In previous communications, we have discussed the need for improving the system of accumulating and reporting of cost savings which are realized through the use of the CAS Clause. I understand that the DOD CAS Working Group has an assignment to accomplish such improvement.

As you know, recent industry-sponsored surveys have questioned the benefits of CAS in relation to costs Neither the detali behind costs reported in the industry-sponsored surveys, nor any other reported information, is available for our review. Industry charges will probably result in Congressional hearings on this subject. Thus, the need for objective statistical data representing the effect since 1972 of CAS upon contract costs is critical.

Accordingly, I request your assistance in obtaining an overview of CAS activity at major defense contractors. What I have in mind is a one-time assessment, to be completed by May 1, 1977, of the amount of cost impact (increases, decreases, and avoidances) for each of the categories listed below:

1. Actions formally resolved (other than through the ASDCA). Resolution may be contract price adjustments, under either par. (a)(4)(A) or bar. (a)(4)(3) or par. (a)(5) of the CAS Clause, initial price proposai negotiation, cost incurred settlement, etc.

2. Actions informally resolved. Resolution may be represented by price adjustments.

3. Estimated results of unresolved actions.

4. Actions formally resolved by the ASDCA or in process. Token amounts or amounts in "test" disputes shall be revised to reflece estimated totals. For example, the actual amount in dicnute in the recently decided Boeing appeal, ASBCA No. 19224, was $972, but we understand that as much as $6 million annually may be saved by the Government as a consequence of this decision. (List individual cases.)

5. Estimated effect of cost accounting practice changes not made by contractors because of the restrictive provisions of CAS contract clause (a)(4)(B).

6.

Estimated increases or decreases expected to result in the future from existing standards. These estimates should be based on events which appear likely to occur. For example, CAS 410 becomes applicable to most contractors in 1978. Bid rate data probably provides sufficient information to estimate the effect of CAS 410.

7. The estimated monetary effect of contractor compliance with consistency requirements of CAS (e.g., CAS 401 and 402) should be included in the data. For example, comparability of a contractor's cost accounting data with data used in pricing proposals may have resulted in reduced contract pricing estimates.

Please use the enclosed format to report the data utilizing a separate form for each category and a summary of the total impact.

issues resolved with the use of CAS should be included even though the practices would have been questioned without CAS. For example, exceptions wore frequently raised regarding double counting before CAS 402 was promulgated. The standard provides additional support for audit recommendations, and its impact should be reflected in this study.

I understand that DOD has concluded that its revised profit policy provides sufficient reductions to offset increased costs resulting from CAS 414, thus maintaining the same pricing structure. Also, controls are expected to be established to prevent any overpayment as a result of overallocations under the CAS 410 transition method. Consequently, the effect of CAS 414 and of the CAS 410 transition method overallocations should be excluded from the report.

I recognize the complexity of gathering the data for this reporting requirement and that a review of all significant audit activity may be necessary to gather the information. Reasonable estimates may be used where hard data are not available.

Sincerely yours,

Enclosure (As stated)
CC: Directer, DUAA

Arthur Schoenhaut
Executive Secretary

(1) Use this format for the summary and for each of the six categories of reporting requirements outlined in the memorandum.

(2) Measure cost increases as well as avoidances and savings and report the net amount.

(3) Enter amounts which can be measured in a lump sum.

(4) Enter amounts which can only be measured in average annual increments.

(5) Include (a)(4)(B) and (a) (5) changes.

OFFICE OF THE ASSISTANT SECRETARY OF DEFENSE

WASHINGTON, D. C. 20301

STATES

MANPOWER,ATTX

RESERVE AFFAIRS

AND LOGISTICS

16 MAY 1977

Mr. Arthur Schoenhaut

Executive Secretary

Cost Accounting Standards
Board

441 G Street, N. W.

Washington, D. C. 20548

Dear Mr. Schoenhaut:

As requested by your letter of March 24, 1977, the attached report is
our one-time assessment of the cost impact of the Cost Accounting
Standards (CAS) Board's promulgations on Government Contracts.

The report was developed by the Defense Contract Audit Agency (DCAA)
and contains agency totals for each of the six categories requested.
The report indicates a nonrecurring decrease in contract cost of about
$121 million, and a recurring annual impact of about $106 million.

As requested, the estimates are identified with specific CAS Board rules
and regulations, even though some items may have been questioned under
Armed Services Procurement Regulation (ASPR) and other requirements in
the absence of CAS. For instance, many amounts identified with CAS 405
such as interest and advertising are questionable under ASPR, but the
Standard greatly facilitates their discovery. Items of double counting
have frequently been questioned by DCAA. CAS 402 provides additional
support for audit recommendations and increases the likelihood that such
questioned cost will be sustained in case of dispute. Because the report
includes such circumstances as those mentioned above, other judgmental
estimates and no amounts for either CAS 414 or the transitional method of
CAS 410, we strongly recommend that any use of this cost impact data con-
tain the qualification noted on the attached summarization schedule.

If we can be of further assistance in this matter please contact
Mr. John L. Kendig, Acting Director, Cost Accounting and Finance at
697-8971.