As a Contracting Officer, am I unable to negotiate changes on a incremental cost basis because of the accounting system practices of a contractor? Is the contractor genuinuely precluded from agreeing to such a change or would they only need to be able to explain why they departed from the typical pricing/accounting practice when agreeing to such a change?
The requirements of the direct cost principle at FAR 31.202 state direct costs shall not have costs allocated to it incurred for the same purpose under similar circumstances in any indirect cost pool. In other words, overhead costs shall not be allocated to the direct cost base. Likewise, the requirements of the indirect cost principle at FAR 31.203 state indirect cost pools shall not have direct costs allocated to it. Thus, the contractor would not be in compliance with the FAR Cost Principles by including indirect overhead costs to the direct cost base. Accordingly, the contractor’s incurred costs may be questioned by DCAA as unallowable because the extent cost are allocable to Government contracts is a determinant for costs to be allowable.
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If this contract is covered by the Cost Accounting Standards (CAS), the departure from disclosed practices may also lead to a non-compliance with CAS 401, Consistency in Estimating, Accumulating and Reporting Costs. The purpose of this standard is to ensure consistency in accounting practices for estimating proposals and reporting contract performance. This provides Government a basis for comparing cost estimates to reports, such as reports for controlling costs and Public Vouchers. The contractor would also depart from CAS 402, Consistency in Allocating Costs Incurred for the Same Purpose. This standard ensures costs are not included in both the direct cost base and indirect cost pools simultaneously, similar to the FAR Cost Principles. For example, overhead costs are included in the indirect pool and all contracts will be charged the pro-rata share of overhead, via the contractor's overhead rate. By also including overhead costs to the base may result in double counting.
The contractor is not precluded from agreeing to change its accounting practice, but changes require more than a simple explanation. FAR Part 30 describes the types of changes the contractor may request to its established accounting practices. However, changes should comply with the accounting principles at FAR Part 31 and the revised disclosed practices would be reviewed for adequacy with CAS.