The Overseas Exemption to the Cost Accounting Standards Eliminated Without Ever Informing Government Contractors of the Correct Interpretation of the Exemption

This post was also written by Stephanie E. Giese.

Those of us who have an interest in compliance with the federal Cost Accounting Standard (“CAS”) are not surprised that the CAS Board eliminated the Overseas Exemption effective October 11, 2011. See 76 Fed. Reg. 49365 (Aug. 10, 2011). What may be more surprising than the elimination of the exemption is that the CAS Board is eliminating the exemption that it first promulgated in 1973 without ever offering its interpretation of how the exemption should be applied. So, for contractors who have relied on this exemption or will rely on this exemption for contracts and subcontracts awarded prior to October 11, 2011, we will never know which federal agency’s interpretation of the exemption is correct. The CAS Board’s failure to interpret this exemption introduces some uncertainty for contractors who have relied on the exemption, particularly in the event of a CAS compliance audit.

Federal Agency Interpretations of the Overseas Exemption Differ. Some federal agencies such as the U.S. Agency for International Development (“USAID”) have interpreted the application of the exemption narrowly in acquisition policy guidance such that the vast majority of U.S. companies could not rely on the exemption (if any costs, direct or indirect, are incurred in the U.S. and charged to a USAID contract). Other federal agencies, including the U.S. Department of Defense (“DoD”), have stated in acquisition policy guidance that a U.S. company may rely on the Overseas Exemption if all direct costs incurred in connection with a government contract are incurred overseas.

The CAS Board’s Limited Jurisdiction was the Basis for the First Promulgation of the Overseas Exemption. You may ask why the Overseas Exemption was first promulgated in light of the fact that the federal agencies do not agree on its application. The Overseas Exemption was first promulgated in the Armed Services Procurement Regulation (“ASPR”) in 1973. The original basis for the exemption was that the CAS Board’s jurisdiction was limited to contracts awarded in the U.S., its territories and possessions pursuant to Section 2168 of the Defense Production Act (“DPA”). Thus, by default, contracts and subcontracts executed and performed entirely outside the U.S. were exempt from CAS. The CAS Board ceased to exist under the DPA in 1980, but was reestablished in 1988 under the Office of Federal Procurement Policy (“OFPP”) Act without the overseas limitation on the Board’s jurisdiction. In 1992 and again in 2008, during the time when its jurisdiction included contracts performed overseas, the Board reviewed its rules and chose to retain the Overseas Exemption without offering any further interpretation of the applicability of the exemption.

CAS Compliance May Depend on Your Agency’s Interpretation of the Overseas Exemption. This month the CAS Board again offered no further interpretation of the Overseas Exemption when it eliminated the exemption. So a government contractor may want to consider the federal agency that awarded the contract before relying on the Overseas Exemption to CAS — while the exemption lasts!