WG 76-8 - Interim Guidance on Use of the Offset principle in Contract Price Adjustments Resulting from Accounting Changes

Background

Paragraph (a)(4)(A) of the CAS clause provides for equitable adjustments when accounting system changes result from the issuance of new Cost Accounting Standards. Paragraph (a)(4)(B) of the CAS clause provides that the Contractor will negotiate with the Contracting Officer the terms and conditions under which a change to either a disclosed or established cost accounting practice may be made. These changes are generally referred to as "voluntary" changes. The (a)(4)(B) clause goes on to forbid any agreement that will result in increased costs being paid by the United States.

The interpretative language found in 4 CFR 331.70(f) advocates the offsetting approach with regard to voluntary changes whereby price adjustments are foregone to the extent that increases under one or more CAS-covered contracts are equaled or exceeded by decreases on toher CAS-covered contracts. However, CAS publications including the CAS clause shed no light on how the offset technique may be related to mandatory changes, simultaneous accounting changes, mult-divisional accounting changes adn changes affecting a diverse contractual mix.

Discussion

While the CAS Board explicity advocates the use of the offset technique to preclude contract price changes under voluntary type (i.e. (A)(4)(B) changes, teh technique can be equally useful in connection with mandtory changes, (i.e. (a)(4)(A) type, if used for the same general purpose of netting out contract price changes and thus reducing the number of individual contract price adjustments required.

No specific method for applying the offset concept has been established. It remains the responsibility of the Administrative Contracting Officer to address each specific situation in a way that best accomplished the overall objective. One method that may simplify the computation in many instances, as well as avoid the pitfalls described in item X of DPC 76-1, would be to compute the impact of a change by types of contracts (e.g., firm fixed price, cost type) and adjust as few contract prices as necessary within each group before merging the net impact from each contract group with that of other groups. Different approaches may provide a better procedure in other cases. For example, contracts may be grouped according to the relative materiality of the impact of the change (also see DPC 76-1). This type of segregation can be helpful in identifying contracts which can be eliminated from further consideration.

Another issue concerns the extent to which the offset principle can be used when several organizational segments of a company are affected by the same accounting change. As a general rule, whenever costs are flowing either from a higher organizational level or between segments, the offset universe may cover all affected segments. For example, a change that affects the flow of costs from a home office to several segments could offset CAS covered contracts within all affected segments. However, accounting changes that only affect the flow of costs within individual divisions should be treated as changes within each division.

The combining for offset purposes, of several accounting changes within a segment as long as they have the same effective date should also serve to reduce the number of necessary contract price changes. Although individual treatment of voluntary changes could maximize the potential for downward price adjustments, the governments interests are adequately protected if no overall price increase is paid by the United States.

In summary, for those aspects of offset situations where specific CAS Rules and Regulations do not exist, Contracting Officers are still charged with exercising their best judgment on each individual impact study in a way that protects the best interest of the Government and considers the equity, fairness, and materiality of the matter.

Guidance

1. Contracts may be adjusted individually or cost increases and decreases may be offset to reduce the number of contract adjustments for both (a)(4)(A) and (a)(4)(B) changes.

2. Cost increases at one organizational segment of a company may be offset by decreases at another segment if the change causes costs to flow between the segments either directly or via a higher organizational level such as a home office.

3. Within a segment the effect of several changes may be combined in the offset consideration if the changes all take place at the same time.

4. When a mix of contract types is involved, grouping of contracts by type, by materiality of cost impact, or other type segregation may often reduce the complexity of the problem and also reduce the number of price adjustments that must be made.

5. The Contracting Officer is responsible for assuring that the offset technique is applied judiciously so that the final cost to the Government or to individual departments or agencies is not materially different from that which would have resulted if the contract prices had actually been adjusted.

6. Offsets affecting incentive contracts should be carefully reviewed to avoid material impacts on the incentive provisions.