CASB 45th Meeting
May 13, 2005

The 45th meeting of the Cost Accounting Standards Board (CASB) took place in the Old Executive Office Building, Washington, DC, on May 13, 2005. The meeting was convened at 2:00 P.M. The Board, consisting of the Chair, Mr. David Safavian, Administrator for Federal Procurement Policy (OFPP), and Messrs. DiPasquale, Reed, and Waszily were in attendance. Also in attendance for the entire meeting were Messrs. Abel, Shipley and Capitano (Board staff), and Mr. Burton, Deputy, OFPP.

The Board discussed the following issues:

CAS Board Staffing – Long-Term

The Board discussed various options for formulating working groups. The Board approved the following structure for the working groups:

1. The working groups will consist of Government members from various agencies, including a member(s) of the Board staff. The working groups may, when the situation warrants, also include Special Government Employees (e.g., industry members that have complied with the requirements to act as Special Government Employees).
2. The working group may, depending on the particular circumstances, seek informal input from industry, public interest groups, academia, and other organizations to gather information for formulation of a Staff Discussion Paper, ANPRM, NPRM, or final rule.
3. When circumstances warrant, public meetings may also be held at any time during the promulgation process to discuss issues and/or obtain input on specific language.
4. The reports will be signed by working group members only.

The Board instructed the staff to present a list of possible issues that merit working groups for consideration at the next meeting.

CAS 404.60(a) – Capitalization Illustration

The capitalization illustration at CAS 404.60(a) is inconsistent with the current capitalization provisions at CAS 404.40(b)(1). The illustration was not revised when the capitalization thresholds were raised to $5,000 in 1996. At the last meeting, the members concluded that issuing a correction to the final rule issued in 1996 would be the most efficient method for correcting the inconsistency but expressed concern whether such a correction was statutorily permitted. The staff informed the Board that OMB Legal Counsel has concluded that issuance of the correction to CAS 404.60(a) was statutorily permitted. The Board then approved the correction. The staff was instructed to process the correction for publication.

CAS 403 Operating Revenue Threshold

The operating revenue thresholds at CAS 403-40(c)(2), which are used in determining whether a contractor must allocate residual expenses using the three factor formula, were promulgated in December 1972. The thresholds have not been revised in the 33 years since the standard was promulgated. At the last meeting, the Board instructed the staff to develop a Staff Discussion Paper (SDP) and an Advanced Notice of Proposed Rulemaking (ANPRM), using the change in the consumer price index as the basis for raising the thresholds.

The staff provided the Board with a draft SDP and a draft ANPRM, using the annual change in the consumer price index as the basis for raising the thresholds. The Board approved both the SDP and the ANPRM, modified to reflect changes made by the Board. These changes included revising the computation of the inflation factor so that it is based on the quarterly changes in the Consumer Price Index, rather than the annual change used by the staff. It also included amending the Federal Register Notice to state that concurrent issuance of the SDP and the ANPRM was warranted in this situation, but that such issuance does not establish a precedent. The Board noted that this specific issue is very narrow and has already been specifically identified, i.e., if and how to adjust the thresholds for application of the three factor formula.

The Board instructed the staff to process the SDP and the ANPRM for concurrent publication.

Contract Clause for Foreign Concerns

On November 4, 1993, the Board revised the definition of modified coverage to include CAS 405 and 406, so that modified coverage currently includes CAS 401, 402, 405, and 406. In conjunction with the revised definition of modified coverage, the Board also amended the clause at 9903.201-4(c) to include CAS 405 and 406. However, the requirement for foreign concerns to comply with only CAS 401 and 402 has remained unchanged. As a result, the contract clause at 9903.201-4(c), which was previously applicable to foreign concerns, can no longer be used for foreign concerns without modification by the parties.

At the last meeting, The Board agreed that a contract clause requiring compliance with CAS 401 and 402 by foreign concerns should be added to the CAS. The Board instructed the staff to develop a clause for foreign concerns.

The staff provided the Board with the draft clause for foreign concerns, to be issued as a proposed rule. The Board approved the proposed rule, modified to reflect changes made by the Board. The staff was instructed to process the proposed rule for publication.

CAS 416 – Definition of Catastrophic Insurance

CAS 416-50(b)(1) requires that a loss that is incurred by a segment shall be identified with that segment except when the contractor's home office is, in effect, a reinsurer of its segments against catastrophic losses. In such cases, a portion of the catastrophic losses shall be allocated to, or identified with, the home office. Questions have been raised as to the appropriate application of the term “catastrophic” in CAS 416, and whether the term should possibly be revised.

The Board concluded that a review of the provisions and related illustrations in CAS 416 is warranted. The staff was instructed to develop an SDP addressing the CAS 416 provisions for reinsurance by the home office for catastrophic losses. The SDP should provide the historical background of the CAS provision, the established definition(s) of catastrophic insurance used in the insurance industry, and potential revisions to CAS 416 (if any) for consideration by the Board.

Time & Material and Labor-Hour Contracts for Commercial Items

Section 1432 of the National Defense Authorization Act for Fiscal Year 2004 (Pub. L. 108-136, referred to as SARA) amends FASA to expressly authorize the use of time-and-material (T&M) and labor-hour (LH) contracts for certain categories of commercial services under specified conditions. As part of the process to implement this amendment, the FAR Council published an ANRPM in the Federal Register on September 20, 2004 (69 F.R. 5631-56322) to amend the FAR. The ANPRM did not provide an exemption from CAS.

The staff provided the Board a proposed rule that would provide a CAS exemption for T&M and LH contracts for commercial items. After discussion of this issue, the Board approved the proposed rule, modified to reflect changes made by the Board. The staff was instructed to process the proposed rule for publication.

Adjustment of Thresholds for Inflation

Section 807 of the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 ((pub. L. 108-375) provides for adjustment every 5 years (starting October 2005) of acquisition related thresholds, except Davis-Bacon, Service Contract Act, and Trade Agreements thresholds. Section 807 defines “acquisition-related threshold” as a “dollar threshold that is specified in law as a factor in defining the scope of the applicability of a policy, procedure, requirement, or restriction provided in that law to the procurement of property or services by an executive agency, as determined by the Federal Acquisition Regulatory Council.”

On April 28, 2005, the General Services Administration sent a letter to the CAS Board stating the FAR Council’s intention to publish a proposed rule changing the thresholds in FAR, including those in Part 30, CAS Administration. The letter stated that advance notice was being provided so that the Board could consider the impact of the proposed rule on the Board’s regulations.

The staff provided the Board a draft proposed rule to revise the acquisition thresholds in the CAS. After discussion of this issue, the Board approved the proposed rule, modified to reflect changes made by the Board. The Board noted that a change to FAR Part 30, without an accompanying change to the CAS, would result in a conflict between the FAR and the CAS. The Board concluded that, since OFPP controls the FAR and CAS processes, any changes to the CAS thresholds in the FAR and CAS should be made concurrently. The staff was instructed to process the proposed rule for publication and to assure that it was published concurrently with the threshold changes to FAR Part 30.

Letter from U.S. Agency for International Development

On February 4, 2005, USAID sent a letter to the Board requesting input regarding the CAS exemption for “contracts and subcontracts to be executed and performed entirely outside the United States, its territories, and possessions.” (referred to hereafter as “the United States”). The USAID requested an interpretation as to whether the exemption applies when costs are incurred in the United States but the contract is actually performed outside the United States. USAID states that “the issue at hand is the incurrence of indirect and possibly direct cost within the United States, its territories, and possessions.” USAID further states that examples of such costs include preparation of billings, purchasing, and other activities performed within the United States.

The staff provided the Board a draft letter to be sent to USAID. The Board approved the letter, modified to reflect changes made by the Board. The Board agreed that the letter specifically state that the Board believes an interpretation on this issue is not warranted. The staff was instructed to process the letter for issuance by the Chairman.

The Board members also agreed that the subject exemption should be reviewed to determine if it is still needed, and if so, whether it should be modified in any way. The staff was instructed to develop a SDP addressing the exemption, including the promulgation history and various alternatives for consideration by the Board.

Adjournment

The meeting was adjourned at 3:40 P.M.

Minutes submitted by David J. Capitano, May 31, 2005.