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BUS315 Week 9 SolarCal Case Analysis

Concept of Facilities Capital Cost of Money and the Procedure for Determining FCCOM

Participants:

Sally- Intern

Dominic- CEO of SolarCal

Luke- Head of Productions

Jake- Head of Accounting/Finance

Melissa- Head of Government Contracting

Dominic: Welcome back Sally! I hope you enjoyed working with me last week and gained some valuable knowledge about the different types of expenses we went over last week.

Sally: Thanks Dominic! You were very helpful and explained the various types of expenses quite well. I feel very confident with my understanding of these topics. I am excited to see what I will be working on this week!

Dominic: I appreciate your enthusiasm! I hope you are ready for another week full of learning, as you will be working with me again this week.

Sally: That is fantastic! What will you be covering today?

Dominic: I thought this week we would talk about some other key factors to take into consideration when dealing with government contracts.

Sally: It sounds like this will be a very interesting week indeed. I’m ready to get started!

Dominic: Let’s begin by talking about contractors and the government contracts they fulfill. Keep in mind that when a contractor does work on a government contract, the government gets benefits from the facilities that the contractor uses. Based on your schooling, do you remember anything about what the Cost Accounting Standards Board developed in relation to these government contracts?

Sally: I recall that the Cost Accounting Standards Board developed Cost Accounting Standard 414 or the Cost of Money as an Element of the Cost of Facilities Capital, to meet the needs of paying contractors properly for the use of their facilities.

Dominic: Very good! These standards then allowed for the Facilities Cost of Capital to be deemed an imputed cost. When I say imputed, I mean a cost that can be inferred from the contractor’s use of capital funds to buy the facilities.

Sally: That makes a lot of sense. Thanks for explaining that term for me. I never heard that term used before.

Dominic: Not a problem at all. That’s why I am here; to provide you with clarity for things you may not understand. Remember that the basic idea of the Facilities Capital Cost of Money is pretty straightforward. Using a form developed specifically to determine the Facilities Capital Cost, the contractor first computes the cost of the facilities devoted to contract work during the accounting period. This value is referred to as the Facilities Capital. Do you recall how this value is determined?

Sally: It is my understanding that the Facilities Capital is determined only for actual tangible assets or intangible assets that are subject to amortization. Am I correct?

Dominic: You are quite right, excellent work! Once this value is determined, an interest rate is then applied to the value. The result is an imputed cost of the facilities capital devoted to contract work for the period. Then the contractor can, by allocation methods, determine the cost of facilities capital for a specific contract.

Sally: I thought I was on to something but am glad I confirmed this with you. I do have a question about the allowability of a facilities capital cost of their money; I remember that allowability is something that occurs with a Facilities Capital Cost, but I am unsure of how this works. Could you explain this for me?

Dominic: I certainly will. This was something I was planning on covering with you during our time this week as well.

Dominic: Take notice that the Facilities Cost of Capital may be allowed as an actual incurred cost even if the Cost Accounting Standards are not applied to the contract. As an actual cost, it is payable under cost-reimbursement contracts and in the progress payments of a fixed-price contract.

Sally: That makes a lot more sense now. Aren’t there certain provisions and clauses that should be included in contracts too?

Dominic: Right you are! Federal acquisition regulations require that the Facilities Capital Cost of Money provision be inserted in all solicitations that will result in contracts subject to the cost principles for commercial organizations. It notifies companies that have a facilities capital cost of money that the cost will be an allowable cost if the required criteria are met.

Sally: Shouldn’t the Waiver of Facilities Capital Cost of Money clause be used in the contract if the company did not request a facilities capital cost of money in its proposal.

Dominic: That is correct! The clause will state that the company did not request a Facilities Capital Cost of Money, and therefore does not qualify as an allowable cost.

Sally: That is quite interesting! I feel like I have a good grasp on the concept of Facilities Capital Cost of Money. What shall we do now?

Dominic: I’m glad to hear you feel confident with this concept, FCCOM is quite important in our field. You have been wonderful this week and have exhibited a wide knowledge base in this subject area.

Before we get ready for our weekly review, I would like for you to go through a review activity I have prepared to help you review some of the concepts we covered this week.

Dominic: Facilities Capital Cost of Money deals with when a contractor does work on a government contract and the government receives benefits from the facilities that the contractor uses. As a result of this the Cost Accounting Standards Board developed Cost Accounting Standard 414, Cost of Money as an Element of the Cost of Facilities Capital, to meet the need for paying contractors properly for the use of their facilities.

Dominic: Allowability of Facilities Capital Cost of Money deals with the Facilities Cost of Capital being allowed as an actual incurred cost even if the Cost Accounting Standards are not applied to the contract. As an actual cost, it is payable under cost-reimbursement contracts and in the progress payments of a fixed-price contract.

Dominic: Contract Provisions and Clauses deals with the federal acquisition regulations that require the Facilities Capital Cost of Money provision to be inserted into all solicitations that will result in contracts subject to the cost principles for commercial organizations. It notifies offers that Facilities Capital Cost of Money will be an allowable cost if required criteria are met.

Dominic: The Determination of the Facilities Capital Cost of Money refers to only the actual tangible assets or intangible assets that are subject to amortization. Once the FCCOM value is determined, an interest rate is then applied to the value. The result is an imputed cost of the Facilities Capital devoted to contract work for the period. Then the contractor can, by allocation methods, determine the cost of Facilities Capital for a specific contract.

Dominic: Great work on the review materials. You did excellent and I think you really have a solid foundation for the concepts we discussed this week.

I would now like to summarize what we went over this week to fill in any gaps you may have had. Please feel free to add on to anything I say as we go through.

Sally, do you want to begin this review?

Sally: That sounds great! I first learned that the Facilities Cost of Capital is an imputed cost, that is, a cost that can be inferred from the contractor’s use of capital funds to buy the facilities. I remember that you also went over the process for determining the Facilities Capital Costs. That part definitely stuck with me!

 

Dominic: Fantastic! I then showed you that the Facilities Cost of Capital may be allowed as an actual incurred cost even if the Cost Accounting Standards are not applied to the contract. I also told you to keep in mind that sometimes the Facilities Cost of Capital is allowable under certain conditions.

 

Sally: The last thing we talked about was the federal acquisition regulations that require you to insert the Facilities Capital Cost of Money provision in all solicitations. I learned that this will result in contracts that will be subject to the cost principles for commercial organizations. I recall that the Waiver of the Facilities Capital Cost of Money clause is used in contracts like these if the contractor did not request the Facilities Capital Cost of Money in their proposal.

Dominic: Very good work with the review Sally. You did really well this week with the concepts we went over.

Sally: Thank you Dominic! This review was very helpful, and I feel that I have really grasped the key concepts discussed this week. I feel very confident in this content area.

Dominic: I would gladly have your assistance on other projects; you have done a great job thus far during your internship. I look forward to working with you again.

Until we meet again don’t forget to complete your weekly discussion questions based on the key concepts, we covered this week.

Have a good rest of the day and I will see you next week!

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