June 04, 2013

Exceptions to CAS Applicability: Commercial Item Procurements; Small Business Status; Monetary Exception.

If you take into account the reasons for CAS applicability, the exceptions make sense. I say this because many industry professionals (including compliance experts) often argue that the FAR "is illogical" or impracticable - that the rules seem arbitrary in both development and application.

I argue the flip side - the FAR actually makes a lot of sense as written. Let's take CAS as an example. CAS was developed so that the government had a benchmark against which it could analyze "imaginary pricing" - both on the high end to make sure it's not getting gouged and ,the low end to make sure the contractor has taken all applicable cost elements into account when developing its pricing. The exceptions apply when proposed pricing is either not "made up", the impact of mistakes on the government are negligible, or when application of CAS on a contractor implicates more expense in proposal development and performance than mitigation of risk to the government.

The first exception is commercial item proposals. If the sub is proposing a total commercial item solution, CAS does not apply. Why not? Because the pricing has been tested in the open market as far as the government is concerned - the pricing is therefore not "made up" for the purposes of responding to an RFP and therefore CAS is not necessary.

Second exception - small business subcontractors. This is different than the "monetary exception" (which is up next). Congress decided CAS doesn't apply to small businesses. Why not? It's a mix of general reasons for exceptions 2 and 3. Generally small businesses don't bid huge contracts, and the costs assumed in CAS compliance usually outweigh the savings to the government that aren't otherwise recognized during pre-award audits. 

Third exception - monetary. If the offeror did not have at least $50M in government contracts in the previous year, they do not have to comply with full CAS, however, watch for those pesky trigger contracts ($7.5 MIL) and Modified CAS applicability. I submit this is another case of hybrid reasoning. First, the sub hasn't been performing under government contracts and shouldn't be expected to shell out money for compliance when it's just entering the market - pre-award audit effectively mitigates pricing risk to the government. Second, the contractor is either a large commercial company (in which case their price development process is likely based on open market considerations) or a small business so reasons for exception previously discussed for those two types of firms would apply.