Difference between revisions of "Recognizing Elements Affecting Facilities Capital Cost Of Money"

Revision as of 11:39, 30 October 2023

General Information^[1]

Cost of money includes facilities capital cost of money (FCCM) and cost of money as an element of the cost of capital assets under construction. Cost of Money is an imputed cost related to the cost of contractor capital committed to facilities and it is not a form of interest. Contractors often use their own money (capital) to invest in facilities and equipment that benefit the Government. The contractor could have instead used that money for other investments, for example, to purchase bonds that would receive interest. FCCM is the method used to determine the amount reimbursable to the contractor for using its own money to invest in facilities and equipment that benefit the Government instead of using it for other investments for which it could receive a return on the investment.

Cost of money is based on the net book value of tangible capital assets and intangible capital assets that are subject to amortization. Regardless of whether the contract is otherwise subject to Cost Accounting Standards (CAS), to be allowable, the contractor’s capital investment must:

● be measured, assigned, and allocated to contracts in accordance with CAS 414 Cost of Money as an Element of the Cost of Facilities Capital (see 414-30 for definitions) or

● be measured and added to the cost of capital assets under construction in accordance with CAS 417 Cost of Money as an Element of the Cost of Capital Assets Under Construction (see 417-30 for definitions), and

● meet the requirements of FAR 31.205-52 Asset valuations resulting from business combinations, and

● be specifically proposed in the contract cost proposal.

There is no requirement for a contractor to propose facilities capital cost of money in pricing and performing a contract. However, if cost of money is not proposed during contract pricing, the contractor surrenders any right to claim it during contract performance. Therefore, the contractor must include the cost in its proposal to the Government for cost of money to be allowable. If the contractor did not propose FCCM, then the costs are unallowable per FAR 52.215-17. If the contract does not contain the clause FAR 52.215-17 waiver, the auditor should still question the costs per this FAR, as the clause is still applicable under the Christian Doctrine.

Why Should Contractors Invest - Example^[2]

For example, suppose a contractor has two options: invest $5,000,000 in modernization of long term assets and save $1,000,000 per year for the next 10 years or invest $5,000,000 in a new business venture that is projected to return $10,000,000 with high probability. If the contractor has primarily cost reimbursement and negotiated fixed price contracts, any saving from the first option will be priced into future contracts or result in a reduction of reimbursements, but will not necessarily translate into profits. Given these types of alternatives, contractors have no direct incentive to invest in cost reducing improvements and will naturally pursue other opportunities. Allowing the cost of money related to missing the opportunity for increased profits encourages contractors to commit funds to reducing Government born expenses.

10.1 Recognizing Elements Affecting Facilities Capital Cost Of Money^[3]

Facilities Capital Cost of Money (FAR 31.205-10(a), Appendix B, 9904.414-30, and Appendix B, 9904.417- 50)

Facilities capital cost of money is an imputed cost related to the cost of contractor capital committed to facilities. CAS 414, Cost of Money as an Element of the Cost of Facilities Capital, provides detailed guidance on calculating the amount of facilities capital cost of money due under a specific contract. Under CAS 414, a business-unit's facilities capital cost of money is calculated by multiplying the net book value of the business-unit's facilities investment by a cost of money rate based on the interest rates specified semi-annually by the Secretary of the Treasury under Public Law 92-41. The business-unit's facilities capital cost of money is then broken down by overhead pool and allocated to specific contracts using the same allocation base used to allocate the indirect costs in the overhead pool. Facilities capital cost of money is determined without regard to whether the source is owner's equity or borrowed capital. It is not a form of interest on borrowing by the firm. Facilities capital cost of money allowed under CAS 414 does not duplicate or replace costs allowed under CAS 417, Cost of Money as an Element of the Cost of Capital Assets Under Construction. CAS 417 establishes criteria for the measurement of the cost of money attributable to capital assets under construction, fabrication, or development as an element of the cost of those assets. CAS 417 costs are only accumulated while assets are under construction, the costs are charged as part of contract depreciation over the depreciable life of the asset. As a result, analysis of CAS 417 costs becomes a part of the complex process of asset valuation and depreciation. If you have questions regarding CAS 417 costs, contact the cognizant Government auditor.

Purpose of Facilities Capital Cost of Money (FAR Appendix B, 9904.414-20)

As contractor management considers investment opportunities, they must consider the cost of capital required to make each investment and the potential return from that investment. To attract investment, the prospective return on investment generally must be higher than the cost of capital required to make the investment. Thus, the cost of capital is a real cost that effects investment decisions. Unfortunately, the cost of capital is not the same for all sources (e.g., owner's equity and long-term loans), all firms, or all periods of time.

The purpose of facilities capital cost of money criteria is to improve contractor cost measurement by providing for allocation of the cost of contractor investment in facilities to negotiated contracts. To assure uniform consideration, the criteria require use of the current Treasury-determined cost of money rate for all firms and all facility investments.

Facilities Capital Cost of Money Allowability (FAR 31.205-10(a) and FAR 31.205-52)

Whether or not the contract is otherwise subject to Cost Accounting Standards, facilities capital cost of money is allowable when all of the following requirements are met: • The contractor's capital investment is measured, allocated to contracts, and costed in accordance with CAS 414. • The contractor maintains adequate records to demonstrate compliance with the requirements of CAS 414. • The estimated facilities capital cost of money is specifically identified or proposed in cost proposals relating to the contract under which the cost is to be claimed. • The requirements in FAR 31.205-52, Asset Valuations Resulting from Business Combinations, are not exceeded.

Contractor Waiver of Facilities Capital Cost of Money (FAR 15.404-4(c)(3), FAR 15.408(i), and FAR 52.215-17)

If the prospective contractor fails to identify or propose facilities capital cost of money in a proposal for a contract that will be subject to the FAR cost principles for contracts with commercial organizations, facilities capital cost of money will not be an allowable cost in any resulting contract. Under those circumstances, the contract must include the FAR clause, Waiver of Facilities Capital Cost of Money.

Facilities Capital Cost of Money Cannot Be Used as a Profit Base (FAR 15.404-4(c)(3) and DFARS 215.404-71-4)

FAR requires that you use your prenegotiation cost objective as the basis for calculating the prenegotiation objective for profit or fee. However, FAR also requires that you exclude any facilities cost of capital included in cost objectives before applying profit or fee factors. Even though FAR excludes facilities capital cost of money from the basis for calculating profit or fee objectives, your agency may provide for using the facilities capital cost of money to estimate the contractor facilities capital employed on the contract. The profit or fee objective may then consider the estimated facilities capital employed.

FCCOM Calculated in a Proposal

Use DD Form 1861. See below.

References

1. ↑ DCAA - Chapter 18 - Cost of Money
2. ↑ https://www.dau.edu/acquipedia-article/facilities-capital-cost-money
3. ↑ https://www.dau.edu/sites/default/files/tools/CPRG-Volume-3.pdf