Is this practice consistent with CAS 418? I am having a hard time because when
you read the term pre-established direct labor rate, you think of $/hour.
There is not a clear definition of how this pre-established rate should be
constructed. Does CAS 418 allow a pre-established rate for labor to be calculated by taking Labor $/Material $?
This answer is provided based on the facts of the situation as presented in the question. We recommend you get the CFAO, DCAA Auditor, and/or legal advice as appropriate.
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Your question consists of two parts. Before answering them one must understand the term pre-established rate. An estimated or pre-established rate is an example of a standard cost. For example, when you get your car serviced at the dealership it is typical to see a sign in the service department that states, "Standard Labor Rate is $55 per hour". This would be an example of a pre-established rate/standard cost. It helps the service manager and customers come up with an estimated cost for the work to be performed. The same holds true when it comes to using a standard cost for material and labor costs for CAS covered contracts.
Question 1: Is this practice consistent with CAS 418? The nature of the work being done and the interchangeability of the workers doing the work are key to a proper determination. Only the Cognizant Federal Agency Official (CFAO), with support from a DCAA Auditor, has the authority to make this determination. Since the requester is from DCMA, the CFAO should be either the Corporate Administrative Contracting Officer (CACO) or the Divisional Administrative Contracting Officer (DACO). Please contact the appropriate CFAO for a specific determination.
Part 2 Answer. Question 2: Does CAS 418 allow a pre-established rate for labor to be calculated by taking Labor $/Material $? Normally not. The Code of Federal Regulations -- CFR (which can be found under Appendix 1 of the FAR), CAS 418 (9904.418-50 -- Techniques for Application) states, "In accounting for direct costs a business unit shall use actual costs, except for standard cost or pre-established rate for labor may be used as provided in CAS 407." CAS 407 states that a standard cost for direct labor may be 1) Actual direct labor hours times a standard labor rate or 2) Standard direct labor hours times actual labor rate or 3) Standard direct labor hours times standard labor rate.
Note: Since in the question background the requester states that this contract was a full CAS covered contract, CAS 407 along with CAS 418 would apply. It should be further noted that under CAS 407 one can only use direct labor standard when 1) Employee functions are interchangeable and functions performed are not materially disparate. Materially means significant and disparate means unlike or dis-similar; 2) there is a homogeneous product. Homogenous means identical or uniform; and 3) there is an integral team. Integral team means a team that works together as one. See CAS 407 (specifically CFR 9904.407-50) for more details. Lastly, CAS 407 (specifically CFR 9904.407-50(a)(1)) requires a contractor to provide a written statement of practices with respect to standards (this would be the business unit's disclosure statement). Contractor shall include in this written statement the bases and criteria used in setting and revising standards; the period during which standards are to remain effective; the level at which material quantity standards and labor time standards are set; and conditions which material price standards and labor rate standards are designed to reflect.
The labor $/material $ factor seems to be a CER used for proposal purposes only. You, may want to check on CAS 401 compliance to ensure the CER is built on actual data that is treated in a consistent fashion (direct v indirect), using the same disclosed cost accounting practices, and accumulated in a manner that is traceable from proposed to incurred.
We reiterate, you must get CFAO, DCAA Auditor, and/or legal advice.