Section 820 of the National Defense Authorization Act for Fiscal Year 2017 (“NDAA”) establishes a new Defense Cost Accounting Standards Board (“D-CASB”) to oversee the application of the Cost Accounting Standards (“CAS”) to defense contracts. The amendments made by Section 820 shall take effect on October 1, 2018.
Originally issued between 1970 and 1980 by the Cost Accounting Standards Board (“CASB”), the CAS are a series of accounting standards “designed to achieve uniformity and consistency” in the measurement of costs, the assignment of costs to cost accounting periods, and the allocation of costs to government contracts. 48 C.F.R. § 9901.302(b). When first proposing what is now Section 820 of the NDAA, the Senate Armed Services Committee expressed its concern that the current CAS “favor incumbent defense contractors and limit competition by serving as a barrier to participation by non-traditional, small business, and commercial contractors.” The Committee also viewed the CASB with disapproval, noting how the CASB does not currently have a quorum and has not met in over three years. Thus, the Committee doubted that “any credible reform will emanate out of [the CASB] in the future,” and opted to favor instead a new D-CASB that “will be better suited to meet national security needs.”
The D-CASB will (1) be responsible for reviewing the CAS and recommending changes to them to the CASB; (2) have exclusive authority, with respect to the Department of Defense (“DoD”), to implement the CAS to achieve uniformity and consistency in the standards governing defense contracts; and (3) develop standards to ensure commercial operations performed by government personnel at the DoD adhere to cost accounting standards that inform managerial decision-making. The D-CASB will be chaired by the Chief Financial Officer of the DoD, and the remaining members will be comprised of three members each from the DoD and the private sector. Of the private sector members, one must be a representative of a “nontraditional defense contractor,” and one must be a representative from a public accounting firm.
Section 820 of the NDAA also creates new responsibilities for the existing CASB. Specifically, Section 820 directs the CASB to (1) ensure that the CAS rely, to the maximum extent practicable, on commercial standards and accounting practices and systems; (2) review the CAS on an ongoing basis and conform such standards, where practicable, to Generally Accepted Accounting Principles; and (3) annually review CAS disputes brought to the Boards of Contract Appeals and consider whether greater clarity in the CAS could avoid such disputes.
As of now, Section 820 leaves many questions unanswered. For instance, will the D-CASB require defense contractors to adhere to a different interpretation of the CAS from that governing other contractors? Will the Board recommend or “implement” new standards altogether to apply only to defense contractors? Perhaps the more important question at this point is whether the D-CASB, and any regulatory changes it may spawn, are even necessary. The CAS, after all, have remained largely unchanged for decades and have become ingrained into how contractors do business with the Government. Altering or expanding upon the CAS for only one subset of the government contracting industry (i.e., defense contractors) thus likely would lead to more, not less, confusion. If we harken back to one of the underlying principles of the CAS as originally promulgated, i.e., the uniformity and consistency of cost accounting practices, Section 820 heralds a potential sea change of significant proportion. Just how many sets of books is a contractor that deals with the DoD and the civilian agencies supposed to maintain?
Unfortunately, only time will tell how these, and multiple other, questions will be answered. But one potential silver lining to Section 820 of the NDAA may be its provision allowing defense contractors to submit commercial auditor’s findings concerning indirect costs to the Defense Contract Audit Agency (“DCAA”). Section 820 will require the DCAA to accept and rely upon such commercial audit findings without conducting additional audits, provided the commercial auditor previously performed an audit of the contractor’s indirect costs and used relevant commercial accounting and auditing standards, and provided the contractor does not have “a predominance of cost-type contracts as a percentage of sales.”
Conclusion
The impact of the changes wrought by Section 820 of the NDAA could be far-reaching. Government contractors – and defense contractors in particular – are well advised to keep abreast of developments as the effective date of October 1, 2018 approaches and the parallel DoD CAS universe emerges and inevitably collides with long-established practice.