Cost Accounting Standards—General Dollar Magnitude vs. Detailed Cost Impacts

HOST: Hello and welcome to Cherry Bekaert’s GovCon podcast where we discuss current Government Contracting trends, compliance matters, and best practices to guide federal contractors forward.

I am Brendan Halloran, a Director with Cherry Bekaert Advisory, and with me today is Jeff Saccazza, a Senior Manager in Cherry Bekaert’s Government Contractor Services Group.

Today we will be talking about cost impacts and the differences between General Dollar Magnitude (GDM) and Detailed Cost Impact (DCI). Thank you for joining me today, Jeff.

JEFF SACCAZZA: Thanks, Brendan.

HOST: As we dig into this topic, I want to start with what cost impacts are and when they are necessary at a high level.

In basic terms, a cost impact is an analysis that shows whether there are increased or decreased costs to the government on CAS-covered contracts.

We are discussing how this relates to Cost Accounting Standards (CAS) and applicable contracts.

The government is trying to understand if more or less cost is accumulated on its contracts as a result of a non-compliance or a contemplated cost accounting practice change.

The circumstances requiring these analyses revolve around accounting practice changes.

This includes required accounting changes driven by law or regulation to remain compliant.

It also includes unilateral accounting changes where a contractor elects to change from one compliant practice to another.

There are also desirable accounting changes where the contractor and government both deem the change desirable.

The scrutiny to get a desirable accounting change determined as such by the government can be quite a challenge, as they are often wary of them.

One of the more frequent and less liked instances is when you have a CAS non-compliance.

You may need to follow the path of a GDM or cost impact to support your position on that.

The CFAO or ACO must keep in mind that the government shall not pay increased costs as a result of CAS non-compliances.

That is the driving factor as contractors evaluate potential changes or a notice of potential non-compliance they have received.

Jeff, what are the different types of proposals that contractors need to understand and be prepared to submit?

JEFF SACCAZZA: There are two different kinds of analyses typically performed to estimate how a cost accounting practice change or non-compliance will affect the cost on CAS-covered contracts.

The first is a General Dollar Magnitude (GDM), and the second is a Detailed Cost Impact (DCI).

As the names imply, a GDM is a higher-level analysis typically performed by contract type.

A DCI is a much more robust analysis typically performed on a contract-by-contract basis.

The FAR also identifies several other areas of cost that must be tracked to show the impact of that change.

When beginning your assessment of a cost accounting practice change or non-compliance, you must determine if that change is material.

If the impact is immaterial, you might not have to develop a full GDM or DCI.

Typically, you start by putting together an initial GDM to determine if the change is material to your CAS-covered contracts.

If the Cognizant Federal Agency Official (CFAO), typically the ACO or Contracting Officer, agrees the change is immaterial, you do not have to do a full cost impact.

It is important to get that agreement in writing.

If the change is material, you must then determine if you need a GDM or a DCI.

I always think it is a good idea to start with the GDM, as Contracting Officers are supposed to settle cost impacts at the highest level possible.

This reduces the administrative burden on both the government and the contractor.

Since many contractors have multiple CAS-covered contracts with various customers, the amount of work required for a DCI is much higher.

HOST: It is good to identify the prescribed differences between them.

As you mentioned, the CFAO or ACO is supposed to resolve these at the highest level of detail possible.

What is prescribed in the FAR for these is often subject to the discretion of the ACO.

It is important to have conversations with the ACO once you have an initial GDM calculation.

Contractors are often wary of having that discussion prior to submitting something, or the ACO may be unwilling to reduce the level of detail required.

Jeff, from your experience on the audit side, have you seen many instances where there was negotiation and agreement as to what the submission should include?

JEFF SACCAZZA: When I was involved from an audit standpoint, it was usually regarding a non-compliance.

DCAA would typically be involved in the non-compliance or help evaluate a CAS practice change.

We were often asked to review a full GDM or an actual DCI to ensure everything was accurate and showed the actual impact.

Starting communication early and maintaining it throughout the process saves both the government and the contractor a significant amount of time.

If you can identify early with your ACO or CO that a GDM is sufficient, it could save you a huge headache later.

HOST: It is worthwhile to try that route, even if a productive outcome is not guaranteed.

I think it is worth trying because of the level of effort involved.

A GDM could be a representative sample of affected CAS-covered contracts and subcontracts.

A DCI could involve all CAS-covered contracts, including those that are still open, active, or even completed and closed.

This is a big difference regarding the amount of analysis and contract data required.

A GDM provides the impact by looking at total bases for fixed-price contracts as well as cost-reimbursable or flexibly priced contracts.

Unless the CFAO or ACO agrees otherwise, a DCI requires looking at the increase or decrease for each CAS-covered contract or subcontract.

For a large contractor with a long history of government contracts, this could be extensive.

Defining a period that is adequate for an initial look is critical, as you could potentially be going back long periods to show the impact under a DCI.

A DCI also requires you to show cost flowing between segments for those CAS-covered contracts and subcontracts.

It expands on an extensive basis what would be included to prove out the increase or decrease in costs.

Contractors contemplating any material or significant change are likely advised to perform a DCI for internal review and management purposes.

This ensures they are prepared at that level of detail and assists in their business decisions.

Jeff, do you have any other thoughts on materiality?

JEFF SACCAZZA: Materiality drives the level of analysis required, whether it be a GDM or a DCI.

The absolute dollar amount involved is a major factor; the larger the amount, the more likely it is to be material.

This can also depend on the contract value and the specific Contracting Officer.

One officer might think $10,000 is material, while another might think $100,000 is not, based on the scope of their work.

You should also compare the cost impact against your contracts.

For example, $10,000 could be material on a small contract, while $100,000 on a multi-million dollar contract might not be.

The relationship between a cost item and a cost objective is another factor.

Direct costs drive changes in rates in addition to the actual costs themselves, so they typically have more impact than an indirect cost would by itself.

Finally, consider the impact on government funding.

Changes in accounting treatment have more impact if they influence the distribution of cost between government and non-government cost objectives.

It is less risky if the majority of a contractor's work is all government-related, as the impact stays within the government.

HOST: Materiality should be the driving point of how a contractor presents their case to the government.

You must understand if the situation is a cost accounting practice change requiring 60 days of advanced notification, or a potential non-compliance identified in an audit.

In the case of a potential non-compliance, the ACO may give you 15 days to notice the issue and 60 days to respond and prove it out.

There is a lot of work involved, and you should lead with your case for materiality.

If the case for immateriality is not present, you must look at the alternative and understand the risk to the organization and the business.

From my time with the government, my recommendation is to provide a complete package that tells the narrative.

Lay out the total dollar amount and the percentage of total contract cost for the CFAO or ACO.

Show that support, hopefully starting at the GDM level, to steer that determination as much as possible.

By doing the legwork and analysis ahead of time, you avoid leaving unanswered questions for the government.

Jeff, any closing thoughts?

JEFF SACCAZZA: I would emphasize early and open communication with the CO.

Hopefully, you can keep the analysis at a GDM level rather than performing a DCI by getting their buy-in on materiality early in the process.

HOST: That is great advice. Thank you everyone for joining us today.

At Cherry Bekaert, we have several professionals with years of CAS experience to help you navigate compliance issues or other administration issues, including disclosure statement development.

Feel free to reach out to us, and we hope you join us for another podcast.