Pricing Handbook
11. FACILITIES CAPITAL COST MONEY
Table of Contents
11.1 Overview of
Facilities Capital Cost of Money
11.2 Calculating
Facilities Capital Cost of Money Factors/Rates
11.3 Summary
11. Facilities Capital Cost of Money
11.1 Overview
of Facilities Capital Cost of Money
This chapter examines the terms, concepts, and issues involved in analyzing facilities
capital cost of money. Federal Aviation Administration Acquisition Management System [FAA
AMS Toolbox Guidance T3.3.2 (Contract Cost Principles), Section A-6, par. g] details the
process of determining allowability, accounting, and payment of Facilities Capital Cost of
Money (FCCOM). The approach described in this chapter is based upon the use of CASB-CMF
and DD 1861 forms.
FCCOM is an imputed cost that represents the cost of the contractor employing capital
when investing in facilities or assets under construction that benefit the Government. As
a first step toward understanding FCCOM, it is necessary to become familiar with the terms
and definitions shown in Table 11-1.
Table -1. Common Terms and Definitions [FAA AMS Toolbox Guidance
T3.3.2 (Contract Cost Principles), Section D]
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Terms |
Definitions |
| Business Unit |
Any segment of an organization, or an entire business
organization, not divided into segments. [par. 12] |
| Cost of Capital Committed to Facilities |
An imputed cost determined by applying a cost of money
rate to facilities capital. [par. 17] |
| Facilities Capital |
The net book value of tangible capital assets and those
intangible capital assets that are subject to amortization. [par. 24] |
| Intangible Capital Assets |
An asset that has no physical substance, has more than
minimal value, and is expected to be held by an enterprise for continued use or possession
beyond the current accounting period for the benefits it yields. (Example: Software) [par.
62] |
| Net Book Value (NBV) of an Asset |
The acquisition value of an asset plus any capitalized
improvements to that asset, less accumulated depreciation. |
| Tangible Capital Assets |
An asset that has physical substance, more than minimal
(negligible) value, and is expected to be held by an enterprise for continued use or
possession beyond the current accounting period for the benefits it yields. (Example:
Computer) [par. 34] |
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Prior to issuing Cost Accounting Standard (CAS) 414 in 1976, the Government did
not recognize the cost of money as an allowable contract cost. CAS 414 established
facilities capital cost of money as an element of cost.
This set forth the guidelines for contractors to follow in order to receive FCCOM and
established the allocability of FCCOM as a contract
 cost. CAS 414, which is addressed in the FAA AMS (Toolbox Guidance T3.3.2
(Contract Cost Principles), Section A-6, paragraph g(1)) provides the rationale and a
viable direction for determining the facilities capital cost of money.
CAS 414 resulted from several studies that showed an outdated and shrinking defense
industrial base. Contractors were earning a lower return on invested capital from their
Government work than from their commercial work, drawing investment dollars away from
defense oriented facilities. The Government implemented CAS 414 as an incentive for
contractors to invest in manufacturing facilities geared toward defense based production.
The guidelines established by CAS 414 provide standardized methodology that can be used to
determine the proper amount of compensation to be paid to a contractor based on the level
of investment in productive facilities.
When a contractor invests in facilities that benefit the Government, other business
opportunities are foregone that may be more profitable. For example, the contractor could
have placed money in a high quality, interest bearing financial instrument and earned a
fixed return, while assuming little or no risk. This is commonly referred to as a
contractor’s opportunity cost. Through investment in Government facilities, the
contractor bears these opportunity costs and the risks inherent in such business
endeavors. The Government, however, receives the benefit of the facilities that the
contractor employs in contract performance and avoids the risks associated with facilities
ownership.
Corporations will not begin a project if the cost of capital is higher than the
expected return. In essence, corporations are compensated for their costs and the
associated risks assumed; otherwise, projects would not be undertaken. CAS 414 recognizes
these costs as "real" and attempts to compensate the contractor in a "fair
and reasonable" manner. In short, through CAS 414, the Government attempts to
properly compensate contractors for the use of their facilities.
At its inception, the cost of money was only allowed on defense oriented contracts: DoD
contracts, and defense related contracts of the Department of Energy (DOE) and the
National Aeronautics and Space Administration (NASA). Today, however, recognition of
facilities capital cost of money is allowed on all contracts. In accordance with FAA AMS
(Toolbox Guidance T3.3.2 (Contract Cost Principles), Section A-6, par. g(1a)) FCCOM is
allowable if:
- The contractor’s capital investment should be measured, allocated to contracts,
and costed in accordance with CAS 414;
- The contractor maintains adequate records to demonstrate compliance with this
standard; and
- The estimated facilities capital cost of money is specifically identified or proposed
in cost proposals relating to the contract under which this cost is to be claimed.
The cost of capital committed to facilities is often treated as an imputed cost. Within
this context, imputed implies that the cost cannot be specifically identified in the
accounting records of the contractor, but it can be inferred from the contractor’s
use of capital funds to purchase facilities. The Cost Accounting Standards Board (CASB)
has concluded that the imputed cost be recognized as a contract cost because it is
"real and relevant". Therefore, if a contractor elects to claim FCCOM, it may
obtain reimbursement as an "actual incurred cost" on cost reimbursement
contracts and through progress payment invoices of a fixed-price contract.
11.2 Calculating
Facilities Capital Cost of Money Factors/Rates
Since a contractor’s facilities are often applied toward the performance of
multiple contracts, it can be difficult to calculate an exact value for the proportion of
facilities used on any one particular contract. To reduce the complexity and subjectivity
of the allocation of FCCOM, CAS 414 specifies the use of the contractor’s overhead
and general and administrative (G&A) bases as allocation bases for FCCOM.
FCCOM factors convert the direct costs proposed on a contract into the cost of money
associated with the portion of facilities they support. When a contractor claims FCCOM,
the CASB-CMF (Cost of Money Factors) Form should be completed. This form requires the
contractor to assign assets to appropriate "expense pools" and calculate a FCCOM
factor for each pool. The purposes of CASB-CMF are: 1.) to accumulate total facilities
capital net book values allocated to each business unit for the contractor cost accounting
period, and 2.) to convert those values to facilities capital cost of money factors
applicable to each overhead or G&A expense allocation base employed within a business
unit. CASB-CMF is shown in Figure 11-1.
Figure 0-1. CASB-CMF Form
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FORM CASB-CMF |
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FACILITIES CAPITAL |
COST OF MONEY FACTORS
COMPUTATION |
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CONTRACTOR: |
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ADDRESS: |
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BUS. UNIT |
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COST ACCTNG PERIOD |
APPLIC. COST OF
MONEY RATE (%)
(1) |
ACCUM. & DIRECT DISTRIB.
OF N.B.V.
(2) |
ALLOC. OF UNDIST. BASIS. OF
ALLOC.
(3) |
TOTAL NET BOOK VALUE
(4)= 2+3 |
COST OF MONEY
FOR THE COST ACCTNG. PERIOD
(5) |
ALLOC. BASE FOR
THE PERIOD IN UNITS OF MEASURE
(6) |
FACILIT. CAP.
COST OF MONEY FACTORS
(7)= 5/6 |
| BUSINESS |
RECORDED |
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| UNIT FACILITIES |
LEASED PROPERTY |
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CORPORATE OR GROUP |
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TOTAL |
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UNDISTR. |
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DISTRIB. |
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| OVERHD. |
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| POOLS |
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| G&A |
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| EXPENSE |
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| POOLS |
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| TOTALS |
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Analysis of cost of money factors should examine the procedures used by the
contractor in each stage of the development of these factors. Government auditors will
typically audit FCCOM factors and bases when reviewing overhead rates. However, if the
Government does not perform, an auditor raises questions as to the preparation of the
factors and/or bases, it is the responsibility of the analyst to ensure that the FCCOM
factors and allocation bases were calculated following the proper procedures.
11.2.1 Utilizing the CASB-CMF Form
Before the analyst can properly analyze FCCOM factors, he or she should fully
understand their development. By tracing the methodology of CASB-CMF, the following
section will detail the steps that a contractor performs when developing FCCOM factors.
Applicable Cost of Money Rates (Column 1 of the CASB-CMF Form)
The first value entered into the CASB-CMF form is the current cost of money rate. The
cost of money rate, as defined in CFR 414.50(b), is the arithmetic mean of the interest
rates in effect for that cost accounting period. It is published by the Secretary of
Treasury pursuant to Public Law 92-41. The Secretary of Treasury publishes this rate in
January (for the period January through June) and in July (for the period July through
December) in the Federal Register. Even if the performance period of a contract
extends beyond the current six month period, offerors must use the current rate when
proposing FCCOM. Cost reimbursement contracts and fixed-price incentive contracts that
will be repriced will eventually be adjusted to reflect the actual FCCOM rates for later
periods.
The imputed cost of money rate is so named because it is a standardized estimate
of the contractor’s actual cost of money. The analyst must ensure that the
appropriate treasury rate is used by the contractor in the development of the FCCOM
factors. The rate is not negotiable and is entered in Block 1 of the CASB-CMF form.
Accumulation and Direct Distribution of Net Book Value (Column 2 of the
CASB-CMF Form)
The average net book value (NBV) of assets held during the cost accounting period is
reported in Column 2. The contractor must divide its assets among three categories:
Recorded Assets, Leased Property, and Corporate or Group Facilities. These categories are
discussed in Table 11-2.
Table 0-2. NBV Asset Categories
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Asset Category |
Description |
| Recorded Assets |
Assets owned by the contractor (or business unit),
carried on its books, and used in the regular conduct of business. |
| Leased Property |
Consists of the capitalized value of assets acquired by
a capital lease to be treated as purchased property in lieu of rental costs. |
| Corporate or Group Facilities |
A business unit’s allocable share of corporate
owned and leased facilities. |
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The total amount of assets allocated to the three categories must equal the sum
of distributedand undistributed assets. Distributed assets are those the
contractor allocates solely to a specific overhead, G&A, or any other indirect cost
pool. Undistributed assets are those that remain (assets used by personnel in several
different overhead accounts that are not solely applicable to a specific indirect cost
pool).
CAS 414 requires the contractor to calculate the
"average" NBV of its facilities, equipment, and land and to allocate the NBV to
the appropriate expense pools. The NBVs should be derived from the same values as those
used to develop the depreciation expenses or amortization included in the projected
overhead rates. The only difference is that land is never included in an expense pool
because it is not a depreciable asset. However, CAS 414 does recognize that land has a
value--land could be sold and the money could earn a return. Accordingly, the standard
permits the inclusion of land’s NBV in FCCOM calculations. CAS 414 states that
"land is integral to the regular operation of a business unit and shall therefore be
included."
Methods of NBV Calculation
A key element in the cost of money calculation is the NBV of facilities. CAS 414
requires the offeror to use the average NBV of its facilities for the cost accounting
period using the beginning and year-end NBVs. Normally, the analyst would request an audit
of the proposed cost of money factors giving special attention to the accuracy of the
proposed NBVs. Two methods are available for determining NBV: the historical method and
the projected method.
The Historical Method of NBV Calculation. The underlying assumption under the
historical method is that the NBV of assets has been and will remain relatively unchanged.
As a result, only one form, CASB-CMF, is required regardless of how many periods are
forecast. The primary considerations for the analyst or Government auditor include the
following (Introduction to Cost Analysis, pages 11-14):
- Verification that the NBV of assets concurs with contractor records.
- Verification that asset allocation to burden centers is appropriate and in accordance
with procedures used in allocation of depreciation expense for the same facilities.
- Verification of the allowability of the costs used to develop the factors.
- Verification of the actual calculations used to develop the factors.
The Projected Method of NBV Calculation.The projected method uses the
contractor’s estimates of future NBVs. There are three parts that make up each NBV
projection (Introduction to Cost Analysis, pages 11-15):
- The NBV of current assets that will be in service during the projected accounting
period.
- A projection of new assets that will be acquired during the projected accounting period.
- A projection of current assets or projected new assets that will be disposed of during
the projected accounting period.
Under the projected method, the primary considerations for the analyst or Government
auditor performing a review are (Introduction to Cost Analysis, pages 11-15):
- Verification of historical bases for projections of the NBV of assets.
- Review of contractor support for projection of asset adjustments, including
identification of assets to be acquired or disposed of, the time phasing of asset changes,
and the capital budget considering these adjustments.
- Verification of the allowability of the projected costs used to develop these factors.
- Review of the methods and rationale used to project burden center bases for the
projected periods.
- Verification of the actual calculations used to develop the factors.
Sections on Overhead Pools and G&A Expense Pools
The lower section of Column 2 of the CASB-CMF Form is used for the allocation of
distributed facilities capital items. Distributed items should be allocated to their
appropriate indirect cost pool. The proper titles for the cost pools to which distributed
facilities capital items have been allocated are listed in the lower section of Column 1
of the form.
Allocating Undistributed Assets (Column 3 of the CASB-CMF Form)
Once distributed assets have been assigned to the appropriate indirect cost pools,
undistributed assets should be allocated to the appropriate overhead and G&A pools.
CAS 414 allows the contractor to allocate undistributed assets to its various overhead and
G&A pools on any reasonable basis that approximates the actual absorption of
depreciation or amortization of the facilities. The goal is to divide the costs so that
each indirect cost pool receives its proper share. In other words, the contractor
allocates the NBV of the main facilities to the indirect cost pools in a manner that
closely relates to how the expenses are allocated to their overhead pools. A supporting
worksheet of this allocation should be provided if more than one service center or other
similar "intermediate" cost objective is involved in the reallocation process.
The analyst should pay close attention to the undistributed assets, assuring that they are
allocated in a reasonable manner. The sum of distributed and undistributed assets should
equal the "Total" line in Column 2 of the CASB-CMF form.
An alternative method, which places all undistributed NBV in G&A, may be used if
the contracting parties agree and if any one of two conditions are met:
- the depreciation or amortization generated by these assets must be immaterial, or
- the results from applying the alternative method must not differ materially from the
"regular" procedure.
Determining Total Net Book Value (Column 4 of the CASB-CMF Form)
The sum of the amounts in Columns 2 and 3 provides the total NBV of assets allocated to
each expense pool and represents the amount of money that would be earning a return if
invested elsewhere had it not been invested in facilities. The total of this column must
agree with the sum of the recorded assets, leased property, and corporate or group
facilities capital recorded in Column 2 of the CASB-CMF form.
Calculating Cost of Money for the Cost Accounting Period (Column 5 of the
CASB-CMF Form)
To calculate the cost of money, the contractor multiplies the total net book value of
each expense pool (column 4) by the cost of money rate (entered in Block 1). These values
are placed in Column 5. The sum of all values in Column 5 represents the opportunity cost
the contractor has forgone during the cost accounting period based on the given treasury
rate.
Determining the Appropriate Allocation Base for an Accounting Period, in
Unit(s) of Measure (Column 6 of the CASB-CMF Form)
The appropriate base for each expense pool is entered in Column 6. CAS 414 requires
that each base unit-of-measure used in the FCCOM calculation be compatible with the
overhead and G&A expense allocation procedures. For example, if a contractor uses
direct labor as the base for computing direct labor overhead, he or she would enter the
total amount of projected direct labor costs for the cost accounting period. These values
are obtained from the contractor’s projected expenses for the proposal year. The
total base unit-of-measure used for allocation in this column refers to all work done in
an organizational unit associated with the indirect cost pool and not to Government work
alone.
Calculating Facilities Capital Cost of Money Factors (Column 7 of the CASB-CMF
Form)
The FCCOM factors are the quotient of the cost of money in Column 5 separately divided
by the corresponding overhead or G&A expense base in Column 6 of the form. Each
computation must be carried to five decimal places.
These factors represent compensation to the contractor for investing in the assets
assigned to each cost pool. For example, if the G&A FCCOM factor was 0.01500, the
contractor would add $0.015 to each G&A base dollar in order to be compensated for
foregone opportunity cost. This foregone opportunity is the result of the
contractor’s decision to invest in facilities utilized in the performance of
Government contracts instead of investment in other non-Government facilities.
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| Columns 2,3,4 and 6 of the CASB-CMF form will not normally vary from proposal to
proposal throughout the cost accounting period--the amounts of distributed and
undistributed assets usually remain the same as do the allocation bases. |
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11.2.2 Calculating
Contract Facilities Capital Cost of Money
The cost of money factors previously discussed are used by the contractor to compute
the cost of money and contract facilities capital. DD Form 1861, Contract Facilities
Capital & Cost of Money, is a cost analysis tool that allows the analyst to record and
compute these values in a standardized and consistent manner. DD Form 1861 is also used to
develop the Government negotiation position.
Utilizing DD Form 1861
DD Form 1861, displayed as Figure 11-2, provides a medium from which to calculate key
inputs necessary for developing the Government negotiation position on profit/fee.
DD Form 1861: Sections 1 through 6
DD Form 1861 consists of seven sections. Sections 1 through 5 require the input of
general contract information. Section 6 of the form, Distribution of Facilities Capital
Cost of Money, is divided into four columns: Expense Pool, Allocation
Base, COM Factor, and Total Amount. The four
columns correspond to information needed to calculate the cost of money objective.
Figure 0-2. DD Form 1861 |
| CONTRACT FACILITIES CAPITAL COST OF MONEY |
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1. CONTRACTOR NAME: |
2. CONTRACTOR ADDRESS: |
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3. BUSINESS UNIT: |
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4. RFP/CONTRACT PIIN NUMBER: |
5. PERFORMANCE PERIOD: |
| 6. DISTRIBUTION OF FACILITIES CAPITAL COST OF
MONEY: |
| EXPENSE POOL |
ALLOCATION BASE |
COM FACTOR |
TOTAL AMOUNT |
| ENGINEERING |
$ - |
- |
$ - |
| MANUFACTURING |
$ - |
- |
$ - |
| GENERAL & ADMINISTRATIVE BASE |
$ - |
- |
$ - |
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TOTAL:
TREASURY RATE:
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$ -
0.000% |
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FACILITIES CAPITAL EMPLOYED (Total Divided by T-Rate)
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$ -
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| 7. DISTRIBUTION OF FACILITIES CAPITAL
EMPLOYED: |
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PERCENTAGE |
AMOUNT |
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LAND |
- |
$ - |
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BUILDINGS |
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$ - |
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EQUIPMENT |
- |
$ - |
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FACILITIES
CAPITAL EMPLOYED |
100.00% |
$ - |
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DD FORM 1861 , AUG '87 |
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Column 1: Expense Pool
The expense pool column provides for listing overhead and G&A pools in the same
structure they appear on the contractor’s cost proposal and the CASB-CMF Form. The
structure and allocation base units-of-measure must be compatible on all three displays.
Completing this column will enable the analyst to ensure that all pools are considered and
that all cost of money factors correspond to the appropriate pool.
Column 2: Allocation Base
Allocation base values are taken from the contractor’s cost proposal. The total
amount of each allocation base (i.e. engineering, manufacturing or service labor and/or
the G&A base) is entered into this column. When preparing a prenegotiation position,
the analyst should incorporate base values from prenegotiation cost objectives. If more
than one prenegotiation position exists, such as both a minimum and maximum position,
separate forms need to be completed for each position.
Column 3: COM Factors
COM factors are obtained from the contractor’s proposal or from corresponding data
in the CASB-CMF Form(s). If a Government audit disputes the proposed factors, the
analyst should incorporate the Government’s recommended rates into the prenegotiation
position.
Column 4: Total Amount
The cost of money for each pool is computed by multiplying the allocation base column
by the COM factor column. These amounts are then summed to determine the total FCCOM
applicable to the prenegotiation position. This value is entered into the row labeled Total.
Once the total amount column has been summed, the value is divided by the treasury rate to
determine the Facilities Capital Employed value. (The treasury rate is the same
rate used on the CASB-CMF Form).
DD Form 1861- Section 7
Section 7, Distribution of Facilities Capital Employed, provides the actual "link" between the DD Form 1861 and
the DD Form 1547. This section facilitates the calculation of the profit objective under
the Weighted Guidelines Analysis for determining profit or fee. This portion of DD Form
1861 consists of two columns: Percentage and Amount.
Column 1: Percentage
The first column, Percentage, refers to the overall percentage of NBV dollars
that are invested in that type of facility. The percentage of facilities is apportioned
between land, buildings, and equipment and must total 100% when summed together. For
example, the percentages between land, buildings, and equipment could be assigned as
follows:
Column 2: Amount |
Land=
Buildings=
Equipment= |
5%
45% (When summed, percentages equal 100%)
50% |
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These percentages are then multiplied by the total Facilities Capital
Employed calculated in Section 6. The resulting values for land, buildings, and
equipment are entered into the Amount column. This process serves to assign a value
to each type of facility which is equal to the overall percentage of the contractor’s
NBV invested in that type of facility.
11.3 Summary
In short, FCCOM is cost reimbursement in recognition of the cost of investing in
government facilities. CAS 414 recognizes these FCCOM costs as "real" and
attempts to compensate the contractor in a "fair and reasonable" manner. Upon
understanding FCCOM and gaining familiarity of relevant forms such as CASB-CMF, DD 1861,
and DD 1457, an analyst will have gained a thorough knowledge of FCCOM and note its
importance in the analysis. |
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