Recognizing Elements Affecting Facilities Capital Cost Of Money

10.1 Recognizing Elements Affecting Facilities Capital Cost Of Money

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.