CAS 414 - Cost of Money as an Element of the Cost of Facilities Capital
Contents |
Introduction
Facilities Capital Cost of Money (FCCOM) 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 investment.
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.
The Contractor Calculation
See the link below for an Excel file to calculate FCCOM.
FCCOM Calculated in a Proposal
Use DD Form 1861. See link below.
http://www.govcwiki.org/index.php?title=File:Form_DD_1861_-_FCCOM_Proposed_on_RFP.pdf
Purpose[3]
The purpose of this Cost Accounting Standard is to establish criteria for the measurement and allocation of the cost of capital committed to facilities as an element of contract cost. Consistent application of these criteria will improve cost measurement by providing for allocation of cost of contractor investment in facilities capital to negotiated contracts
Definitions[4]
(a) The following are definitions of terms which are prominent in this Standard.
(1) Business Unit
(2) Cost of Capital Committed to Facilities
Facilities capital means the net book value of tangible capital assets and of those intangible capital assets that are subject to amortization.
Fundamental requirement[5]
(a) A contractor's facilities capital shall be measured and allocated in accordance with the criteria set forth in this Standard. The allocated amount shall be used as a base to which a cost of money rate is applied.
(b) The cost of money rate shall be based on rates determined by the Secretary of the Treasury, pursuant to Public Law 92-41 (85 stat. 97).
(c) The cost of capital committed to facilities shall be separately computed for each contract using facilities capital cost of money factors computed for each cost accounting period.
Techniques for application[6]
(a) The investment base used in computing the cost of money for facilities capital shall be computed from accounting data used for contract cost purposes. The form and instructions stipulated in this Standard shall be used to make the computation.
(b) The cost of money rate for any cost accounting period shall be the arithmetic mean of the interest rates specified by the Secretary of the Treasury pursuant to Public Law 92-41 (85 stat. 97). Where the cost of money must be determined on a prospective basis, the cost of money rate shall be based on the most recent available rate published by the Secretary of the Treasury.
(c)
- (1) A facilities capital cost of money factor shall be determined for each indirect cost pool to which a significant amount of facilities capital has been allocated and which is used to allocate indirect costs to final cost objectives.
- (2) The facilities capital cost of money factor for an indirect cost pool shall be determined in accordance with Form CASB CMF, and its instructions which are set forth in appendix A to 9904.414. One form will serve for all the indirect cost pools of a business unit.
- (3) For each CAS-covered contract, the applicable cost of capital committed to facilities for a given cost accounting period is the sum of the products obtained by multiplying the amount of allocation base units (such as direct labor hours, or dollars of total cost input) identified with the contract for the cost accounting period by the facilities capital cost of money factor for the corresponding indirect cost pool. In the case of process cost accounting systems, the contracting parties may agree to substitute an appropriate statistical measure for the allocation base units identified with the contract.
Illustrations[7]
The use of Form CASB CMF and other computations anticipated for this Cost Accounting Standard are illustrated in appendix B to 9904.414.
Exemption[8]
(a) For contractors who are not subject to full CAS-coverage as of the date of publication of this part 99 as a final rule, this Standard shall apply only to those fully-covered contracts with subsequent dates of award and pricing certification.
(b) This Standard shall not apply where compensation for the use of tangible capital assets is based on use rates or allowances provided for by other appropriate Federal procurement regulations such as those governing:
- (1) Educational institutions,
- (2) State, local, and federally recognized Indian tribal governments, or
- (3) Construction equipment rates (see 48 CFR 31.105(d)).
