Question 1: Is this a violation of any of the Cost Accounting Standards?
Question 2: If a CAS violation does not apply, are there any other regulatory FAR violations?
The information provided appears to indicate two primary issues with the manner the contractor has handled the intracompany transfer. First, they are charging at price and not costs for the services transferred between divisions and second, Division B failed to provide adequate accounting information to track the costs to final cost objectives.
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The charging at price is allowable under certain circumstances discussed in FAR 31.205-26 as follows:
“Allowance for all materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred in accordance with this subpart. However, allowance may be price when--
(1) It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor or any division, subsidiary, or affiliate of the contractor under a common control; and (2) The item being transferred qualifies for an exception under 15.403-1(b) and the contracting officer has not determined the price to be unreasonable.”
The information provided by the questioner and further conversations indicated an exception did not exist in this instance and the contractor is violating FAR subpart 31.2. As a CPFF contract, the clause found at 52.216-7 should be included in the contract which requires the cost be determined allowable per FAR subpart 31.2.
The lack of adequate accounting information to track the costs to final cost objectives would indicate a deficiency in the contractor’s accounting system. In order for a cost to be allowable to a government contract it has to be allocable to the government contract. FAR 31.201-4 states “a cost is allocable to a Government contract if it -- (a) Is incurred specifically for the contract”. If an accounting system cannot demonstrate the cost was incurred specifically for the contract, it would not be allocable as a direct cost. In addition, since the costs are of a type that are treated direct when incurred for the same purpose for other situations it would violate CAS 402 and 418 to treat these costs as indirect costs – therefor, they must be maintained as direct costs, but to be allowable information must be provided trace to a particular final cost objective to allocate to a specific contract.
At this point the information provided does not indicate the contractor is failing to delineate between direct and indirect costs; thus it does not indicate a CAS noncompliance. However; if the contractor has intentionally included costs to the incorrect contract to avoid cost limitations, they would be in violation of 18 U.S. Code § 1001.