Committee Keeps Pulse on Rulemakings and Other Evolving Policies

Accounting, Cost, & Pricing Committee Watchlist

Summary

The Public Contract Law Section’s Accounting, Cost & Pricing (ACP) Committee brings together a broad range of attorneys, accountants, and other professionals from across the federal government, law firms, and industry to engage on issues that affect the financial health and performance of contractors.

The committee serves as a valuable resource for keeping its members engaged, not just on events or decisions that have happened, but on developments that are in progress and may influence the future of their practices.

To that end, this committee report summarizes a range of developments currently in progress that could affect the rules that the committee’s professional members apply in their daily practice. These developments include rulemakings, pending precedential disputes, and other evolving policies.

If you are interested in topics like these, please reach out to any of our committee co-chairs—Stephanie Harden (Partner, Blank Rome LLP), Michael Martin Jr. (Director, LitCon Group LLC), Gale Monahan (Partner, Dentons), and Gary Ward (Partner, Wiley Rein LLP)—so we can welcome you to our future meetings and events.

Regulatory Developments

FAR Part 31, Cost Principles, and the Cost Accounting Standards (CAS) provide some of the most fundamental (and complicated) rules on how contractors must measure, assign, allocate, and recover the costs they incur in delivering goods and services to the federal government. Compared with other regulations affecting government contractors, updates to these rules are infrequent. But when changes occur, they tend to impact industry broadly. The FAR Council and the CAS Board both have previewed potential changes in the coming year:

• FAR Cost Principle on Organization Costs (FAR Case No. 2025-001): The FAR Council is considering an amendment to the cost principle at FAR 31.205-27 covering organization costs. According to the FAR Council’s Open FAR Cases Report, this proposal would “clarif[y] when organization costs begin and specif[y] the types of costs that are unallowable under the cost principle.” These types of costs have long been a noteworthy topic for the ACP Committee. In 2020, the committee hosted a meeting including industry and government representatives to discuss these types of costs along with other key issues associated with mergers and acquisitions. This proposed rulemaking also comes on the heels of a dispute between Raytheon and the Defense Contract Management Agency over the potential line between allowable general long-range management planning costs (under FAR 31.205-12) and unallowable organization costs (under FAR 31.205-27). The ASBCA initially ruled in favor of Raytheon, but the Federal Circuit reversed that decision in early 2023.
• Cost Accounting Standards Updates: After several years of relative inactivity, the CAS Board issued a series of notices signaling potential changes to the Cost Accounting Standards. Several of these items relate back to the FY2017 National Defense Authorization Act (NDAA), which directed the CAS Board to, among other things, “review any cost accounting standards . . . and conform such standards, where practicable, to Generally Accepted Accounting Principles.” For example, the CAS Board issued an Advanced Notice of Proposed Rulemaking to eliminate CAS 404, Capitalization of Tangible Assets, and CAS 411, Accounting for Acquisition Costs of Material. The CAS Board also signaled interest in resolving the long-running open question of how to determine CAS coverage for indefinite-delivery contracts, which includes commonly used indefinite-delivery, indefinite-quantity (IDIQ) contracts.

Pending Disputes

The FAR Cost Principles and the Cost Accounting Standards strive to address a broad range of potential scenarios. But disputes frequently arise over how to apply these rules in specific scenarios the rulemakers may not have originally considered, or simply may not have addressed with enough clarity to persuade both sides of a single meaning. As a result, contractors routinely turn to the Boards of Contract Appeals, US Court of Federal Claims, and the US Court of Appeals for the Federal Circuit to resolve their disagreements. To ensure the best advice to their clients, members of the ACP Committee closely monitor these types of disputes. The following list includes a few key disputes currently pending that are likely to affect more than just the individual parties to the litigation.

• Secretary of Defense v. Pratt & Whitney, No. 2023-1337 (Federal Circuit): Pratt & Whitney is challenging a government claim involving a dispute over the proper measurement of costs under CAS 418 for parts contributed by Pratt’s suppliers under collaboration agreements. The case also presents questions concerning the validity of advance agreements and the Federal Circuit’s appellate jurisdiction. Following the ASBCA’s earlier decision, in June 2021 the ACP Committee hosted a meeting to discuss the significance and impact of this case.
• Boeing v. United States, No. 17-1969 (Court of Federal Claims): Boeing is challenging a government claim seeking a contract price adjustment under the CAS statute due to a change Boeing made in its cost accounting practices. This dispute relates to how the government calculates the contract price adjustment contemplated by the CAS statute when a contractor revises multiple cost accounting practices at the same time and the net effect of those new practices saves the government money. This dispute has twice gone to the Federal Circuit and has now been remanded for a decision on the merits.
• Sikorsky Aircraft Corp. v. United States, No. 21-2327 (Court of Federal Claims): Sikorsky is challenging a government claim asserting that its practices concerning the allocation of independent research and development (IR&D) costs are not compliant with CAS 420. After an early ruling on the scope of the government’s claim—and thus the court’s jurisdiction—the United States sought an interlocutory appeal. Although the Court of Federal Claims certified the issue, the Federal Circuit denied the petition to appeal. Over the last several years, the ACP Committee has dedicated multiple meetings to discussing policies and practices related to IR&D as the Department of Defense has considered different initiatives affecting how contractors invest in their future products and services.

Other Policies

At times, various government entities also issue additional guidance on topics that they perceive to require additional clarity beyond what the rules and precedent provide. Across the topics monitored by the ACP Committee, the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA) are some of the most significant sources for these policies.

For example, in late 2023, DCAA and DCMA issued similar policies concerning how to calculate the cost impact to the government when a contractor unilaterally changes its cost accounting practices. While these policies recognized several ASBCA decisions that preceded it, the policies provided additional interpretations on more controversial scenarios, including how to measure cost impacts associated with fixed-price contracts. A few months later, in early 2024, the ACP Committee hosted a meeting with representatives from DCAA, DCMA, and industry to discuss these new policies. These new policies remain a significant item to watch because they signal positions that the government is likely to take in future audits, claims, and disputes. These policies also affect contractors broadly because virtually all contractors subject to the CAS expect to change their accounting practices from time to time and thus may need to negotiate the cost impact calculations with the government.

Come join the ACP Committee and engage with us on these complex issues important to both the government and its contracting partners. PL