Instructor Preparation - Defense Acquisition University · Web view“Cost objective” means (except for Subpart 31.6) a function, organizational subdivision, contract, or other

STUDENT GUIDE

CON 170Fundamentals of Cost & Price Analysis

Unit 1, Lesson 3Contract Cost Principles and Procedures

April 2019

STUDENT PREPARATIONRequired Student Preparation:Read FAR Part 31, DFARS Part 231Planned Academic Time Required: 1.5 hoursStudent performance will be informally evaluated during class discussions, and formally evaluated on Exam 1

CON170, Unit 1 Lesson 3 – Contract Cost Principles & Procedures - Page | 2

Lesson Presentation




Per FAR 31.201-2(b), “Certain cost principles incorporate the measurement, assignment, and allocability rules of selected CAS and limit the allowability of costs to the amounts determined using the criteria in those selected standards. Only those CAS or portions of standards specifically made applicable by the cost principles in this subpart are mandatory unless the contract is CAS-covered (see Part 30). Business units that are not otherwise subject to these standards under a CAS clause are subject to the selected standards only for the purpose of determining allowability of costs on Government contracts. Including the selected standards in the cost principles does not subject the business unit to any other CAS rules and regulations.” What this means is that while a contractor may be subject to certain cost accounting standards for purposes of determining allowability, it is not subject to the administrative remedies provided by the CAS for non-compliance, etc.

You should review FAR 31.205, “Selected Costs,” and become familiar with the many different cost categories which are addressed therein. This FAR Section is an important reference for Contracting Officers when determining cost allowability in contractors’ proposals and invoices. The exercise at the end of this lesson will provide an opportunity to explore this section of the FAR, and practice making determinations of allowability.






Exercise: Contract Cost Principles – Knowledge Review

Learning ObjectiveUnderstand the vocabulary and identify the general concepts pertaining to contract cost principles and procedures. Identify the cost principles and procedures pertaining to contracts with commercial organizations.

IntroductionThis lesson introduced the important terms and concepts relative to contract cost principles and procedures. Complete the following questions based on the classroom lecture and slides.

AssessmentThis activity is not scored or graded.

Student Instructions: Using the FAR, complete the following table. Then, answer the questions that follow based on the class lecture and slides. Be sure you understand the information and ask questions of your instructors if you do not, rather than just copy the information from the FAR. You will have 20 minutes to complete this exercise.

In CON090, you learned that definitions have a specific meaning depending on the context in which they are written. Information regarding cost principles may be found in FAR 2.101 and FAR Part 31. Complete the definitions of the below terms:

Cost Principle Term

Definition FAR Reference

Allocate Allocate means to assign an item of cost, or a group of items of costs, to one or more __________________. This term includes both _____________ assignment of cost and the reassignment of a share from an _______________ cost pool.

FAR 31.001

Allocable cost A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative______________________ or other equitable relationship. A cost is allocable to a Government contract if it— (a)_____________________________________ (b)_______________________________________________________________________________________________________________; or (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.

FAR 31.201-4

Allowable Cost A cost is allowable only when the cost complies with all of the following requirements:

(1) _____________________(2) _______________________________________________________(3) _____________________________________________________;

generally accepted accounting principles and practices appropriate to the circumstances;

(4) ________ of the contract(5) Any limitations set forth in FAR Subpart _______

FAR 31.201-2


Unallowable Cost

“Unallowable cost” means any cost that, under the provisions of any pertinent law, regulation, or contract, ________________________________________________________________________________________to which it is allocable.

FAR 2.101

Reasonable Cost

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a __________________ in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

What is reasonable depends upon a variety of considerations and circumstances, including—

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;

(2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;

(3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and(4) Any significant deviations from the contractor’s established practices.

FAR 31.201-3

Estimating Costs

“Estimating costs” means the process of forecasting a future result in terms of cost, based upon information available at the time.

FAR 31.001

Actual Costs “Actual costs” means (except for Subpart 31.6) amounts determined on the basis of costs incurred, as distinguished from forecasted costs. Actual costs include standard costs properly adjusted for applicable variances.

FAR 31.001

Cost Input “Cost input” means the cost, except general and administrative (G&A) expenses, which for contract costing purposes is allocable to the production of goods and services during a cost accounting period.

FAR 31.001

Cost Objective “Cost objective” means (except for Subpart 31.6) a function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects, etc.

FAR 31.001

Final Cost Objective

“Final cost objective” means (except for Subparts 31.3 and 31.6) a cost objective that has allocated to it both direct and indirect costs and, in the contractor’s accumulation system, is one of the final accumulation points.

FAR 31.001

Depreciation “Depreciation” means a charge to current operations that distributes the cost of a tangible capital asset, less estimated residual value, over the estimated useful life of the asset in a systematic and logical manner. It does not involve a process of valuation. Useful life refers to the prospective period of economic usefulness in a particular contractor’s operations as distinguished from physical life; it is evidenced by the actual

FAR 2.101


or estimated retirement and replacement practice of the contractor.

1. What is the definition of total cost?

2. According to FAR 31.201, can a cost be allocable to a contract, but not allowable?

3. What do you consider when determining if a cost is allowable?

FAR Reference: _____________________________________________

(a) A cost is allowable only when the cost complies with all of the following requirements—

(1)

(2)

(3)

(4)

(5)

4. From FAR 31.202, fill in the blanks in the phase below.

Costs may be charged as __________ only or _____________ only.

5. When may a direct cost be treated as an indirect cost?

(b) For reasons of practicality, the contractor may treat any direct cost of a _________ dollar amount as an indirect cost if the accounting treatment—

(1)________________________________________; and

(2)____________________________________________________________________.

6. What is the definition of an indirect cost?


7. As we learned in this lesson, for a cost to be considered “allowable,” it must comply with all of the following requirements, per FAR 31.201-2:

(1) Reasonableness(2) Allocability(3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted

accounting principles and practices appropriate to the circumstances;(4) Terms of the contract(5) Any limitations set forth in FAR Subpart 31.2

This part of the exercise provides insight regarding the fifth requirement, “any limitations set forth in FAR Subpart 31.”

(Student Instructions: Research FAR Subpart 31.205, Contract Cost Principles for the costs or categories of cost listed below and determine if each of the costs is allowable, allowable with restrictions, or unallowable. Cite the FAR reference where you found your answer and explain, if a cost is AWR, what conditions must be met for the cost to be allowable.)

Cost Category FAR 31.205Ref.

A/ AWR/

UA

Circumstances under which the cost is allowable

Cost of souvenirs, models, imprinted clothing, buttons, and other mementos provided to customers or the public

Independent R&D and bid and proposal costs

Cost of shareholder meetings

Direct selling costs

Costs of training and education that are related to the field in which the employee is working

Overtime compensation for training and education

Defense against Federal Government claims or appeals or the prosecution of claims or appeals against the Federal Government


LESSON SUMMARYTLO - Identify the contract cost principles and procedures. (FAR Part 31 and DFARS Part 231)

ELOs –

• Identify the applicability of the cost principles and procedures to various types of contracts and subcontracts. (FAR Subpart 31.1 and DFARS Subpart 231.1)

• Identify the cost principles and procedures pertaining to contracts with commercial organizations. (FAR Subpart 31.2 and DFARS Subpart 231.2)

• Determine when a cost is allowable, unallowable or allowable with restrictions (FAR 31.205)


Instructor Preparation - Defense Acquisition University · Web view“Cost objective” means (except for Subpart 31.6) a function, organizational subdivision, contract, or other

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