Recent and Proposed Changes to the FAR Cost Principles: New Controversies

Author:Mr Paul Pompeo
Profession:Holland & Knight LLP

Originally published March 2004

In its latest Federal Acquisition Circular dealing with cost principles (FAC 2001-18), the Defense and Civilian Agency Acquisition Councils amended the compensation cost principle on: pensions, Federal Acquisition Regulation (FAR) 31.205-6(j);1 insurance, FAR 31.205-19; depreciation, FAR 31.205-11; and rental costs, FAR 31.205-36.2 These changes became effective on January 12, 2004. Additionally, the Councils have issued a second proposed rule to amend the training and education cost principle, FAR 31.205-44. A discussion of these changes follows.

Pension Costs and ESOPs

The subject of pension costs has been very controversial during the past decade. In 1989, the Councils amended the cost principle requiring contractors to refund or credit the government its "equitable share" of excess or surplus assets. In 1995, the Cost Accounting Standards (CAS) Board amended CAS 412 and 413, most notably in the realm of segment closures and refunds to the government for surplus assets. In 1997, the Armed Services Board of Contract Appeals issued the first segment closure decision under the original CAS 413 provisions.3 Just last year, the United States Court of Appeals for the Federal Circuit issued a decision on conflicting arguments involving both the original and the 1995 versions of CAS 413 segment closure provisions.4 Hence, it might be appropriate for contractors to hold their breath when the Council amends the pension cost principle once again. The current amendment, however, is a rather minor change. Its real import is regarding the subject of Employee Stock Ownership Plans (ESOPs) wherein the new controversy rages.

Regarding pension costs specifically, the Councils merely delete the definitions from the cost principle, relying instead on the definition that exists at FAR 31.001, which corresponds with the definition of a pension plan in the CAS. The Councils elected not to include proposed language that would have affected settlements on segment closures as set forth in the proposed rule. The Councils focused on the ESOP provisions, moving them into a new section 31.205-6(q).

Apart from the move to a separate section, the Councils made several substantive changes to the cost principle. First, the Council removed all provisions addressing the measurement, assignment and allocation of ESOP costs. For ESOPs that meet the definition of a pension plan, the new cost principle requires contractors to comply with CAS...

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