Contracts executed and performed entirely outside the United States – CAS now applies!
August 26, 2011
By: Lindsay Simmons
The Office of Federal Procurement Policy (OFPP), Cost Accounting Standards (CAS) Board, has issued a final rule eliminating the exemption regarding Cost Accounting Standards for contracts executed and performed entirely outside the United States, its territories, and possessions. 76 Fed. Reg. 49365-49368 (Aug. 10, 2011). The new rule takes effect October 11, 2011.
The overseas exemption was first promulgated in 1973 to eliminate confusion over the applicability of CAS outside the United States (since the underlying authority for CAS was applicable only to the United States). When Congress reestablished the CAS Board in 1988, however, it did so under the OFPP Act, which is not limited in applicability to the United States.
Nevertheless, at that time the CAS Board opted to retain the overseas exemption.
How did the August 10th change come about? Section 823(a) of the Defense Authorization Act for 2009 required the CAS Board to:
Review the inapplicability of the cost accounting standards, in accordance with existing exemptions, to any contract and subcontract that is executed and performed outside the United States when such a contract or subcontract is performed by a contractor that, but for the fact that the contract or subcontract is being executed and performed entirely outside the United States, would be required to comply with such standards; and (2) determine whether the application of the standards to such a contract and subcontract (or any category of such contracts and subcontracts) would benefit the Government.
In response, the CAS Board requested input from the Department of Defense, the Department of State and the U.S. Agency for International Development – the agencies with the greatest number of contracts performed outside the United States. After reviewing the agencies’ comments and the comments received in response to the Notice of Proposed Rulemaking, the overseas exemption was eliminated, for the following reasons:
- From a legal standpoint: The original statutory basis for the overseas exemption no longer exists. Thus, deference must be given to CAS which is mandatory for use by all executive agencies and by contractors and subcontractors in estimating, accumulating, and reporting costs in connection with pricing and administration of, and settlement of disputes concerning, all negotiated prime contract and subcontract procurements with the United States;
- From an accounting standpoint: There is no accounting basis for the overseas exemption. The place of contract execution and performance is not relevant to CAS requirements to measure, assign, and allocate the costs of contract; and
- From a hardship standpoint: The imposition of CAS overseas will not create hardships for Federal agencies, prime contractors or subcontractors.
The last point may be a leap of faith. Only time will tell.
Lindsay Simmons is the attorney responsible for the content of this article.