A Texas-based aerospace manufacturer lost $6.8 million in allowable facilities capital cost of money during their fiscal year 2024 contract negotiations after DCAA auditors rejected their net book value calculations for systematic violations of Cost Accounting Standard 414. The contractor’s failure to properly exclude fully depreciated assets, adjust for accumulated depreciation timing, and segregate land values from facilities capital computations resulted in complete facilities capital rate rejection affecting 17 active cost-reimbursable contracts. The audit revealed improper inclusion of $42 million in ineligible asset values, inadequate asset retirement documentation, and systematic errors in applying Treasury interest rates to facilities capital calculations. This enforcement action demonstrates how contractors systematically miscalculate facilities capital cost of money through seemingly minor computational errors that compound into multi-million dollar recovery losses and competitive disadvantages in federal contracting markets.
Legal Foundation and Facilities Capital Computation Requirements
Cost Accounting Standard 414, codified at 48 CFR 9904.414, establishes mandatory requirements for calculating and allocating cost of money on facilities capital employed in contract performance. The standard defines facilities capital as the net book value of tangible capital assets and specifically mandates exclusion of land, construction in progress, and accumulated depreciation from facilities capital computations. CAS 414-50(a)(2) requires contractors to measure facilities capital using historical cost adjusted for accumulated depreciation with specific timing provisions ensuring accurate period-end valuations reflecting actual asset deployment in contract performance.
Federal Acquisition Regulation 31.205-10, codified at 48 CFR 31.205-10, implements facilities capital cost of money allowability provisions including specific calculation methodologies and Treasury interest rate application requirements. The regulation mandates that contractors compute facilities capital using average net book values calculated on a monthly basis with proper asset categorization and depreciation timing adjustments. FAR 31.205-10(a)(2) specifically requires facilities capital cost of money calculations to use Treasury rates published in the Federal Register for the contractor’s applicable cost accounting period.
48 CFR 9904.414-50(b) provides detailed implementation guidance for facilities capital measurement requiring contractors to establish systematic procedures for identifying eligible assets, calculating net book values, and applying appropriate depreciation schedules. The standard mandates comprehensive asset tracking systems capable of segregating eligible facilities capital from excluded asset categories with complete audit trail documentation supporting all computational elements. Violations of CAS 414 measurement requirements trigger automatic facilities capital cost of money rejection requiring comprehensive asset analysis reconstruction and potential multi-year contract adjustments.
Systematic Facilities Capital Calculation Failures
DCAA’s enhanced enforcement protocols have identified seven recurring facilities capital calculation violations that contractors consistently implement despite clear regulatory requirements. Fully depreciated asset inclusion represents the most prevalent violation where contractors improperly include assets with zero net book value in facilities capital computations. DCAA auditors systematically reject facilities capital calculations including fully depreciated assets because they violate the fundamental net book value requirement under CAS 414. Contractors must implement systematic asset retirement procedures removing fully depreciated assets from facilities capital pools immediately upon reaching zero net book value.
Land value segregation failures emerge when contractors improperly include land costs in facilities capital calculations despite explicit CAS 414-50(a)(2) exclusion provisions. Land represents non-depreciable capital ineligible for facilities capital cost of money recovery regardless of utilization in contract performance. Contractors frequently violate segregation requirements by including land values embedded in building acquisition costs or failing to properly allocate purchase prices between land and building components. DCAA compliance requirements mandate detailed asset categorization supporting proper land value exclusion from all facilities capital computations.
Construction in progress inclusion violations occur when contractors improperly include partially completed construction projects in facilities capital before assets are placed in service. CAS 414-50(a)(2) explicitly prohibits inclusion of construction in progress in facilities capital computations until projects reach completion and commence productive use in contract performance. Contractors violating temporal inclusion requirements face systematic facilities capital adjustments requiring detailed construction project analysis and asset placement timing documentation.
Accumulated depreciation timing errors emerge when contractors use beginning-of-period or end-of-period accumulated depreciation values rather than required average monthly calculations. 48 CFR 9904.414-50(c) mandates average net book value calculations requiring systematic monthly depreciation adjustments reflecting actual asset value deployment during contract performance periods. Contractors using simplified year-end calculations violate measurement precision requirements creating systematic computational errors requiring comprehensive recalculation.
Treasury interest rate misapplication failures occur when contractors apply incorrect Treasury rates to facilities capital calculations through improper period selection or rate source errors. FAR 31.205-10(a)(2) requires application of Treasury rates published in the Federal Register for the six-month period corresponding to the contractor’s cost accounting period. Contractors frequently violate rate selection requirements by using calendar year rates for non-calendar fiscal year periods or applying rates from incorrect publication dates. These violations require complete facilities capital cost of money recalculation using proper Treasury rate applications.
Asset categorization deficiencies round out common violations where contractors fail to properly classify assets between facilities capital eligible equipment and excluded categories including special tooling, special test equipment, and other ineligible asset types. CAS 414 provides specific definitional criteria requiring detailed asset-by-asset evaluation supporting categorization decisions. Contractors using simplified categorization assumptions violate measurement requirements creating systematic inclusion of ineligible assets requiring comprehensive asset inventory analysis and reclassification procedures.
Leased asset treatment violations emerge when contractors improperly include or exclude capital lease assets from facilities capital computations based on financial reporting classifications rather than CAS 414 control and benefit criteria. The standard requires inclusion of leased assets meeting control and benefit tests regardless of financial statement lease classification. Contractors must implement systematic lease evaluation procedures supporting proper facilities capital treatment with comprehensive documentation demonstrating regulatory compliance.
Step-by-Step Compliance Requirements for Facilities Capital Calculations
Step 1: Implement Comprehensive Asset Tracking and Categorization Systems Deploy automated fixed asset systems capable of tracking individual asset acquisition costs, accumulated depreciation, net book values, and asset categorization supporting CAS 414 facilities capital eligibility determinations. Configure systems to automatically exclude land, construction in progress, and fully depreciated assets from facilities capital computations with complete audit trail maintenance. Establish quarterly asset inventory reconciliation procedures confirming asset existence, categorization accuracy, and proper depreciation application with management certification supporting regulatory compliance.
Step 2: Establish Monthly Net Book Value Calculation Procedures Create systematic procedures for calculating average monthly net book values for all eligible facilities capital assets incorporating beginning and ending period values adjusted for asset acquisitions, retirements, and depreciation expense. Implement automated calculation systems eliminating manual computational errors and ensuring consistent application of averaging methodologies across all asset categories. Maintain comprehensive documentation supporting monthly calculation procedures including detailed reconciliation to general ledger fixed asset accounts and management review certifications.
Step 3: Deploy Treasury Interest Rate Application Controls Implement systematic procedures for identifying and applying correct Treasury interest rates to facilities capital calculations based on contractor fiscal year periods and Federal Register publication timing. Create automated rate selection systems eliminating manual rate identification errors and ensuring consistent application of appropriate rates across all calculation periods. Establish quarterly verification procedures confirming rate accuracy through independent Federal Register review and management approval documentation.
Step 4: Create Asset Retirement and Fully Depreciated Asset Exclusion Procedures Develop comprehensive asset retirement procedures ensuring timely removal of fully depreciated assets from facilities capital computations immediately upon reaching zero net book value. Implement automated system controls flagging assets approaching full depreciation with management review requirements confirming continued productive use or proper retirement processing. Maintain detailed documentation supporting all asset retirement decisions including physical verification procedures, disposal documentation, and facilities capital computation adjustments.
Step 5: Establish Annual Facilities Capital Compliance Reviews Conduct mandatory annual comprehensive reviews of facilities capital calculations including detailed asset categorization verification, land value segregation confirmation, construction in progress exclusion validation, and Treasury rate application accuracy assessment. Document all review procedures with formal management certifications supporting calculation accuracy and regulatory compliance. Create systematic corrective action procedures for identified deficiencies with immediate facilities capital computation adjustments and contract modification notifications when material errors are discovered.
Financial Impact Analysis: Accurate Calculations vs. Rejection Consequences
The financial analysis for accurate facilities capital cost of money calculations demonstrates significant advantages for proper system implementation over rejection consequences and lost recovery opportunities. Comprehensive facilities capital calculation systems including automated asset tracking, monthly net book value computations, and Treasury rate application controls typically cost $225,000 to $385,000 for initial implementation with ongoing annual maintenance costs of $65,000 to $95,000 for system updates and quarterly compliance reviews.
Facilities capital calculation rejection consequences create substantial financial exposure through lost cost recovery and contract modification requirements. The Texas contractor case demonstrates typical consequences where $6.8 million in allowable facilities capital cost of money was lost due to systematic calculation violations. This lost recovery represents permanently foregone contract revenue requiring immediate cash flow adjustments and potential covenant compliance issues on credit facilities.
Beyond immediate lost recovery, facilities capital calculation violations create additional financial exposure through potential unallowable cost penalties when contractors continue claiming rejected facilities capital amounts in contract pricing. False Claims Act liability emerges when contractors submit invoices including facilities capital cost of money calculated using rejected methodologies. Civil monetary penalties under 31 USC 3729 range from $13,508 to $27,018 per violation with each invoice submission constituting separate liability.
Contract modification costs for facilities capital calculation corrections average $110,000 per affected cost-reimbursable agreement creating additional administrative burden during challenging audit periods. Professional services costs for calculation reconstruction including forensic asset analysis, Treasury rate verification, and regulatory compliance assessment typically exceed $675,000 for major findings requiring comprehensive multi-year facilities capital recalculation.
Long-term competitive disadvantage from facilities capital calculation deficiencies affects contractor pricing competitiveness in federal procurements. Contractors unable to recover legitimate facilities capital cost of money face structural cost disadvantages relative to compliant competitors creating systematic bid evaluation penalties. The competitive impact often exceeds immediate lost recovery amounts affecting contractor market share and federal revenue portfolio composition over extended periods.
Multi-Jurisdictional Application and Federal Coordination
Facilities capital cost of money requirements apply uniformly across all federal agencies and geographic jurisdictions regardless of contractor location or contract performance sites. Cost Accounting Standards supersede state-specific capital accounting practices creating consistent national compliance obligations eliminating contractor ability to leverage favorable state regulations. This uniform application extends to multi-state operations where contractors must demonstrate consistent facilities capital calculation methodology application across all facilities and asset locations.
Contractors operating facilities in multiple states face coordinated DCAA enforcement where regional audit offices share facilities capital calculation information and coordinate violation assessments maximizing disallowance across all contractor locations. The facilities capital calculation compliance determination applies contractor-wide rather than facility-by-facility, creating aggregate exposure increasing with organizational complexity and geographic asset distribution.
Multi-agency coordination occurs through standardized DCAA audit procedures ensuring consistent facilities capital calculation evaluation across Department of Defense, civilian agencies, and NASA contracts. Contractors with diversified federal portfolios face simultaneous calculation rejection across all agencies when computational deficiencies are discovered, eliminating contractor ability to segment compliance by customer or contract type.
International operations require facilities capital calculations demonstrating compliance with CAS 414 and FAR requirements regardless of foreign subsidiary structures or international accounting standards. Contractors with international facilities must implement systematic procedures ensuring foreign asset valuations, depreciation calculations, and cost of money computations satisfy federal requirements despite potential conflicts with local generally accepted accounting principles or international financial reporting standards.
DCAA’s Strategic Facilities Capital Enforcement Focus
DCAA’s 2025 enforcement strategy explicitly identifies facilities capital cost of money calculations as critical audit focus areas requiring detailed analytical review and comprehensive computational verification. This strategic focus reflects agency recognition that facilities capital calculation errors create systematic contractor overrecovery through improper asset inclusion and computational methodology violations. Current enforcement data demonstrates 58% calculation deficiency rates for contractors lacking automated facilities capital systems compared to 11% deficiency rates for contractors with comprehensive calculation controls and quarterly compliance review procedures.
The agency’s automated calculation analysis systems identify computational anomalies triggering immediate detailed review procedures including asset-by-asset verification, depreciation calculation validation, and Treasury rate application confirmation. DCAA auditors receive specialized training emphasizing facilities capital calculation evaluation with specific focus on fully depreciated asset inclusion, land value segregation, and construction in progress exclusion verification.
Contractors maintaining proactive facilities capital compliance systems demonstrate calculation acceptance rates 89% higher than organizations requiring computational corrections during audit processes. The compliance investment generates immediate returns through sustained cost recovery, accelerated audit completion, and maintained competitive positioning avoiding structural cost disadvantages in federal contracting markets.
The facilities capital calculation enforcement landscape represents permanent intensification in DCAA audit methodology requiring immediate contractor adaptation to automated calculation systems and comprehensive compliance verification procedures. Contractors failing to implement accurate facilities capital calculation methodologies face inevitable lost recovery and competitive disadvantage threatening market share and federal revenue sustainability.
