Perplexed Posted on
Friday, July 11, 2003 - 05:04 pm:I hope this is not too simple a question but it's been
bugging me, wonder if one can help.
A small business has been awarded a contract that under most
circumstance (value) would be CAS covered. Being a small
business at the time of award, of course, triggers the
exemption. The contract is a multi-year incrementally funded
CP. My question is, if this small business is bought by a
large business that does have CAS covered contracts, does
the small business's original contract still enjoy the
exemption or does become subject to CAS coverage, also?
Thanks
edwardo Posted on
Saturday, July 12, 2003 - 09:48 am:
You wouldn't be asking if you didin't have some hunch
that this sm will be bought by a Large. It depends on the
buying company. Novation and name change agreements asume
all in place liabilities, contracts, proceeds, etc....if
they exercise the novation, they woul most likely be held to
CAS due to the new acct. system
Lone Wolf Posted on
Saturday, July 12, 2003 - 11:36 am:
I'm not sure I agree with Eduardo. The applicability of
CAS to a contract is determined at the time the basic
contract is awarded; once awarded, a contract's CAS status
does not change regardless of later events. See 59 Fed Reg
55746.
For example, not only would a $450,000 award to a large
business be exempt, a later within-scope modification adding
another $450,000 of work -- bringing the total value of the
contract to $900,000 -- would not trigger CAS coverage,
either for the added work or for the overall contract. The
result would be the same if the value of the mod were
$600,000. As I recall, there is an "Ask the Professor" Q&A
making this same point.
Here's some more support for the rule that a contract's CAS
status is determined at time of award and is not changed by
later events: consider the case of a contractor who receives
an award subject to modified CAS but later in that same
accounting period receives a $50M+ non-exempt award,
triggering full coverage. The CAS regs make clear that full
coverage applies only to the $50M+ plus award and any later
awards received in that same cost accounting period. The
earlier-received award that was subject to modified
covereage at the date of award stays subject to modified
coverage, even after receipt of the $50M+ award.
9903.201-2(b)(2), (b)(3). Contractors thus can have some
contracts subject to full coverage and other contracts
subject to modified coverage at the same point in time.
9903.304.
Finally, the CAS regs address full CAS coverage in terms of
"awards." A contractor who acquires a contract via novation
does not receive an "award," so an express criterion for
full coverage in the regs is not met.
I do agree with Eduardo that a large company that acquires a
smaller one might agree in a novation agreement to
administer certain novated awards under full CAS coverage,
but this result would arise from contract, not from
regulation. I can't imagine a large business agreeing to
such a provision in a novation agreement, and I don't think
I've ever seen the Govt demand such a provision.
John Ford Posted on
Saturday, July 12, 2003 - 12:54 pm:
I am in general agreement with LW in regard to the
original question. However, I have to disagree that the type
of CAS coverage is always determined at the time of award.
Specifically, if a small business were to acquire a segment
of a large business subject to CAS coverage and have those
contracts novated to the small business, the contracts would
lose their CAS coverage upon the novation. That is because
the CAS rules exempt contracts "with" small businesses from
CAS coverage, not just contracts "awarded" to small
businesses.
Vern Edwards Posted on
Sunday, July 13, 2003 - 02:11 pm:
The specific question cannot be answered on the basis of
the information provided; however, I'll take a stab at
providing a general answer.
A business unit must comply with CAS when it has a
CAS-covered contract. (The definition of business unit
is in FAR § 2.101.) As a business unit, the small business
was exempt from CAS.
Now a large business unit with CAS-covered contracts has
"bought" the small business. In my opinion, if as a result
of the purchase the small business has became a part of the
large business unit that has CAS-covered contracts, then it
will have to comply with CAS because it is part of a
business unit that must comply with CAS, even though its
contract was originally exempt from CAS and even if it did
not include the CAS clause. However, I think that if,
despite the purchase, the small business has remained a
separate business unit, then it will not have to comply with
CAS even though its new ownership means that it is no longer
a small business under SBA regulations.
So I think that the answer to the specific question depends
on the effect that the purchase had on the organizational
status of the former small business, whether it was merged
into the large business unit or remained a distinct business
unit. The change in its size status, in and of itself,
should not bring CAS into effect on the contract, even if
the contract included the CAS clause. I'm pretty sure this
is correct, but I'm not absolutely sure.
John Ford
Posted on
Sunday, July 13, 2003 - 03:57 pm:
I want to respond to Vern's post by stating that to the
best of my knowledge we are all giving our opinions here
because there is no case on point to dispose of this issue.
Further, I am not sure what the answer should be. However, I
would like to receive more reasoning from Vern regarding the
first situation described in his post as most of his posts
are well reasoned, even if I disagree with him from time to
time.
For simplicity sake, here is the fact situation. A large
business Government contractor buys a small business
Government contractor and merges the small business into the
large business. The small business disappears and all we are
left with is a contract that was awarded to a small business
now being performed by a large business. Because the
contract orginally was with a small business, it was not
subject to CAS. It is now being performed by a large
business that has CAS covered contracts. The contract does
not contain any CAS clause. If the contract now becomes
subject to CAS coverage, under what theory are the
appropriate CAS clauses incorporated into the contract so
that they become enforceable against the large business?
Would the answer be different if a novation were required or
if the contract were transferred by operation of law?
perplexed. Posted on
Monday, July 14, 2003 - 09:23 am:
After reading Vern's post, I should add that this
purchase was done as a stock purchase as opposed to an asset
purchase. In this case I understand that a novation is not
applicable. Secondly, the former small business is a wholly
owned subsidiary
of the large company.
Because of this, I tend to believe that the orginal contract
would maintain CAS exemption.
Thanks for all your inputs.
Vern Edwards Posted on
Monday, July 14, 2003 - 08:20 pm:
John:
I wrestled with the issue that you are raising, and its a
good one. Here is how I reasoned it out:
I did not say that the previously exempt contract would
become CAS-covered following the purchase of the small
business by the large business. I said: "In my opinion, if
as a result of the purchase the small business has became a
part of the large business unit that has CAS-covered
contracts, then it will have to comply with CAS because it
is part of a business unit that must comply with CAS, even
though its contract was originally exempt from CAS and even
if it did not include the CAS clause."
I probably could have made my point more clearly than I did.
I don't think a business unit can keep two sets of books --
one for CAS-covered contracts and one for non-CAS-covered
contracts. Am I wrong? Thus, as a practical matter, once a
business unit agrees to comply with CAS under any contract,
it must comply with CAS with respect to all its accounting
for government contracts, even its non-CAS-covered
contracts. At least, this is what I have been told.
Can a business unit keep two sets of books, one for CAS-covered
contracts and another for non-CAS-covered contracts? I
honestly don't know, but I think not. Am I wrong?
I think that if a contractor with both CAS-covered and non-CAS-covered
contracts violates a cost accounting standard the government
cannot come after it for breach under its non-CAS-covered
contracts, because it did not promise to comply with CAS
under those contracts. The government must come after it
under the CAS-covered contracts.
I don't know what the right answer is; I'm just trying to
think it through based on what I do know. What do you think?
John Ford Posted on
Monday, July 14, 2003 - 10:05 pm:
Vern, as a practical matter you are correct when you say
that a contractor cannot keep two sets of books, one for CAS
covered contracts and one for non CAS covered contracts.
However, this is a matter of convenience not of CAS
compliance or the CAS clauses in the FAR. Thus, from a
theoretical perspective, a contractor can keep two sets of
books. In fact, perhaps we should add that it can keep three
or four sets of books. One for it its CAS covered contracts,
one for its non-CAS covered contracts which are subject to
the cost principles, one for cost accumulation and
management on its sealed bid contracts and one for its
commercial items.
The issue I am concerned with is the question of whether the
contracts with the former small business would become CAS
covered as a matter of compliance with the CASB's
regulations although those contracts would not have any CAS
clause in them. In this regard, the CASB's regulations on
applicability of the CAS state that "negotiated contracts
not exempt in accordance [with the regulations] shall be
subject to CAS." No exemption in the regulations covers this
situation. Thus, it would seem that the former small
businesses contracts would become subject to CAS when they
are taken over by the large business. However, to me it
seems that the CASB did not have transfers of contracts in
mind when it wrote the regulations as they seem to address a
contract's CAS status being determined at the time of award.
As I said earlier, I don't know what the answer is to this
question.
Vern Edwards Posted on
Tuesday, July 15, 2003 - 11:11 am:
John:
I barely passed accounting in business school, so let me
ask: Wouldn't keeping two sets of books -- one for CAS-covered
contracts and one for exempt contracts -- make it hard for a
business unit to comply with CAS under its covered
contracts? Think of CAS 410 and 418. Could a business unit
allocate indirect costs one way under its covered contracts
and differently under its exempt contracts and still comply?
Also, I don't think that a change in a business unit's size
status affects CAS coverage of its pre-existing contracts,
except as a practical matter, as we have discussed.
Vern
AnonYmus Posted on
Tuesday, July 15, 2003 - 12:19 pm:
Vern,
Yes. Contractors must keep several sets of books: (1) as per
GAAP for financial reporting, (2) as per IRS code for tax
accounting and reporting, (3) as per FAR Part 31 for those
cost-based contracts subject to that subsection but
otherwise exempt from CAS, and (4) as per CAS for CAS-covered
contracts. And we wonder why contractors' indirect rates are
so high??
Anyway, y'all might want to check out the CAS requirements
at 48 CFR 9903.201-2 (Types of CAS Coverage). Here is a
pertinent quotes --
"(b)(3) A contract awarded with modified CAS coverage shall
remain subject to such coverage throughout its life
regardless of changes in the business unit's CAS status
during subsequent cost accounting periods."
From that specific rule I deduce (or is it infer?) to a
general rule that a contract's CAS coverage status (i.e.,
Exempt, Modified or Full) is determined once at contract
award and does not change throughout the life of the
contract regardless of what happens to the business unit.
A topic for more general discussion might be what it means
to be CAS-covered. A contract might be exempt from CAS, but
subject to the half-dozen CAS brought into the Part 31 cost
principles because allowability is determined by virtue of
compliance with a particular Standard.
If a contract is exempt from CAS, then it seems to be that
the real advantage a contractor has is that a contracting
officer cannot assess a CAS non-compliance with respect to
that contract. Also, when a contractor initiates a change in
cost accounting practice, that CAS-exempt contract would not
be included as an "affected contract" for purposes of the
cost impact analysis.
You make a very cogent point, Vern, in that cost accounting
practices do not, as a rule, vary by contract. Cost
accounting practices exist at the business unit (or segment)
level and must be applied consistently to all contracts,
though billing practices might vary widely. The remedy found
in CAS for a failure to consistently apply those practices,
however, will only be applied to CAS-covered contracts.
So to answer the initial question, although the contract
remains exempt from CAS, we would expect the cost accounting
practices applied to the contract to be compliant with the
Standards to which the acquiring entity was subject.
John Ford Posted on
Tuesday, July 15, 2003 - 05:37 pm:
AnonYmous, I cannot agree with your statement that a
contract retains its original CAS status throughout the life
of the contract. Specifically, I refer back to the
hypothetical I raised in my first post to this thread. If a
small business obtains a business unit, along with its CAS
covered contracts, it is my contention that those contracts
are no longer CAS covered. One of the specific exemptions
from CAS coverage relates to contracts "with" small
businesses. Thus, it is my contention that all contracts
"with" small businesses are exempt from CAS coverage not
just those that are awarded to small businesses. This result
furthers the policy reason for exempting small businesses
from CAS coverage in the first instance. To require a small
business to comply with the CAS would be contrary to the
reason they are exempt, i.e., to prevent small businesses
from having to incur the expense and effort that CAS
compliance requires.
AnonYmus |
Posted on
Tuesday, July 15, 2003 - 11:53 pm:
Well John, you and I are just going to have to disagree
on this one. (Though I'll throw you some hope at the end of
this post ...)
Under your reasoning, Lockheed Martin or Boeing could have a
fully CAS-covered contract but move performance to, let's
say, Warsaw. That contract would then be available for the
exemption at 9903.201-1(b)(15) -- "Contracts ... to be
executed and performed entirely outside the United
States..." Granted, we can dispute the meaning of the term
"executed" but a contract can be executed anywhere
(especially in the digital age) so I contend that would be a
quibble. All it would take is simply to move performance
OCONUS and that would be it -- the contract would now be
exempt from CAS.
Basically, my point is that if it were really that simple,
we would see a mass migration of CAS-covered contract
performance to Zimbabwe or Timbuktu or wherever (anyplace
but the USA). Since we don't see that happening, there must
be some reason why not ...
Moving on, let's note DOD's CAS Working Group Item 76-2,
which says in part: "With respect to contract modifications
the general rule is that any modifications made to a
contract pursuant to the terms and conditions of the
contract will not affect the status of the contract with
respect to CAS application. That is, if CAS was applicable
to the original contract, it will be applicable to the
modification; if CAS was not applicable to the original
contract, it will not apply to the modification.”
So DOD guidance is that, generally, an exempt contract does
not become CAS-covered because it was modified with additive
changes to a value that is now over the CAS threshold. Let's
take it a step further and agree that a CAS-covered contract
cannot become exempt from CAS simply by enough deductive
changes to drop it under the CAS threshold. In other words,
you can't take a $10 million CAS-covered contract and make
it subject to the exemption at 9903.201-1(b)(2) ["Negotiated
contracts .. not in excess of $500,000."] simply by
processing $9.9 million of deductive changes or issuing a
partial TforC. That makes sense, right?
So, in summary, a modified CAS-covered contract EXPLICITLY
cannot "change its stripes" no matter what happens to the
business unit; a change of performance location won't affect
a contract's CAS coverage; and subsequent modifications
won't (as a general rule) affect the contract's CAS status.
Are we seeing a pattern here? I contend the pattern leads
inextricably to the conclusion that a contract's CAS status
is determined at award (or perhaps at negotiation of price)
and doesn't change no matter what.
Now here's the ray of hope I promised you ...
it comes from the original CAS Board's prefatory comments,
at Preamble F, dated 12/24/1974. In discussing CAS
applicability the Board said:
"Retroactivity. Several commentators requested that the
Board modify its proposal so as to provide retroactive
exemption to existing contracts where the circumstances are
such that these existing contracts would have been exempt if
awarded after the effective date of the proposed regulation.
The Board has no authority to modify existing contractual
agreements between the government procurement agencies and
their contractors. However, the Board sees nothing
inconsistent with its regulations or with Pub. L. 91-379 in
modification by the procurement agencies of contracts in
this category, assuming of course that the Government
receives adequate consideration for deletion of the CAS
requirements."
So, in theory, it would be possible to negotiate away CAS
coverage in the hypothetical circumstances you have
created... assuming the small business could offer adequate
consideration. I maintain that this is not particularly
likely, however. Perhaps some current 1102's might like to
add something about whether they would consider something
along this line given your hypothetical.
Great question -- good discussion.
Regards
|
Vern Edwards |
Posted on
Wednesday, July 16, 2003 - 11:32 pm:
John:
What if a large business becomes a small business (it
happens). Do you believe that its CAS-covered contracts
would then become exempt?
|
John Ford |
Posted on
Friday, July 18, 2003 - 11:13 am:
Vern, in this case, I do not think the contracts would
become exempt. There are several factual distinctions
between this situation and the one where a small business
obtains the business line of a large business with CAS
covered contracts. First, there is no transfer of the
contracts from one contractor to another. Second, the large
business (presumably) had an accounting system that was
designed to accommodate the CAS. Thus, there would be no
need for the contractor to change its accounting system.
This leads to the final factor that distinguishes the two
situations and that is the policy underlying the small
business exemption, i.e., not to impose the burden of
establishing and maintaining a CAS compliant accounting
system. In your hypothetical, the contractors accounting
system would already be set up for the CAS. While it may
have to incur some marginal costs to continue with that
system until its CAS covered contracts expire, I do not
think this is a sufficient basis for applying the exemption
in this case.
I think this discussion demonstrates a need for the CASB to
clarify how the exemptions are to apply in a dynamic instead
of static environment. |
AnonYmus |
Posted on
Friday, July 18, 2003 - 02:52 pm:
My favorite (unanswered) CAS coverage question is whether
a contract is exempt from CAS when it is performed entirely
on an Indian Reservation.
John, you're right that there is a lot of ambiguity
remaining in CAS. I don't want the current CAS Board,
however, to tackle anything else right now. In my view,
ressurecting the CAS Board under OFPP has been an
unmitigated disaster for both industry and government.
Right now the CAS Board is down to one staffer, is missing
an Executive Director, and has a Chairperson who,
apparently, couldn't care less about dealing with cost
accounting issues. Not a recipe for success...
|
John Ford |
Posted on
Friday, July 18, 2003 - 03:39 pm:
Anon, my big gripe with the CASB is that it is separate
from the FAR Council. The CASB rights accounting rules to be
applied in a government procurement context, yet its members
do not have general procurement experience nor do they right
the rules with an appreciation of procurement policies. The
CASB should be subordinate to the FAR Council who could
reject proposes rules or Standards if they do not promote
sound procurement policies or conflict with other national
interests such as military readiness. |
AnonYmus |
Posted on
Friday, July 18, 2003 - 04:28 pm:
John, we should move this debate to another thread
because we're moving off-topic.
What makes you think the FAR Council has any appreciation of
good, accurate, cost accounting policies? In fact, what
makes you think that the FAR Council is concerned with sound
procurement policies? Have you seen recent proposed rules
(e.g., FAR Case 2002-008, Proposed Revisions to FAR Part 30,
DOD Guidance on Changes to Cost Accounting Practice, etc.)?
Regards |
Lone Wolf |
Posted on
Friday, July 18, 2003 - 04:34 pm:
John -
I agree that the distinctions you identify in your post of
7/18 (11:13 am) are legitimate distinctions, but I'm not
sure you're being consistent here. If you are in favor of
reading the small business exemption (exempting contracts
"with" small businesses) literally in order to reach the
result that a fully-CAS-covered contract awarded to a large
business loses its CAS status where it is novated to a small
business, why don't you want to read the same provision just
as literally when responding to Vern's hypo? In both cases,
after the relevant event has occurred (the novation in the
first hypo, the change in size status in the second hypo)
the contract is no longer "with" a "small business."
I think the better analysis is: a contract that is exempt
when it is awarded stays exempt throughout its life. A
contract can only be subject to CAS if it meets the
threshold requirements at the time it is "awarded." A
contract subject to CAS at the time of award can lose its
CAS status if it is novated to a small business, because, as
you correctly note, the exemption language focuses on who
the contract is "with," not to whom it was "awarded." To me,
this interpretation is both equitable and consistent with
the CAS rules.
I do agree, however, that this issue, like others relating
to CAS, needs regulatory clarification.
My big CAS gripe: the way far too many Part 31 cost
principles incorporate CAS standards by reference (e.g.,
31.205-6 incorporating CAS 412 and 413). What a nightmare! |