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Welcome to Apogee Consulting, Inc.


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Readers: It’s not that we have nothing to say; it’s that we have no time for saying it.

Very busy time of year. Much travel.

Would love to chat but gotta go.

Talk to you later.


Tell Us About It

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This is the worst RFP I’ve ever seen in my career!

This contracting officer doesn’t know what they’re doing!

Doesn’t anybody care that we are spending $100 to deal with $5 in costs?

We’ve all heard such comments. Businesses don’t like doing business with the government, primarily because the government doesn’t do business very well. It does government, not business. (H/T Brent C.)

RFPs are poorly drafted—ambiguous at best, literally insane at worst. CO’s won’t listen; or if they do listen, they listen to DCAA and not the contractor. DCAA auditors don’t even understand their own audit programs. We could go on, listing complaints so common that we don't pay attention to them anymore.

We get it. According to many, the government workforce is poorly prepared, poorly trained and, as a result, poorly executes. And then the finger gets pointed at the poor contractors, who were trying to do their best and were only following direction.

We’ve all heard it. We have all heard the foregoing complaints, and many others as well. More than likely we’ve all heard those complaints many many times.

Complaining. Grousing. Kvetching. Bitching.

Whatever you want to call it.

But it’s almost never said directly to the people who most need to hear it. You complain about the situation around the watercooler with your colleagues, or you complain late at night when you are trying to complete that stupid schedule. You complain to us via email.

But you don’t actually complain to the contracting officers, or to the ACOs, or to the audit supervisors. You don't complain to the people you think are responsible for the problems, and thus nobody is ever held accountable. You don't officially complain, do you?

Now’s your chance.

On July 23, 2018, the FAR Councils published a proposed rule to allow contractors to offer “feedback … on Government contracts and solicitations.”

Remember, this is a proposed rule. The Councils are looking for feedback as to whether or not contractors would actually provide the feedback, if there were a mechanism in place to receive and disseminate it.

An example of the kind of feedback they would be looking for can be found here.

The proposed rule discussed ten things for which the FAR Councils are seeking industry comment. Why don’t you follow the link above, and see whether or not you might have some responses you’d like to submit for consideration?

Remember, if you don’t provide your feedback to the proposed rule, you may not like the final rule and the final survey questions. And if you don’t use the future state feedback portal because you don’t like the survey questions or you don’t like the portal—or you think you will be the object of retaliation if you really tell the truth—then you will have nothing.

You will be right back where you are now, grousing about the situation with no means of communicating what’s wrong, let alone changing it.

So tell them about it now, so that you can tell them about it later.

Last Updated on Saturday, 04 August 2018 08:33

CAS Board Makes More Changes to Rules

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Roughly four months ago, we noted that the CAS Board had jumped back into action by adding a single word (“certified”) to the 48 CFR 9903-201-1(b)(15) list of CAS exemptions. It took the CAS Board a full seven years to make that one-word change.

Seven years.

Still, we were happy to see evidence—any evidence—that the CAS Board was moving forward. Even if the speed at which the Board was moving resembled molasses flowing over ice at the North Pole.

Now comes additional evidence that the CAS Board is continuing to move forward. Forgive us if you’ve already seen this, but we don’t think many people have.

On July 17, 2018, the CAS Board published a Federal Register notice announcing a final rule that revised the CAS exemption for contracts and subcontracts for the acquisition of commercial items. Previously, the exemption at 48 CFR 9903-201(b)(6) exempted “firm fixed-price contracts and subcontractors for the acquisition of commercial items.” The problem with that language was that government acquisition folks were awarding commercial item contracts that were other than firm fixed-price. Read literally, it was only a subset of commercial item contracts (and subcontracts) that were exempt from CAS; however, as the Board explained, that was never the intent. The Board stated—

An inconsistency has developed between the list of contract types recognized for use in acquiring commercial items set forth in paragraph (b)(6) and that commercial item exemption and contract types reflected in FAR 12.207. For example, FAR 12.207 allows the use of firmed fixed price contracts in conjunction with award fee incentives or performance or delivery incentives, known as fixed-price incentive (FPI) contracts, when the award fee or incentive is based solely on factors other than cost. However, the (b)(6) exemption does not expressly recognize FPI contracts on the enumerated list of exempt contracts. Because of this discrepancy, some commenters on a prior CAS Board rulemaking expressed concern that these types of FPI contracts might be excluded under a literal reading of the (b)(6) exemption. See 72 FR 36367.

The Board went on to state that, when read in proper context—i.e., by reading the CAS Board’s “authorizing statute at 41 U.S.C. 1502(b)(1)(C)(i) as well as the language in section 4205 of the Clinger-Cohen Act”—a reasonable person wouldn’t reach the conclusion that only a subset of commercial item awards were exempt from CAS. But some people might not be reasonable, and therefore the Board acted to clarify the (b)(6) CAS exemption.

To keep things simple, the Board decided to stop listing contract types and just refer to FAR Part 12 (Acquisition of Commercial Items). In the Board’s words: “… this final rule amends the language at 9903.201–1(b)(6) to exempt contracts and subcontracts authorized in 48 CFR 12.207 for the acquisition of commercial items.”

In other words, if the contract or subcontract is a commercial item contract as authorized by FAR 12.207, then it is exempt from CAS.


Seems pretty simple, right?

It took the CAS Board nearly six years to go from proposed rule to final rule.

Six years.

Still, it was faster than the prior regulatory action.

Perhaps that molasses is flowing a bit more quickly these days.


Capitalization and Expensing Part 3

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In the two previous articles we discussed basic GAAP requirements and some of the fundamental FAR and CAS requirements that may supersede GAAP requirements, especially for government contractors that are subject to Full CAS coverage.

Link to Part 1

Link to Part 2

This article will explore some of the compliance challenges in a government contracting environment. As we hope to demonstrate, sometimes you have to throw out everything you thought you knew in order to comply with the requirements. It can be tough to try to explain what’s going on to people who thought they had it all down.

Expensing and Capitalization Revisited

In Parts 1 and 2, we explained that the 205-11 cost principle required contractors subject to Full CAS coverage to comply with the requirements of CAS 404 (to determine the value of the capital asset) and CAS 409 (to determine the estimated service life and the amount of annual depreciation associated with the capital asset). We told you that assets valued at $5,000 or more, which had an estimated service life of two years or more, were required to be capitalized. If the asset was valued at less than $5,000 or had a service life of less than two years, the contractor had some discretion in the expensing/capitalization decision (so long as it consistently followed its written practices). Seems pretty straightforward.

But hold on there.

What about direct contract costs?

Suppose you have a contract that requires a test station to be constructed. The value of the test station is $100,000. It is expected to have a useful life of 5 years. According to what we thought we knew, we are required to capitalize that test station.

But not always. If the test station is a contract requirement, the contractor can charge the entire $100,000 to the contract. The $100,000 will be expensed as costs are incurred.

The same is true for direct material costs. A part that costs $50,000 might well be directly charged to the requiring contract as an expense.


Don’t believe us? Check out CAS 411, which states “The cost of units of a category of material may be allocated directly to a cost objective provided the cost objective was specifically identified at the time of purchase or production of the units.”

Check out the cost principle at 31.205-40 (Special Tooling and Special Test Equipment Costs), which states “The cost of special tooling and special test equipment used in performing one or more Government contracts is allowable and shall be allocated to the specific Government contract or contracts for which acquired …”

Thus, it seems apparent that certain transactions are exempted from the standard capitalization criteria. The primary distinguishing characteristic of such transactions is that they are direct contract costs. A contractor may choose to treat those direct contract costs as current period expenses, even if they would otherwise be required to be capitalized.

This is not as much of a free pass as one might think. There are rules regarding when a transaction may be treated as a direct contract cost. For example, see 31.201-4(a) and the definition of “direct cost” at FAR 2.101. In addition, we devoted an article to the notion of “authority to acquire,” which we broadly defined as “the terms of the prime contract (or higher tier subcontract) gives the entity performing the contract the authority to procure the stuff necessary to execute the contract’s (or subcontract’s) Statement of Work (SOW).” We noted in that article that contractors who charge goods and services directly to their government contracts without that authority run some risks. We summarized the situation thusly: “… goods and services obtained and direct-charged without the requisite authority to acquire can impact every one of the six DFARS business systems. They can impact financial results. They can impact tax reporting. They can, in extreme cases, lead to disputes and litigation.”

So yeah, not really a free pass. But still, valid direct charges will supersede the GAAP and FAR and CAS requirements that we thought we knew.

Direct vs. Indirect Revisited

One of the more interesting questions we encounter, from time to time, is whether a contract requirement must be directly charged to the requiring contract. Can you sometimes take a contract requirement and, instead of treating it as a direct contract cost, treat it instead as a capital asset on your balance and recognize the cost ratably over time through depreciation?

Sure you can.

We mean, not always. If you are building a contract deliverable then we’re fairly sure that the costs of that deliverable must be charged to the contract, regardless of contract type. But take the example from a couple of paragraphs above, where you have a $50,000 test station you need to build. Assume it’s not a deliverable, you simply need it to test widgets and you expect it to last for five years. You are going to test widgets and you may have multiple contracts during that five-year period. As we know, the cost principle at 31.205-40 permits you to direct charge that piece of special test equipment directly to the contract. You can do that. But must you do that? The answer—perhaps surprisingly—is no. You can, but you don’t have to.

First, you and your customer can agree to exclude certain items from contract costs. Looking again at 31.205-40, there’s a limitation that states, “Items which the contract schedule specifically excludes, shall be allowable only as depreciation or amortization.” Thus, it seems quite clear that the FAR contemplates a contractual agreement that certain items—special test equipment for example—may be excluded from a contract even if otherwise required by that contract; and if that’s the case, then the contractor must capitalize and depreciate those items over time, in accordance with its accounting policies and procedures.

And as we noted in the previous article, while depreciation is normally an indirect expense, it does not have to be. CAS 409 expressly permits treatment of depreciation as a direct contract cost, if done consistently and on the basis of usage.

Therefore, it is certainly possible to reduce your estimated (and actual) contract costs on a CLIN or annual basis by proposing to your customer to remove certain items from the contract schedule, such that you will capitalize the costs of those items and amortize the cost over a period of time. You can, if you want, charge the depreciation/amortization as a direct contract expense.

It can be done. Larger contractors do this all the time. (Well, maybe not the direct charge part, but certainly the exclusion part.)

It’s not a particularly great financial strategy. If you treat the cost of the item(s) as direct costs of the contract, then you are recovering your costs within a month (assuming a cost-type contract). Even in a fixed-price contract scenario, if you have contract financing payments you are still recovering the vast majority of your costs within a month or two. In contrast, if you capitalize the item(s) and recover them through depreciation/amortization, then your cash flow will be negatively impacted. The costs you would have recovered in roughly 30 days will now be recovered over a period of years. Still, if that’s the win strategy then oftentimes a contractor will trade cash flow for the revenue.

A government contractor has some flexibility in its direct versus indirect decision-making, just as it has with respect to its expensing versus capitalization decision-making. Some people (usually auditors) like to argue that if a cost can be identified with a final cost objective, then it must be allocated to that final cost objective as a direct cost. That is absolutely not the case. The definition of “direct cost” at FAR 2.101 has a subtle nuance that many people miss. Let’s quote it—

‘Direct cost’ means any cost that is identified specifically with a particular final cost objective. Direct costs are not limited to items that are incorporated in the end product as material or labor. Costs identified specifically with a contract are direct costs of that contract.

See that? A direct cost is one that is identified specifically with a particular final cost objective—not one that can be so identified. If the contractor records a cost as a direct contract cost, then it is one; but if the contractor records the cost as an indirect cost—or as a capital asset—then that cost is not a direct contract cost. Again, consistency is important here, as is transparency and reaching an agreement with a customer regarding contract cost exclusions. We don’t at all mean to say the discretion afforded a contractor with respect to its accounting treatment is a free pass to bid costs one way and account for them in another way.

However, we are confident that the discretion discussed in this article exists, and that it may be used when it makes good business sense to do so.

Expensing versus capitalization. Seems fairly straightforward on first glance. Many contractors can simply follow GAAP and IRS rules, and they’ll be fine. But other contractors have to content with rather complex and nuanced FAR and CAS requirements. Savvy contractors can use those nuances to their competitive advantage.

We trust that you’ve enjoyed the deep dive into the business challenges presented by what seems at first to be a relatively trivial issue.

Last Updated on Wednesday, 25 July 2018 17:31

Capitalization and Expensing Part 2

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In the previous article we discussed basic GAAP requirements and noted that, for government contractors, GAAP applies unless it does not apply. FAR and/or CAS requirements may supersede GAAP requirements; and government contractors are required to comply with the superseding requirements at the risk of having some or all of claimed costs disallowed.

FAR requirements

In addition to the FAR Part 31 requirements we touched-on in Part 1, the FAR has more specific cost principles with which government contractors must comply. Foremost among them is 31.205-11 (Depreciation). That cost principle establishes that “Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle.” It seems that a contractor can simply comply with GAAP and the resulting depreciation would be 100% allowable. But not so fast.

Before we conclude that compliance with GAAP is sufficient, we have to look at the “limitations” found in the cost principle.

The first limitation is CAS. The cost principle states that contractors that have fully CAS-covered contracts must comply with the requirements of CAS 409 (“Depreciation of Tangible Capital Assets”). If a contractor has a fully CAS-covered contract, then CAS 409 requirements control, not GAAP requirements. However, if a contractor is subject to only modified CAS coverage, or is exempt from CAS coverage, then CAS 409 will not control. In that latter case, “allowable depreciation shall not exceed the amount used for financial accounting purposes, and shall be determined in a manner consistent with the depreciation policies and procedures followed in the same segment on non-Government business.” (Except for certain other limitations that we will touch on in a minute.)

The FAR cost principle establishes a hierarchy of compliance requirements. If a contractor is exempt from CAS (or subject only to modified CAS coverage), then it may (generally) follow GAAP with confidence, so long as it does so in a consistent manner. But if a contractor has fully CAS-covered contracts, then it has to follow the requirements of CAS 409 which, to the extent there is any conflict, supersede GAAP for purposes of government contract cost accounting and pricing.

Let’s talk about limitations that might apply to the foregoing general statement.

First, if the contractor acquires assets from the government at no cost then, regardless of the value it puts on those assets for its GAAP accounting purposes, any resulting depreciation is unallowable.

Second, once an asset has reached the end of its service life and has a net book value (NBV) of zero, then no further depreciation is allowed. However, if a government customer wants to use an asset with a zero NBV, then the contractor may charge a “reasonable” rental fee for that use. The cost principle states that “In determining the [value of the] charge, consideration shall be given to cost, total estimated useful life at the time of negotiations, effect of any increased maintenance charges or decreased efficiency due to age, and the amount of depreciation previously charged to Government contracts or subcontracts.”

Third, sale and leaseback arrangement are subject to special cost allowability rules. (See 31.205-11(g)(3) and (h)(1).)

Fourth, capital leases that are amortized over time are covered by this cost principle. Generally, the amortization charges are allowable—but see 31.205-11(h) if you are dealing with capital leases.

Fifth, in business combinations, when the value of purchased assets is changed to fair market value, “the allowable depreciation and cost of money shall be based on the capitalized asset values measured and assigned in accordance with 48 CFR 9904.404-50(d), if allocable, reasonable, and not otherwise unallowable.” For intangible assets, “allowable amortization and cost of money shall be limited to the total of the amounts that would have been allowed had the combination not taken place.”

Other FAR cost principles that are (or may be) relevant to this topic include—

  • 31.205-10 (Cost of Money)

  • 31.205-16 (Gains and Losses on Disposition or Impairment of Depreciable Property or Other Capital Assets)

  • 31.205-26 (Material Costs)

  • 31.206-36 (Rental Costs)

  • 31.205-37 (Royalties and Other Costs for Use of Patents)

  • 31.205-40 (Special Tooling and Special Test Equipment Costs)

  • 31.205-52 (Asset Valuations Resulting from Business Combinations)

We may come back and visit one or two of the cost principles listed above, but let’s move this along and talk about CAS requirements.

CAS Requirements

As noted above, the depreciation cost principle (31.205-11) expressly invokes the requirements of CAS 409. A government contractor with fully CAS-covered contracts must comply with CAS 409 requirements; if it doesn’t then, to the extent the resulting costs exceed those that would have been recorded in accordance with CAS 409, the excess costs are unallowable.

CAS 409 (Depreciation of Tangible Capital Assets) establishes “criteria and guidance for assigning costs of tangible capital assets to cost accounting periods and for allocating such costs in cost objectives within such periods in an objective and consistent manner.” The Standard establishes four fundamental rules, as follows—

  1. The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value.

  2. The estimated service life of a tangible capital asset (or group of assets) shall be used to determine the cost accounting periods to which the depreciable cost will be assigned.

  3. The method of depreciation selected for assigning the depreciable cost of a tangible capital asset (or group of assets) to the cost accounting periods representing its estimated service life shall reflect the pattern of consumption of services over the life of the asset.

  4. The gain or loss which is recognized upon disposition of a tangible capital asset shall be assigned to the cost accounting period in which the disposition occurs.

Those rules establish the capitalization value (how much) and the assignment of resulting depreciation costs to future years (when). The next set of four rules establish how the depreciation expense is to be allocated to cost objectives. They are:

  1. Depreciation cost may be charged directly to cost objectives only if such charges are made on the basis of usage and only if depreciation costs of all like assets used for similar purposes are charged in the same manner.

  2. Where tangible capital assets are part of, or function as, an organizational unit whose costs are charged to other cost objectives based on measurement of the services provided by the organizational unit, the depreciation cost of such assets shall be included as part of the cost of the organizational unit.

  3. Depreciation costs which are not allocated in accordance with paragraph (b) (1) or (2) of this subsection, shall be included in appropriate indirect cost pools.

  4. The gain or loss which is recognized upon disposition of a tangible capital asset, where material in amount, shall be allocated in the same manner as the depreciation cost of the asset has been or would have been allocated for the cost accounting period in which the disposition occurs. Where such gain or loss is not material, the amount may be included in an appropriate indirect cost pool.

In that second set of rules, we see that depreciation expense is normally an indirect expense, unless charged as a direct expense “on the basis of usage and only if depreciation costs of all like assets used for similar purposes are charged in the same manner.” Thus, a government contractor has some flexibility (within strict limits) on how to allocate depreciation expense. In addition to exercising judgment regarding whether to expense or to capitalize, judgment may also have to be exercised regarding whether to charge depreciation as a direct or indirect expense.

Further, CAS 409 recognizes that judgment and estimates are involved in the details. The Standard states “Determination of the appropriate depreciation charges involves estimates both of service life and of the likely pattern of consumption of services in the cost accounting periods included in such life.” The Standard provides guidance intended to help the contractor with those estimates.

The Standard also allows use of GAAP treatment in most cases. It states “The method of depreciation used for financial accounting purposes (or other accounting purposes where depreciation is not recorded for financial accounting purposes) shall be used for contract costing unless: (i) Such method does not reasonably reflect the expected consumption of services for the tangible capital asset (or group of assets) to which applied, or (ii) The method is unacceptable for Federal income tax purposes. If the contractors' method of depreciation used for financial accounting purposes (or other accounting purposes as provided above) does not reasonably reflect the expected consumption of services or is unacceptable for Federal income tax purposes, he shall establish a method of depreciation for contract costing which meets these criteria.” Thus, at the end of the day, it is very possible that GAAP or IRS-compliant depreciation lives may be acceptable for government cost accounting and pricing purposes.

Looking briefly at CAS 404 (Capitalization of Tangible Assets), we see that CAS establishes firm guidelines regarding the expensing versus capitalization decision. The Standard states that contractors must have a written policy that establishes the decision criteria. Contractors have some flexibility with respect to those criteria; however, “The contractor's policy shall designate a minimum service life criterion, which shall not exceed 2 years, but which may be a shorter period. The policy shall also designate a minimum acquisition cost criterion which shall not exceed $5,000, but which may be a smaller amount.” So any contractor subject to CAS 404 must capitalize tangible assets when the purchase price exceeds $5,000 and the estimated service life exceeds two years. The resulting depreciation will generally be allowable if it complies with GAAP and/or IRS regulations. The resulting depreciation is normally an indirect expense; however, in certain circumstances it may be treated as a direct contract cost.

Somewhere within The Beltway, a group of people have been meeting to see if we really need CAS 404 and 409. As noted, in many circumstances GAAP and IRS rules are perfectly fine. Section 820 of the 2017 National Defense Authorization Act (NDAA) required that CAS requirements “be reconciled, to the extent possible, with U.S. Generally Accepted Accounting Principles.” See our article on that requirement here. Our backchannel tells us that those efforts are not going very well. In particular, we are hearing that the government representatives are not excited to eliminate those two Standards, despite the general agreement that they are not really necessary. As one person stated, “If we can’t reach agreement on CAS 409, there is no hope for reaching agreement on anything else.” So stay tuned for future articles on that topic.

We have now reviewed the basics. We’ve flown over the GAAP requirements at 50,000 feet and we’ve gone into FAR 31.205-11 in some detail. We’ve reviewed CAS 409 and mentioned CAS 404.

In the next and final article, we’re going to tackle the toughest challenge of all: whether the rules on capitalization and expensing--the rules we've just spent two articles discussing--really work in a government contracting environment.

Last Updated on Wednesday, 25 July 2018 17:22

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In March 2009, Nick Sanders’ article “Surviving Government Audits: Have the Rules of Engagement Changed?” was published in Government Contract Costs, Pricing & Accounting Reports (4 No. 2 GCCPAR P. 11). Apogee Consulting, Inc. is proud to announce that Mr. Sanders’ article was selected for reprint and publication in Thomson West’s The New Landscape of Government Contracting.  Mr. Sanders, Apogee Consulting’s Principal Consultant, joins such distinguished contributors as Professors Steven Schooner and Christopher Yukins, Luis Victorino and John Chierachella, Joseph West and Karen Manos, Joseph Barsalona and Philip Koos and Richard Meene, and several others.  The text covers a lot of ground, ranging from the American Recovery and Reinvestment Act (ARRA) to Business Ethics and Corporate Compliance, and includes several articles on the False Claim Act and the Foreign Corrupt Practices Act.  In addition, the text includes the full text of many statutory and regulatory matters affecting Government contract compliance.


The book may be found here.