When an organization starts a federal contract for the first time, they must navigate a list of often unfamiliar accounting rules to be understood and adhered to throughout the entire process.
What Are Cost Accounting Standards (CAS)?
The Cost Accounting Standards, or CAS, are 19 standards set out by the Cost Accounting Standards Board that aim to ensure consistency and uniformity when assigning, allocating, and measuring costs to contracts with the government of the United States. CAS covers a range of costs including personal compensation, indirect costs, pension plans, depreciation, and others.
CAS Compliance for Government Contractors
Discussed below are some of the main aspects of CAS compliance for government contractors.
Direct vs. Indirect Costs
In government contracts, a direct cost is one that is linked to a particular final cost objective. If a particular cost would not have been incurred if the specific contract never existed, that is generally an indication that it is a direct cost. These may include costs related to materials, subcontractor expenses, labor, and travel.
Indirect costs, in contrast, are not directly linked to a single final cost objective. Instead, they may be related to two or more final cost objectives or an intermediate cost objective such as rent, insurance, depreciation, or utilities.
Indirect costs are accounted for by using pools whose totals are allocated to each contract. Cost pools may be created for overhead, general and administrative expenses, and fringe benefits.
The contractor determines the number and composition of cost pools, and many contractors find that having fewer pools makes administration easier. However, having more cost pools can provide a higher degree of financial transparency and accuracy.
Overhead Versus G&A Costs
Differentiating between overhead and general and administrative (G&A) expenses without help from experts can be difficult, particularly for small businesses.
Overhead costs can be thought of as those costs that support a specific function or operation of the company. They are usually related to a group of projects rather than one specific contract.
Some examples of overhead costs include obtaining security clearances for employees as well as proportionate shares of costs related to facilities, such as office supplies and rent. Overhead costs usually exist because the company has billable work.
Meanwhile, G&A costs are those that are needed for the business’s overall operations. These costs are necessary for running a business whether it has billable work or not. Examples of this type of cost include legal and accounting fees, IT services, and executive costs.
Allowable Versus Unallowable Costs
The federal government does not reimburse all costs incurred by an organization when working on contracts, which is why being able to determine which costs are allowable is essential.
An allowable cost is one that may be included on an invoice to the government for reimbursement, and it must meet three requirements under FAR regulations.
First, it must be allowable under the contract’s terms. Some contracts include costs that are specifically unallowable, so contractors must be familiar with the ins and outs of their contract from the onset.
Second, the cost must also be considered allowable by the CAS Board and FAR 31-205.
Finally, the cost must be considered reasonable to be eligible for inclusion. To qualify as reasonable, the amount and nature of the cost should be something that a prudent person from a competitive business would be willing to pay.
Costs are considered allowable when they are incurred specifically for a contract, benefit said contract, and are necessary for the business’s operations.
Unallowable costs, in contrast, are those that are not reimbursed by the federal government and therefore should not be listed on bills to government agencies.
FAR lists a few unallowable costs specifically, including bad debt, interest, donations, entertainment, and fines and penalties. While some costs related to compensation and travel are allowed, those deemed excessive are unallowable.
Documentation of Policies and Procedures
Even contractors who are compliant in their accounting processes must keep written policies and procedures that document their responsibilities and established practices. Government auditors will ask to see these established policies and procedures when evaluating contractors’ accounting systems.
Code of Business Ethics and Conduct
The government will also look for an established code of business ethics and conduct as defined by FAR 52.203-13. This code is required to be put in writing and supplied to all employees involved.
Larger contractors are required to provide all employees, subcontractors, and agents with training in this regard, and the company must carry out due diligence in detecting criminal conduct and disclosing non-compliances to the relevant government agencies.
Labor Recording System
It is essential that a labor recording system that applies to all employees is developed and implemented to be compliant with basic government cost accounting principles. Labor is typically one of the largest costs that a contractor incurs, and accurately recording the total hours that each employee works by account or charge number is essential.
How to Receive an Exemption from Cost Accounting Standards
In some cases, it may be possible to receive an exemption from CAS requirements.
Certain small businesses and contracts less than $750,000 may be exempt from CAS. Other CAS exemptions may be granted, but it is important to discuss the specifics with an expert.
Speak with A Government Contract Accounting Firm
If you are a government contractor who needs guidance related to CAS, get in touch with the government contract accounting firm of Diener & Associates to learn how they can help you understand the Cost Accounting Standard requirements to remain compliant.