Zadroga 9/11 Health and Compensation Act of 2010, Pub. L. No. 111-347, which set up a relief fund for victims, first responders, and construction workers who were injured in the September 11 terrorist attacks in New York City. To pay the estimated $4.3 billion price tag for the Act, Section 301 of the Act imposed on any foreign person a tax equal to 2% of federal procurement payment received by that foreign person. See 26 U.S.C. § 5000C. In addition, any person who makes or otherwise is a withholding agent with respect to such a payment is required to withhold the 2% tax from the federal procurement payment and remit the tax withheld to the Internal Revenue Service (“IRS”) under tax laws and regulations applicable to withholding of United States taxes from payments made to foreign persons. Although the tax has been in place for more than 14 months and the IRS has issued a revised Form 1042 with revised instructions to implement withholding and reporting obligations, the Government is only now turning to the details of how this tax will be accounted for in connection with the procurement process. And – as is often the case – there is quite a lot of devil in those details.
CAS 402 has long provided that B&P costs incurred pursuant to a specific requirement of an existing contract may be distinguished from B&P generally and treated as direct costs of the requiring contract. As CAS 402-61 states:
The circumstances are different because the costs of preparing proposals specifically required by the provisions of an existing contract relate only to that contract while other proposal costs relate to all work of the contractor.
Continue Reading DOD Issues New Guidance on B&P – But Is It Right?
Those familiar with Government contracting know at least a little bit about the elusive and fickle regulatory requirements for Independent Research and Development (“IR&D” or “IRAD”) costs. IR&D is a means by which the U.S. Government supports a Contractor’s independent R&D efforts. By reimbursing a Contractor’s independent R&D costs, the Government long has hoped to advance the state of the art without stifling a contractor’s innovation under the weight of a federal bureaucracy, while simultaneously banking on the fact that the U.S. Government also will benefit from the technology advancements. But two recent developments may change the essential nature of IR&D, making it less “independent” and more “dependent” on Government rights and oversight. To quote Bob Dylan – “the times they are a changin’.”
By: John W. Chierichella and W. Bruce Shirk
We previously noted DCAA’s hasty implementation of the Court of Appeals for the Federal Circuit’s (“CAFC’s”) decision in Gates v. Raytheon Co., 584 F.3d 1062 (Fed. Cir. 2009), requiring daily compounding of interest on adjustments made to rectify Cost Accounting Standards (“CAS”) noncompliances. DCAA Implements Federal Circuit Decision Requiring Interest Compounded Daily on Adjustments for CAS Noncompliances (June 14, 2010). We say “hasty” because – while noting that its holding was required by Canadian Fur Trappers v. United States, 884 F.2d 563 (Fed. Cir. 1989) – the panel expressed reservations regarding that decision’s validity, commenting that appellee’s (Raytheon’s) arguments “may support the proposition that Canadian Fur Trappers was erroneously decided.” Not surprisingly, Raytheon accepted this implicit invitation to petition for rehearing en banc, and that petition is currently pending. Nonetheless, the FAR Councils are now rushing to mimic DCAA by proposing in equally hasty fashion to extend the holding to overpayments under the Truth in Negotiations Act (“TINA”). 75 Fed. Reg. 57719-57721 (Sept. 22, 2010).
Albert Einstein supposedly said that “the most powerful force in the world is compound interest.” Whether or not the great man actually said that, DCAA is now prepared to show contractors just how powerful compounding can be.
A controversy with a more than 35 year life has finally been addressed by the US Court of Appeals for the Federal Circuit – and in a pro-contractor fashion. In its March 19, 2010 decision in ATK Thiokol, Inc. vs. United States, Fed. Cir. No. 2009-5036 (3/19/10), the Court of Appeals, in affirming the Court of Federal Claims decision from 2005, determined that research and development costs not specifically required by a contract may be treated as Independent Research and Development ("IR&D") under FAR 31.205-18. While this might seem a fairly unremarkable holding, and one consistent with reason, sound procurement policy, and a harmonious reading of the relevant regulations, the Government has for years taken the contrary view that costs of implicitly required development cannot be treated as IR&D. And, as a result, those contractors who treated such costs as IR&D have been treated to cost disallowances, citations for CAS non-compliance, and even accusations of fraud.