As a “SDVOSB”, our firm receives most of its work as pass through on IDIQs held by big government contractors. We are in negotiations with a large business partner for a new task order, and we have run into a requirement from that business partner which we have not encountered in the past. We hope that you can provide some guidance to us on this matter.

The following is what we received from our prime contractor as part of our subcontract negotiations:

“Further, since your firm claims an exemption from CAS, I want to confirm the adequacy of your accounting system. Pursuant to FAR 16.301-3(a), We as the prime will be unable to award a cost-reimbursement contract to your firm without confirmation of the adequacy of your accounting system. If your accounting system has not been reviewed by DCAA, I will only include the labor rates in your IDIQ Agreement.”

The above requirement appears to negate the exemption that “small businesses” have from DCAA’s CAS rules, referenced in DCAA Audit Manual, Chapter 8. 103.2 CAS Exemption.

We are looking for a way to convince our prime contractor that we, as a small business, can be awarded cost contracts. Our firm has been working on government contracts for 25 years. We submit an “Incurred Cost Submission” yearly, we are audited by DCAA yearly, and we request and receive approved provisional rates from DCAA yearly. Do you have any suggestions on how to resolve this issue?

Getting to the issue -

The CAS exemption basically pertains to the requirement to submit a disclosure statement and to meet the more detailed cost accounting standards as outlined under the CAS Guidelines.You are required to meet the FAR requirements and in p

articular FAR Part 31. Under the FAR, several of the CAS standards are restated or referenced as applicable which makes a small firm required to adhere to them to the extent explained in the FAR Part 31.

Also, it is the Primes responsibility to ensure their subcontractors cost or price are reasonable, current, accurate, complete, and adequate. In meeting this responsibility, the Prime can either review the information provided by the subcontractor, including a description of their accounting system.

The subcontractor can also choose to allow the Prime to come in and review their actual system. This typically does not happen. The subcontractor can seek to meet most of a primes requirements by describing their accounting systems capabilities, with examples, as it pertains to and addresses the requirements of the Governments Standard Form 1408 (SF 1408).

From reading your primes statement to you, they are seeking to meet the requirement of FAR 16.301-3a by trying to determine the adequacy of your accounting system.

But in your case, this should not be an issue! Why? According to your statement above, your system had to be deemed adequate at one time by the DCAA in order for you to have been awarded your current Cost Reimbursement contracts. Your support of this is actually the explanation in shared in your question that you have an annual DCAA incurred cost audit and your rates and accounting system is under regular review by the DCAA. You should be able to provide the Prime with your DCAA cognizant office that does your regular reviews. They can contact them directly, or through their CO, and request the status of your system. This should more than satisfy your prime.

Alternately, you can search out when you last had a review of your accounting system and provide a copy of the audit report to the prime (which you should have, and if not you can request from your DCAA office). This should meet their requirement for determining adequacy.

They are trying to cover themselves because it is the prime who must ultimately absorb any costs if the government comes back later and determines cost are unallowable for any reason. The government takes it from the prime and the prime has to get it from the subcontractors.

I would try not to focus on the CAS exemption when replying to the prime as this is not the issue.

I do not see anything that cannot be resolved to everyone’s satisfaction and promptly. You should have no issue with the prime once you share what has been identified above.