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

==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.