CAS 403 - 3 Factor Formula
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3 Factor Formula
In some instances, contractors are required to use the 3 factor formula. The determination of whether a contractor is required to use the 3 factor is if the residual pool is greater than the following calculation which is based on revenue.
- For the 1st $100M, mutiply the revenue * 3.35,
- For the next, 2nd $200M, multiply the revenue * .95,
- For the next $2.7B, multiply the revenue * .3,
- If the revenue is over $3B, multiply the revenue * .2
The 3 Parts of the 3 Factor Formula
Payroll Dollars
The percentage of the segment's payroll dollars to the total payroll dollars. Note, that the requirement is dollars, not hours.
Operating Revenue
The percentage of the segment’s operating revenue to the total operating revenue of all segments. Verify that only net interdivisional purchases are included (amounts charged to other segments reduced by any amounts charged by other segments for purchases.)
Net Book Value
The percentage of the average net book value of the sum of the segment’s tangible capital assets plus inventories to the total average net book value of such assets of all segments.
- (a) Verify that property held primarily for leasing to others is excluded.
- (b) Verify that inventories are net of progress payment billings.
- (c) Verify that inventories include work-in-process on fixed price contracts.
- (4) Determine that there are no double entries in the three factor formula (e.g., unbilled costs classified as revenue and inventory).
Reference
DCAA Audit Program, Activity 19403, Version 6.11, dated June 2012
