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When Can a Full CAS Covered Contractor Start Determining Contracts as Modified CAS

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Once a contractor triggers the Full CAS covered threshold, when can it determine that a contract is only Modified CAS and can a business unit get back to only being Modified CAS covered?

I understand that once a contractor has triggered the Full CAS covered threshold, that all subsequent contracts in that accounting period that are not exempt from CAS would also be Full CAS.  My interpretation of the CAS Coverage and Disclosure Statement Determination flow chart in the DCAA Contract Audit Manual (Figure 8-1-1) (http://www.dcaa.mil/Content/Documents/CAM/chapter_08_-_cost_accounting_standards.pdf) is that determination for Full or Modified CAS coverage is made for each contract. 

For example, a business unit receives an award of $10 million, which is not exempt from CAS.  The business unit has not received $50 million or more in net CAS-covered awards in the preceding cost accounting period, nor received a single CAS-covered contract / subcontract of $50 million or more during the current cost accounting period, but is performing on a contract that was determined to be Full CAS covered that was awarded 2 years ago.  My interpretation, is that the contract would be determined to be Modified CAS covered. 

I have received an interpretation from a consultant that if you are currently performing on a contract that was determined to be Full CAS covered, then all contracts that are not exempt from CAS would also be determined to be Full CAS covered, even if that contract was awarded 2 years ago and in the preceding year you did not receive $50 million or more in CAS-covered awards, and the current award isn't $50 million.  

I understand that the business unit would need to keep it's Accounting System in a way that meets Full CAS as long as there is one Full CAS covered contract.  The reason for the question is that my interpretation would mean a business unit could get back to only being Modified CAS covered if all Full CAS covered contracts ended and the business unit has not hit one of the $50 million triggers listed earlier.   

I'm interested to know how others on this forum interpret the CAS determination.  

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Here's part of the relevant rule from 48 CFR 9903.201-2(a), Types of CAS Coverage:

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(a) Full coverage. Full coverage requires that the business unit comply with all of the CAS specified in part 9904 that are in effect on the date of the contract award and with any CAS that become applicable because of later award of a CAS–covered contract. Full coverage applies to contractor business units that—(1) Receive a single CAS–covered contract award of $50 million or more; or (2) Received $50 million or more in net CAS–covered awards during its preceding cost accounting period.

Is the issue the interpretation of paragraph (a)(1)?

Is the consultant interpreting (a)(1) to mean that once you receive a CAS-covered contract with full coverage all subsequent covered-contracts are subject to full coverage, regardless of dollar value or accounting period?

Or is he/she literally saying that full coverage applies to all new covered-contracts, regardless of dollar value and accounting period, if you are currently performing a fully covered contract, no matter when it was awarded?

 

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Vern, I don't think I have an exact answer to your question.  The feedback I received through a higher manager that spoke to the consultant was that once a contractor is determined to be Full CAS covered, all future CAS covered contracts would be Full CAS covered.  The manager also conveyed that to no longer be Full CAS covered, all CAS covered contracts would have to end and no CAS covered contracts awarded for a full year from the last one ending.  This scenario is very unlikely, so under this interpretation, the contractor would always be Full CAS covered. 

In your quoted text of the regulation: 

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 Full coverage applies to contractor business units that—(1) Receive a single CAS–covered contract award of $50 million or more; 

This doesn't have the same words as the flow chart, which states:

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Has the business unit received a single CAS covered contract/subcontract of $50million or more during the current cost accounting period?

I also see that the regulation states:

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(2) If any one contract is awarded with modified CAS coverage, all CAS-covered contracts awarded to that business unit during that cost accounting period must also have modified coverage with the following exception: if the business unit receives a single CAS-covered contract award of $50 million or more, that contract must be subject to full CAS coverage. Thereafter, any covered contract awarded in the same cost accounting period must also be subject to full CAS coverage.

This makes the flow chart logic make sense.  I have always used the flowchart on each contract to determine if the contract was CAS covered, then if it was Full or Modified CAS.  I would like to push back to the higher manager and the consultant, but wanted to make sure my interpretation (stated in my original post) isn't faulty and know there are a lot of experienced and very knowledgeable people running and contributing to this forum, who could help me with this.  

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Inquiring, what is your interpretation?  You gave two different interpretations in your original post that cannot be reconciled. 

18 hours ago, inquiring mind2 said:

I have received an interpretation from a consultant that if you are currently performing on a contract that was determined to be Full CAS covered, then all contracts that are not exempt from CAS would also be determined to be Full CAS covered, even if that contract was awarded 2 years ago and in the preceding year you did not receive $50 million or more in CAS-covered awards, and the current award isn't $50 million.  

As for this interpretation by the consultant, are you with an educational institution?

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1 hour ago, inquiring mind2 said:

Vern, I don't think I have an exact answer to your question.  The feedback I received through a higher manager that spoke to the consultant was that once a contractor is determined to be Full CAS covered, all future CAS covered contracts would be Full CAS covered. 

Well, that's what I asked. It appears that the consultant is interpreting 48 CFR 9903.201-2(a)(1) to mean that once you have received a $50 million+ CAS-covered contract that is subject to full coverage, every CAS-covered contract awarded thereafter must be subject to full coverage, without regard to the accounting period in which the first full-coverage contract was awarded.

I don't know if that is right or wrong, and I can't tell from the language of the regulation. Furthermore, I can't find any guidance that specifically addresses the issue. I would want to ask the consultant what are the grounds are for his/her interpretation. Or ask a different consultant.

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Retreadfed: I am not with an educational institution.  My interpretation of the CAS regulation is that each contract is determined independently for Full or Modified coverage by working through the DCAA Manual flowchart (link in original post, page 17).  This interpretation leads me to believe that a contract can be determined to be a Modified CAS contract subsequent to being awarded a contract that was determined to be Full CAS and still performing that Full CAS, but the contractor has not been awarded $50 million of CAS covered contracts in the preceding accounting period, and has not been awarded a CAS covered $50 million award in the current accounting period.

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In my view contracts are either exempt from CAS or they are subject to CAS. If subject to CAS they receive Full coverage unless eligible for Modified coverage.

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here_2_help: In your opinion, are covered contracts eligible for Modified coverage if there is a current Full covered contract being performed, but it was awarded 2 years ago and the contractor wasn't awarded $50 million or more in covered contracts in the previous accounting period and there has not been a single award of $50 million or more in the current accounting period?

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@inquiring mind2

The DCAA flow chart seems clear. But it is not a regulation. Whether it's right or not, I don't know.

The real problem here is that you are dealing with a secondhand report of what a consultant supposedly said.

My advice is that you call the consultant and work it through with him. No matter what any of us say, you've still got that consultant to deal with. Right? If your company paid the consultant for his advice, why would your higher manager care what any of us nobodies thinks?

A 30 minute conversation might clear this up for you.

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Vern:  Yes, you are correct on all counts (except the "nobodies" part), but I want to make sure I wasn't overlooking something or if someone on the forum has been in a similar situation and has received determination perhaps from a CO or cognizant ACO, that my interpretation is correct, it would help the debate I'm sure to have with the higher manager and have a follow up with the consultant with me on the telecom this time.  

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Inquiring, for what it is worth, I agree with you.  The rule specifically states that the requirement for full CAS coverage applies when the contractor received $50M in net CAS covered contracts in its preceding accounting period.  Preceding means its last accounting period.  It does not say that the contractor received $50M in net CAS covered contracts in any or a preceding period and one or more of those contracts is still active.  That is reading too much into the plain language of the CAS rules.

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I'm going to play devil's advocate.

Here is the coverage rule in its entirety as it applies to commercial organizations:

 
Quote

(a) Full coverage. Full coverage requires that the business unit comply with all of the CAS specified in part 9904 that are in effect on the date of the contract award and with any CAS that become applicable because of later award of a CAS–covered contract. Full coverage applies to contractor business units that—(1) Receive a single CAS–covered contract award of $50 million or more; or (2) Received $50 million or more in net CAS–covered awards during its preceding cost accounting period.

(b) Modified coverage.
(1) Modified CAS coverage requires only that the contractor comply with Standard 9904.401, Consistency in Estimating, Accumulating, and Reporting Costs, Standard 9904.402, Consistency in Allocating Costs Incurred for the Same Purpose, Standard 9904.405, Accounting for Unallowable Costs and Standard 9904.406, Cost Accounting Standard—Cost Accounting Period. Modified, rather, than full, CAS coverage may be applied to a covered contract of less than $50 million awarded to a business unit that received less than $50 million in net CAS–covered awards in the immediately preceding cost accounting period.
(2) If any one contract is awarded with modified CAS coverage, all CAS–covered contracts awarded to that business unit during that cost accounting period must also have modified coverage with the following exception: if the business unit receives a single CAS–covered contract award of $50 million or more, that contract must be subject to full CAS coverage. Thereafter, any covered contract awarded in the same cost accounting period must also be subject to full CAS coverage.
(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.
 
Let's interpret that rule through the use of a scenario.
 
Suppose we have a business unit that has received a $50 million CAS-covered contract with a five year performance period.
 
Start with paragraph (a).
 
According to (a)(1), if a business unit receives just one CAS-covered contract worth $50 million or more, then full coverage applies to the business unit immediately. Not just to that contract, but to that entire business unit. The rule does not say full coverage applies to the business unit during the accounting period in which the contract was received, but to that business unit. Period. No time limit stated. Of course, the contractor will be under no further obligation to the government with respect to cost accounting standards once the contract has been completed and the contract has been closed out, unless it wins more CAS-covered contracts. So let's say that full coverage applies to the business unit while the contract is in effect.
 
What about (a)(2)? Well, forget about it, because it's either/or. If (a)(1), the single contract rule, applies, then (a)(2), the "net awards" rule doesn't add anything. If the single award rule does not apply, but the "net awards" rule does, then the business unit will be subject to full coverage during the next accounting period. 
 
CAS defines "net awards" at 48 CR 9903.301 as follows:
 
Quote

Net awards, as used in this chapter, means the total value of negotiated CAS-covered prime contract and subcontract awards, including the potential value of contract options, received during the reporting period minus cancellations, terminations, and other related credit transactions.

So let's suppose that two accounting periods after the award of the $50 million contract, and while that contract is still in effect, our business unit wins a $30 million CAS-covered contract.
 
Full coverage or modified coverage?
 
Look at paragraph (b). According to (b)(1):
 
Quote

Modified, rather, than full, CAS coverage may be applied to a covered contract of less than $50 million awarded to a business unit that received less than $50 million in net CAS–covered awards in the immediately preceding cost accounting period.

That refers to the "net awards" rule in (a)(2). Well, okay. But what does that rule have to do with anything? Full CAS-coverage already applies to the business unit by virtue of (a)(1), with no specified time limit, and the $50 million contract is still in effect.

You can't just ignore (a)(1). Reading the rule as a whole, paragraph (b)(1) rule says only that if the business unit were not already subject to full coverage by virtue of (a)(1), and if it did not cross the (a)(2) "net award" threshold in its previous accounting period and were not subject to full CAS-coverage on that basis, then the new contract award valued at $30 million would not be subject to full CAS-coverage. 
 
$50 million is the tripwire that applies full coverage to a business unit. Once across that boundary, the business unit is subject to full coverage. Period. The (b)(1) rule protects a contractor that has received several small CAS-covered contracts during a cost accounting period that were individually worth less than $50 million, and worth less than $50 million in total, by preventing the government from aggregating across accounting periods.
 
Now look at (b)(2):
 
If at the outset of an accounting period the business unit has not already tripped the $50 million wire, either by virtue of (a)(1) or (a)(2), then any CAS-covered contract worth less than $50 million it receives in that accounting period is subject to only modified coverage. But if it receives a single covered contract worth $50 million or more during that period, then all further awards during that accounting period will be subject to full coverage regardless of dollar value. So what about the next accounting period? See (a)(1).
 
I'm not sure that I'm right. And I'm not sure that inquiring mind2 is wrong. I'm just trying to think it through.
 

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If you have a Full CAS-covered contract and your cost accounting practices are consistently applied so as to make that contract compliant, then it doesn't matter whether a subsequent contract is subject to Full or Modified coverage. So long as the Full coverage contract is active, you will treat all subsequent contracts as being subject to Full coverage, whether or not the rules would formally apply Full coverage to those subsequent contracts.

Because you have to be consistent. You can't have one set of practices for that one contract and another set of practices fore the other contracts. That's not how it works.

Let me clarify: it will matter if you have a noncompliance with one of the Standards that only applies in Full coverage (e.g., CAS 403, 410, 418, etc.). If you are dealing with calculating the cost impact associated with a noncompliance, then it matters; otherwise, it does not.

In my experience, it is rare for contractors or auditors to apply the kind of critical analysis to the CAS coverage regulations as Vern has done. Most people go right to the DCAA flowchart and that's the extent of things.

Since so few people actually critically analyze the rules, I should think that im2 can argue any position that they feel to be advantageous to their organization, with little risk of contradiction. That's not saying what the technically correct answer is (if it matters, I think Vern is correct). What I'm saying is that I have yet to meet an active DCAA auditor (including a CAS Tech Specialist) or an ACO/DACO/CACO who has the ability to apply critical analysis to the question.

My advice: Pick a position and advocate for it.

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Vern: I appreciate the thoughts and I believe this is probably the thought process of the consultant.  My only debate with this thought process is your statement: 

4 hours ago, Vern Edwards said:

You can't just ignore (a)(1). Reading the rule as a whole, paragraph (b)(1) rule says only that if the business unit were not already subject to full coverage by virtue of (a)(1), and if it did not cross the (a)(2) "net award" threshold in its previous accounting period and were not subject to full CAS-coverage on that basis, then the new contract award valued at $30 million would not be subject to full CAS-coverage. 

I don't see "if the business unit were not already subject to full coverage" in the regulation in (b)(1), so my interpretation is that you can read sections (a) and (b) independently.  If you meet a criteria in (b) for modified, then the contract can be determined as subject to modified CAS, although the business unit will still be subject to Full CAS as long as there is one contract that was determined as Full CAS still active.  Why would it state in (b)(2):

4 hours ago, Vern Edwards said:

Thereafter, any covered contract awarded in the same cost accounting period must also be subject to full CAS coverage.

if the full determination continued beyond the "same cost accounting period"?  Wouldn't it state "Thereafter, any covered contract awarded during the trigger contract's performance must also be subject to full CAS coverage?  The CAS regulation starts with:

Quote

9903.201-1 CAS applicability.

(a) This subsection describes the rules for determining whether a proposed contract or subcontract is exempt from CAS. (See 9904 or 9905, as applicable.) Negotiated contracts not exempt in accordance with 9903.201–1(b) shall be subject to CAS. A CAS-covered contract may be subject to full, modified or other types of CAS coverage. The rules for determining the applicable type of CAS coverage are in 9903.201–2.

My interpretation of this is that each contract should be determined either full or modified.  The business unit will be subject to full CAS during the performance of a contract that was determined to be full CAS (the $50 million triggers), but each contract independently should be determined as full or modified and if it meets the requirements in 9903.201-2(b)(1) and (2), it can be determined modified.

Although, I dislike (with a passion) the use of the DCAA Manual and I will admit that relying on the logic of the flowchart in the DCAA Manual is very hypocritical for me, it does make the regulation ambiguity more clear and shows that section 9903.201-2(a) doesn't block the ability to determine a contract to be subject to modified CAS even if the business unit may still be subject to full CAS for other contracts.

I think we can all agree that the regulation is not as clear as it could be.  I appreciate the input.

Edited by inquiring mind2
fix grammatical error

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h2h: Thanks for the input and advice. 

The reason I am doing a critical analysis is to certify our business unit as a Non-traditional DOD Contractor (definition shown below).  If in the next twelve months, we can determine any DOD contracts awarded as modified coverage, we can then certify as Non-traditional.  The contract that is full coverage that will be on going is under a non-DOD agency.

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Definition of Nontraditional Defense Contractor, 10 U.S. Code § 2302(9): An entity that is not currently performing and has not performed, for at least the one-year period preceding the solicitation of sources by the Department of Defense for the procurement or transaction, any contract or subcontract for the Department of Defense that is subject to full coverage under the cost accounting standards (CAS) prescribed pursuant to section 1502 of title 41 and the regulations implementing such section.

 

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That's a good reason.

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3 hours ago, inquiring mind2 said:

I don't see "if the business unit were not already subject to full coverage" in the regulation in (b)(1), so my interpretation is that you can read sections (a) and (b) independently. 

That violates the canon of regulatory interpretation that says you must interpret a regulation as a whole. See Lengerich v. Dept. of Interior, 454 F.3d 1367 (Fed. Cir. 2006):

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In interpreting a regulatory provision, we examine the text of the regulation as a whole, reconciling the section in question with sections related to it. See Reflectone, 60 F.3d at 1577–78 (holding that the proper interpretation of the plain language of the regulation “examines and reconciles the text of the entire regulation, not simply isolated sentences”).

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If the full determination continued beyond the "same cost accounting period"?  Wouldn't it state "Thereafter, any covered contract awarded during the trigger contract's performance must also be subject to full CAS coverage?

If the regulation applied full coverage only to the current accounting period, would it say so?

3 hours ago, inquiring mind2 said:

My interpretation of this is that each contract should be determined either full or modified.  The business unit will be subject to full CAS during the performance of a contract that was determined to be full CAS (the $50 million triggers), but each contract independently should be determined as full or modified and if it meets the requirements in 9903.201-2(b)(1) and (2), it can be determined modified.

That doesn't make sense to me.

Take a look at the DCAA flow chart and note that it includes language that is not in the regulation. It's not a regulation. It's for DCAA internal use. Having said that, if it works in your best interest, use it.

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Inquiring,  take a look at the solicitation provision found at FAR 52.230-1, particularly Roman numeral II.  I think that will provide you with an answer.

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Retreadfed: Thank you.  That FAR clause makes it clear to me that I can certify that contracts meet the Modified CAS coverage determination as the flowchart shows.  

Update: I spoke to the consultant and he is very intrigued with my interpretation and is doing further research to see if there are any CASB guidances / clarifications that would contradict my interpretation. 

Vern: Regarding your point that a regulation has to be viewed as a whole, I think that makes my interpretation stronger as that would mean that one shouldn't stop reading at the end of (a)(1) and disregard (b)(1).   Since there isn't a statement in the regulation that states "if the business unit is performing a full CAS covered contract, all CAS covered contracts are determined to be full coverage," and the contract being determined meets the requirements in (b) Modified coverage, the contract can be determined as modified.  The business unit will be subject to full CAS as long as there is a full CAS covered contract being performed, as stated in (a)(1).  Each contract will still be determined full or modified per the whole regulation.

Thank you all for this healthy debate and making valid points.  I have taken the advice of advocating my position.

 

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Inquiring, you should note that FAR 52.230-1 was adopted in total from the CASB rules.  This provision (not clause) is found in 9903.201-4 and is a part of the same regulations as is 9903.201-2.  It shows the CASB's interpretation of CAS applicability discussed in 201-2.

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