Cost Accounting Principles for Federal Contracts (Portfolio 5300)

Portfolio 5300, Cost Accounting Principles for Federal Contracts, should serve as a comprehensive, easy to understand, reference for any contractor, or prospective contractor, required to compute contract costs in accordance with the FAR Cost Principles for Commercial Organizations.

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Portfolio 5300, Cost Accounting Principles for Federal Contracts, should serve as a comprehensive, easy to understand, reference for any contractor, or prospective contractor, required to compute contract costs in accordance with the FAR Cost Principles for Commercial Organizations.
Organizations that perform, or wish to bid on, federal government contracts are subject to numerous provisions of the Federal Acquisition Regulations, or FAR. Of particular importance and complexity are those provisions that govern how the actual or estimated contract costs of federal contracts are to be computed. This Portfolio provides detailed guidance in this regard.
The FAR Cost Principles discussed in this Portfolio include both general cost principles and specific cost principles for “selected costs.” These cost principles specifically apply to commercial organizations and also may apply by reference in whole or in part to other organizations. The general cost principles govern such matters as the allocability and the allowability of contract costs, the distinction between allocability and allowability, and the difference between direct and indirect costs.
In addition to the general cost principles in the FAR, 47 specific cost principles apply to “selected costs.” The selected costs include such items as compensation for personal services, the cost of money, depreciation, idle facilities, independent research and development, material costs, selling costs, and travel. The FAR Cost Principles and this Portfolio also set forth certain selected costs which are categorically unallowable as a cost of federal Government contracts, such as certain advertising costs, contributions or donations, entertainment costs, fines and penalties, interest, goodwill, and certain legal costs.
The Portfolio explains the difference between the FAR Cost Principles, which are applicable to most contractors, and the federal Cost Accounting Standards, which are applicable only to large contractors. This Portfolio summarizes each of the 19 Cost Accounting Standards, which are anticipated to be analyzed in a separate Portfolio.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5300, Bodenheimer, Cost Accounting Principles for Federal Contracts (Accounting Policy and Practice Series).


Bertold Bodenheimer, CPA

Bertold Bodenheimer, CPA, B.S., University of Maryland, practices accounting with Caldwell & Bodenheimer, LLC, providing consulting services to government contractors and government agencies on cost accounting issues. Mr. Bodenheimer frequently serves as an expert witness in contract cost litigation.
Mr. Bodenheimer served for many years at the Defense Contract Audit Agency, both in the field and at headquarters. He also has served as Chairman of the Armed Services Procurement Regulation (now FAR) Cost Principles Subcommittee and on the staff of the first Cost Accounting Standards Board (CASB).

Table of Contents

Detailed Analysis

I. Introduction

II. Background

A. Cost Accounting Generally

1. Cost Accounting Functions

2. Absence of Generally Accepted Cost Accounting Principles

3. Contract Costs and GAAP

B. Government Contract Cost Accounting

1. Contract Cost Principles and Cost Accounting Standards

2. Sources and Citations for FAR and CAS

a. Organization of the CFR

b. Codification of the FAR

c. Codification of CAS

d. Effective Dates

3. Basic Functions of FAR Cost Principles

III. Cost Accounting Standards

A. Description

B. Relationship to Cost Allowability

C. Applicability

D. Waivers and Exemptions

E. Summary of CAS Applicability

IV. Applicability of Contract Cost Principles

A. Overview

B. Cost-Type Contracts

C. Fixed Price Contracts

1. Description

2. Use of Cost Principles

3. Limitations

D. Cost Principles by Types of Contractor

1. Commercial Organizations (FAR Subpart 31.2)

2. Educational Institutions (FAR Subpart 31.3)

3. State, Local, and Federally Recognized Indian Tribal Governments (FAR Subpart 31.6)

4. Nonprofit Organizations (FAR Subpart 31.7)

5. Construction and Architect-Engineering Contracts (FAR 31.105)

E. Supplemental Cost Principles by Individual Agencies

F. Advance Agreements

G. Accounting for Unallowable Costs

1. Background

2. Description of Unallowable Costs

3. Unallowable Indirect Costs

4. Statistical Sampling

5. Penalties

a. Expressly Unallowable Costs

b. Costs Previously Determined to be Unallowable

V. Explanation of Cost Principles for Commercial Organizations

A. Overview

1. General Concepts and Selected Items of Cost

2. Definitions

B. General Concepts.

1. Composition of Total Cost (FAR 31.201-1)

a. Direct and Indirect Costs

b. Accrual Accounting

c. Cost of Money

d. Cost Accounting Systems

e. Allowability v. Allocability

2. Determining Allowability (FAR 31.201-2)

a. Reasonableness (FAR 31.201-3)

b. Allocability (FAR 31.201-4)

c. Applicable Accounting Standards

(1) GAAP

(2) CAS

d. Terms of the Contract

e. Specific Limitations

3. Direct Costs (FAR 31.202)

a. Definitions

b. Discussion

4. Indirect Costs (FAR 31.203)

a. Definition

b. Indirect Cost Pools

c. Allocation Bases

d. Unallowable Costs in the Allocation Base

e. Base Period

(1) Contractors Not Subject to CAS

(2) Contractors Subject to CAS

f. Indirect Cost Rate Computation

5. Hierarchy for Allocating Costs

VI. Selected Costs (FAR 31.205)

A. Overview

B. Individual Items of Cost

1. Public Relations and Advertising Costs

a. Allowable Costs

b. Unallowable Costs

2. Reserved

3. Bad Debts

4. Bonding Costs

5. Reserved

6. Compensation for Personal Services

a. General Criteria

(1) Current Services Only

(2) Reasonableness

(3) Established Compensation Plan

(4) Compensation Unallowable Under Other Provisions

(5) Owners' Compensation

b. Reasonableness Criteria for Compensation Not Covered by Labor-Management Agreements

c. Reasonableness of Compensation Under Labor-Management Agreements

d. Income Tax Differential Pay

e. Bonuses and Incentive Compensation

f. Severance Pay

g. Backpay

h. Compensation Based on Changes in the Prices of Corporate Securities

i. Pension Costs

(1) Overview

(2) CAS 412 Concepts

(3) Components of Pension Plans

(4) Measurement of Pension Costs

(5) Assignment of Pension Costs

(6) Allocation of Pension Costs

(7) FAR Funding Requirements

(8) CAS 413 Concepts

(9) Assignment of Actuarial Gains and Losses

(10) Valuation of Pension Fund Assets

(11) Allocation of Pension Costs to Company Segments

j. Deferred Compensation Other Than Pensions

(1) Definition

(2) CAS 415

(3) Assignment of Deferred Compensation Costs to Periods

(4) Measurement of Deferred Compensation Costs

k. Compensation Incidental to Business Acquisitions

l. Fringe Benefits

(1) Definition and Allowability

(2) Company Furnished Automobiles

m. Post Retirement Benefits Other Than Pensions

(1) Definition and Allowability

(2) Funding

(3) PRB Attributable to Past Service

n. Executive Compensation Limitation

o. Employee Stock Ownership Plan (ESOP)

(1) Overview

(2) Pension ESOPs

(3) Deferred Compensation ESOPs

(4) Valuation of ESOP Stock

7. Contingency

8. Contributions or Donations

9. Reserved

10. Cost of Money

a. Facilities Capital Cost of Money

(1) Background

(2) Computation and Allocation

(3) Relationship to Pricing

b. Cost of Money as an Element of the Cost of Capital Assets Under Construction

(1) Imputed Cost

(2) Computation

11. Depreciation

a. Overview

b. CAS 409

(1) Depreciable Cost Basis

(2) Estimated Service Life

(3) Depreciation Method

(4) Gains and Losses

c. Depreciation for Contracts Not Subject to CAS 409

d. Miscellaneous Depreciation Provisions

12. Economic Planning Costs

13. Employee Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits

a. Allowability

b. Losses on Food and Dormitory Services

c. Vending Machines

14. Entertainment Costs

15. Fines, Penalties, and Mischarging Costs

16. Gains and Losses on Disposition or Impairment of Depreciable Property or Other Capital Assets

a. Background

b. Allocation

c. Exceptions

17. Idle Facilities and Idle Capacity Costs

a. Definitions

b. Allowability of Idle Facilities

c. Allowability of Idle Capacity

18. Independent Research and Development and Bid and Proposal Costs

a. Definitions

b. Background

c. Allowability

d. CAS 420

(1) Project Accounting

(2) Allocation of Home Office IR& D and B& P Cost to Segments

(3) Allocation of Business Unit IR& D and B& P to Final Cost Objectives

e. Deferred IR& D Costs

f. Cooperative Arrangements

g. Special Allowability Limits for Major DoD Contractors

19. Insurance and Indemnification

a. Applicability

b. Costs of Contractually Required Insurance

c. General Business Insurance

d. Self-Insurance

(1) Definitions and Concepts

(2) Self-Insurance Approval Requirements

(3) Costs of Deductibles Under Purchased Insurance

(4) Self-Insurance for Catastrophic Losses

(5) Measurement of Actual Losses

20. Interest and Other Financial Costs

a. Interest

b. Other Costs of Capital

21. Labor Relations Costs

22. Lobbying and Political Activity Costs

a. Unallowable Costs

b. Allowable Costs

c. Documentation

23. Losses on Other Contracts

24. Maintenance and Repair Costs

25. Manufacturing and Production Engineering Costs

26. Material Costs

a. Allowability

b. Direct v. Inventory Accounting

c. Interdivisional Materials and Services

d. CAS 411

e. Definition of Material Costs

27. Organization Costs

a. Unallowable Costs

b. Stock Related to Compensation

28. Other Business Expenses

29. Plant Protection Costs

a. Allowability

b. Allocability

30. Patent Costs

a. Background

b. Allowability

31. Plant Reconversion Costs

32. Precontract Costs

a. Allowability

b. Discussion

33. Professional and Consultant Service Costs

a. Overview

b. Definition

c. Allowability

d. Retainer Fees

e. Documentation

34. Recruitment Costs

a. Allowability

b. Help Wanted Advertising

35. Relocation Costs

a. Definition and General Criteria

b. Allowable Costs

c. Unallowable Costs

d. Refund Requirements

e. Employment for Specific Assignments

36. Rental Costs

a. Overview

b. Allowability

c. Sale and Leaseback

d. Rent Between Organizations Under Common Control

37. Royalties and Other Costs for the Use of Patents

38. Selling Costs

a. Definition

b. Categories

c. Foreign Sales Efforts

d. Sellers Compensation

e. Allocation of Selling Expense

39. Service and Warranty Costs

40. Special Tooling and Special Test Equipment Costs

a. Overview

b. Definitions

41. Taxes

a. Overview

b. Allowability and Allocability of Specific Taxes

(1) Federal Income Taxes

(2) Allowability of State and Local Income Taxes

(3) Allocability of State and Local Income Taxes

(a) Background

(b) Allocation Requirements

(c) Interpretation

(4) Personal Property Taxes

(5) Taxes Connected to Financing Operations

(6) Excise Taxes on Employee Benefit Plans

(7) Superfund Taxes

42. Termination Costs

a. Introduction

b. Settlement

c. Inventory Versus Total Cost Basis

(1) Inventory Basis

(2) Total Cost Basis

d. Cost Principles â€" Background

e. Initial Costs

f. Loss of Useful Value of Special Tooling and Machinery and Equipment

g. Rental Under Unexpired Leases

h. Subcontractors' Claims

i. Settlement Expenses

j. Effect of Default Terminations

(1) Fixed Price Contracts

(2) Cost-Reimbursement Contracts

43. Trade, Business, Technical and Professional Activity Costs

44. Training and Education Costs

a. Overview

b. Vocational Training

c. Part Time College Level Education

d. Full-Time Education

e. Specialized Programs

f. Non-Employees

g. Simplification

45. Reserved

46. Travel Costs

a. Transportation

b. Lodging, Meals, and Incidental Expenses

c. Documentation

d. Allocation of Travel Costs

e. Travel by Contractor-Owned, -Leased, or Chartered Aircraft (Private Aircraft)

f. Cost of Company Furnished Automobiles

47. Costs Related to Legal and Other Proceedings

a. Overview

b. Unallowable Legal Costs of Proceedings Brought by a Government Against a Contractor

c. Allowable Legal Costs for Proceedings Brought by a Government Against a Contractor

d. Legal Costs of Settling a Qui Tam Proceeding

e. Other Unallowable Costs of Legal and Other Proceedings

f. Costs of Defense Against Shareholders Suits

48. Research and Development Costs

49. Goodwill

a. Definition

b. Allowability

50. Reserved

51. Costs of Alcoholic Beverages

52. Asset Valuations Resulting From Business Combinations

a. Background

b. Tangible Capital Assets

c. Intangible Capital Assets

d. Application of Effective Date

e. Relationship of FAR 31.205-52 to FAR 31.205-11

C. Agency Supplemental Cost Principles

1. DoD - External Restructuring Costs

a. Background

b. Applicability and Definition

c. Allowability

d. Allocation Among Cost Accounting Periods

e. Allocation to Cost Objectives

2. OPM â€" Allocation of Indirect Costs

a. Background

b. Allocation Techniques

c. Business Unit General and Administrative Expenses

d. Home Office Expenses

VII. Financial Accounting and Reporting

A. Sources of GAAP

B. Basic Accounting Policy

1. Percentage of Completion Method

2. Completed Contract Method

C. Accounting for Cost Type Contracts

D. Accounting for Fixed Price Contracts

E. Accounting for Progress Payments

F. Contract Costs

1. Overview

2. GAAP v. FAR

Working Papers

Working Papers


Worksheet 1 Principal Acronyms Used in Portfolio

Worksheet 2 Agency Supplements to the Federal Acquisition Regulation Cost Principles

Worksheet 3 Typical Indirect Expense Rate Structure


Worksheet 5 Summary of Cost Accounting Standards

Worksheet 6 List of Significant Accounting Pronouncements Principally Discussed