Breakout Session # 2 Nick Sanders, Director, Government Contracts Practice

2. Navigating the Cost Impact Process – The New FAR Part 30 Breakout Session # 2 Nick Sanders, Director, Government Contracts Practice PricewaterhouseCoopers LLP July 28, 2006

3. A Maze of Overlapping Requirements • CASB rules, regulations & Standards • 48 C.F.R. § 9900 revised (in pertinent part) June 2000 • FAR Part 30: Administration of CAS and CAS-covered contracts • Revised March 2005 • CAS clauses incorporated into contracts • 52.230-1 thru 52.230-7 • 52.230-6 revised March 2005 • 52.230-7 added March 2005

4. Evolving and Conflicting Guidance • Court decisions • Perry v. Martin Marrietta • 47 F.3d 1134, 1995 • Lockheed Martin v. United States • U.S. Court of Federal Claims, 2006 • DoD guidance • DPAP, January 2002 • What is a “change in cost accounting practice”? • DPAP, Sept. 2002 – modification to January 2002 guidance • DCAA, January 2002 – format and calculation of cost impacts

5. Navigating the Process Requires Knowledge of All Relevant Areas Cost Impact Process

6. Overview of the New FAR 30.6 • Three Types of Changes • Required change • Unilateral change • Desirable change • Two Proposal Formats • Gross Dollar Magnitude (GDM) • Detailed Cost Impact (DCI)

7. Contractor Pre-Award 52.230-7 Disclosure Statement Post-Award Changes Noncompliances Government Pre-Award CFAO DCAA Post-Award CFAO DCAA Key Responsibilities

8. The Cost Impact Process • CFAO Notification • DCAA’s Five-Step Process • Compute increased/decreased cost estimates and/or accumulations for CAS-covered contracts/subcontracts • Combine contract impacts by type (FP vs. Flexibly priced) • Handling T&M contract types? • Combining between groups? • Evaluating non-CAS-covered contracts and future awards?

9. DCAA’s Five-Step Process (Cont’d.) • Net contracts (within each type) together to determine increased or decreased costs paid by Government for each type - Include profit/fee/incentives

10. DCAA’s Five-Step Process (Cont’d.) 4. Combine bottom-line impacts of each contract type together to determine increased or decreased costs “in the aggregate” • Increased costs in the aggregate to be recovered by Government—except for desirable changes • Decreased costs in the aggregate will not be recovered by contractor—except for required changes

11. DCAA’s Five-Step Process (Cont’d.) 5. Settle Impact • Contract adjustments • Indirect rate adjustments • Cash payment

12. Gross Dollar Magnitude Proposal • Show impacts on a representative sample of contracts, or • Show change in indirect cost rates muliplied by estimated contract base(s), or • Must show fixed-price impact separate from flexibly priced impact • “Any other method that provides a reasonable approximation of the total increase or decrease in cost accumulations for all affected fixed-price and flexibly-priced contracts and subcontracts.”

13. Gross Dollar Magnitude Proposal • May be in any format acceptable to CFAO, but format must show: • Impacts by Executive Agency • Impacts by contract type • Fixed-price vs. flexibly priced • For unilateral changes, contractor must be able to identify all affected CAS-covered contracts when required to do so by CFAO

14. Detailed Cost Impact Proposal • CFAO may require DCI if GDM is not adequate • Contractor may elect to submit DCI in lieu of GDM proposal • DCI shows impacts on each affected CAS-covered contract and subcontract • Parties may agree to limit impact to contracts over a certain dollar threshold • Same minimum format requirements as GDM

15. Calculating the Cost Impact • Unilateral changes • Compare estimated cost to complete under old and new practices • Calculate impacts to profit, fees, and incentives based on changes to contract costs • Required or Desired Changes • Estimated change in contract costs is the basis for calculating increases to ceilings, prices, targets

16. CAS Noncompliances • Three Types of Noncompliance • Estimating • Cost Accumulation • FAR Part 31 • Many Types of Reviews/Audits • Disclosure Statement (adequacy and compliance) • Desirable vs. Unilateral Changes • Materiality of impact • Adequacy of GDM

17. More About the New FAR Part 30.6 • Prescribes Calculation of Cost Impacts • “Increased cost to the Government” • “Decreased cost to the Government” • “Increased costs in the aggregate” deliberately not defined • But see recent Lockheed Martin COFC case, which is likely to be appealed • CFAO discretion on Resolving Cost Impacts • Adjust a single contract, several contracts, all contracts • Or “any other suitable method”

18. Wrap-Up • The Good • Permits retroactive changes (to beginning of FY) • Single change: Cost flows between multiple segments or implementation of a common practice among segments • Contemplates that GDM proposal may be sufficient to resolve impact • Permits submission of DCI proposal in lieu of GCM proposal • Permits negotiation of GDM/DCI formats

19. Wrap-Up • The Bad • Difficult, if not impossible, to combine changes into one impact unless all changes increase costs to Government (vs. DoD WG 78-8) • Remedies for subcontractor issues expressly at prime contractor level

20. Wrap-Up • The Ugly • “Affected CAS-covered contract” includes closed contracts and closed fiscal years (like TINA) • Two EACs for T&M contract types • Individual EACs for each Task Order in ID/IQ contract types • Applicability of rule to contracts awarded before April 2005 • CASB DS-1 determination of adequacy prior to award of CAS-covered contract

21. Conclusion • Was the old process broken, or simply not well understood? • New regulations clarify some issues, but raise new problems • Gray area – “increased costs in the aggregate” – still gray • For Your Consideration • Education • Preparation • Execution