Can you confirm my understanding of this issue and if I am missing some aspect of the regs, please point me to the regulations that indicate how CAS is still "somehow" applicable to the LB subcontractor?
Your help is greatly appreciated, thanks.
If a contract is exempt from the Cost Accounting Standards (CAS) under FAR 9903.201-1, which a small business is, (9903.201-1(b)(3), then the prime contract is not subject to CAS and neither are subcontracts. Also see, FAR 52.230-3(d) which essentially says that the disclosure and consistency of cost accounting practices shall not apply to negotiated subcontracts otherwise exempt from a requirement to include a CAS clause under 9903.201-1. The general rule is that if a contract is exempt from CAS there is no flow down to subcontracts.
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I suggest you review this answer with your legal counsel.