Factors Used In Calculating Facilities Capital Cost Of Money

Projected Facilities Capital Cost of Money Over 5 Years

Year	Beginning Net Book Value	Depreciation	Ending Net Book Value	Calculated FCCM

What is Facilities Capital Cost of Money?

The facilities capital cost of money (FCCM) is an imputed cost that government contractors can claim on contracts. It is an accounting concept, defined by Cost Accounting Standard (CAS) 414, designed to incentivize contractors to invest in new and modernized facilities and equipment that ultimately benefit government projects. Essentially, the government acknowledges that when a contractor ties up its capital in facilities, it forgoes the opportunity to invest that money elsewhere. FCCM is a way for the government to compensate for this opportunity cost, without paying direct interest, which is typically an unallowable cost on government contracts.

This concept is crucial for contractors in the defense, aerospace, and other sectors with significant government contracts. By properly calculating and including the facilities capital cost of money in proposals, contractors can recover a portion of their capital investment costs, improving cash flow and making capital-intensive projects more financially viable. Misunderstanding or ignoring FCCM means leaving allowable money on the table.

Facilities Capital Cost of Money Formula and Mathematical Explanation

The calculation for the facilities capital cost of money is straightforward and prescribed by CAS 414. It involves multiplying the investment base (the net book value of the facilities) by a specific interest rate published by the U.S. Treasury.

The formula is:

FCCM = Average Net Book Value of Facilities × Cost of Money Rate

The process involves a few key steps: First, determine the average net book value of the assets (buildings, equipment) that are allocable to government contracts for the specific accounting period. Second, identify the correct cost of money rate, which is published semi-annually by the Secretary of the Treasury. Finally, multiply these two values to determine the total facilities capital cost of money for the period.

Variables Table

Variable	Meaning	Unit	Typical Range
Net Book Value (NBV)	The original cost of an asset minus its accumulated depreciation.	Dollars ($)	Varies widely based on company assets.
Cost of Money Rate	An interest rate set by the U.S. Treasury for CAS 414 calculations.	Percentage (%)	Typically 1% – 8%, changes semi-annually.
FCCM	The resulting imputed cost for the period.	Dollars ($)	Directly proportional to NBV and the rate.

Practical Examples (Real-World Use Cases)

Example 1: Aerospace Parts Manufacturer

An aerospace company invests in a new $50 million automated manufacturing line. For the first full year of operation, the average net book value of this facility is $48 million. The Treasury’s cost of money rate for that period is 4.5%.

• Inputs:
  • Average NBV: $48,000,000
  • Cost of Money Rate: 4.5%
• Calculation:
  • $48,000,000 * 0.045 = $2,160,000
• Financial Interpretation: The company can include $2.16 million as an allowable, imputed cost in its overhead rates for its government contracts. This recovery helps offset the financial burden of the large capital outlay, making the investment in efficiency improvements more attractive. The proper calculation of facilities capital cost of money is vital here.

Example 2: Defense IT Services Firm

A defense IT contractor purchases a new data center for $15 million to support its classified government work. In its third year, the average net book value of the data center’s assets is $11 million. The applicable Treasury rate is 3.8%.

• Inputs:
  • Average NBV: $11,000,000
  • Cost of Money Rate: 3.8%
• Calculation:
  • $11,000,000 * 0.038 = $418,000
• Financial Interpretation: The firm can claim $418,000 in facilities capital cost of money for that year. This demonstrates that FCCM is not just for tangible manufacturing equipment but also for the critical infrastructure required for service-based contracts. It is an important factor in any government contract pricing guide.

How to Use This Facilities Capital Cost of Money Calculator

1. Enter Net Book Value: Input the average net book value (NBV) of the facilities allocable to government work for the accounting period you are analyzing.
2. Enter Cost of Money Rate: Input the specific rate published by the U.S. Treasury for that period. Be sure to use the correct semi-annual rate.
3. Enter Depreciation Rate: For projection purposes, enter a reasonable average annual depreciation rate for your assets. This powers the 5-year forecast table and chart.
4. Review the Results: The calculator instantly displays the primary facilities capital cost of money result. The summary provides a quick check of your inputs.
5. Analyze the Projections: The table and chart show how the FCCM will likely change over five years as your asset’s book value depreciates. This is crucial for long-term financial planning and understanding the full impact of a capital expenditure analysis.

Decision-Making Guidance: Use this calculator to validate your accounting, prepare for contract proposals, and make informed decisions about future capital investments. A higher FCCM can make an investment in efficiency-improving technology more financially justifiable to stakeholders.

Key Factors That Affect Facilities Capital Cost of Money Results

Several factors can influence the final facilities capital cost of money calculation. Understanding them is key to accurate cost accounting and proposal pricing.

• 1. Asset Capitalization Policy: How a company defines a “capital asset” is fundamental. Aggressive capitalization policies (i.e., capitalizing more assets with lower thresholds) will lead to a higher net book value and, therefore, a higher FCCM.
• 2. Depreciation Method: The method used to depreciate assets (e.g., straight-line, declining balance) directly impacts the net book value year over year. Accelerated depreciation methods will lower the NBV faster, reducing the claimable facilities capital cost of money in later years.
• 3. U.S. Treasury Rates: The cost of money rate is outside a contractor’s control. It is tied to the interest rates on U.S. Treasury notes. When rates rise, the FCCM claim increases, and vice-versa. This factor directly links the calculation to broader economic conditions.
• 4. Allocation of Assets: Only the portion of an asset’s value that is allocable to government contracts can be included in the FCCM base. Companies with both commercial and government divisions must carefully allocate asset values between them. An accurate cost allocation strategy is essential.
• 5. Asset Acquisitions and Disposals: A company’s investment cycle heavily influences the NBV. A period of heavy investment in new facilities will significantly increase the base for calculating facilities capital cost of money. Conversely, selling off or retiring old assets will decrease it.
• 6. Lease vs. Buy Decisions: The treatment of leased assets under accounting standards (like GAAP) can affect the NBV. Capital leases, which are treated as owned assets, are typically included in the FCCM base, while operating leases may not be. This makes the lease vs. buy calculator a relevant tool in the decision process.

Frequently Asked Questions (FAQ)

1. Is facilities capital cost of money the same as interest?

No. FCCM is an “imputed” cost, not a direct cash expense like interest on a loan. The Federal Acquisition Regulation (FAR) generally considers interest an unallowable cost. FCCM was created specifically to provide a mechanism to recognize the cost of capital without violating the rule against allowing interest.

2. Do I need to be a large defense contractor to claim FCCM?

No. Any contractor with CAS-covered contracts can claim facilities capital cost of money, provided they follow the rules in CAS 414. This applies to subcontractors and smaller businesses if their contracts meet the CAS applicability thresholds.

3. Where can I find the official cost of money rates?

The rates are published semi-annually by the Secretary of the Treasury in accordance with Public Law 92-41. They are typically available on the U.S. Treasury website and are also republished by various government contracting news outlets.

4. What happens if I don’t include FCCM in my contract proposal?

If you do not specifically identify and propose the facilities capital cost of money in your proposal, you generally waive your right to claim it after the contract is awarded. It is critical to include it upfront.

5. Can I claim FCCM on assets under construction?

The cost of money for assets under construction is covered by a different standard, CAS 417 – Cost of Money as an Element of the Cost of Capital Assets Under Construction. CAS 414 applies to assets that have been placed in service.

6. Does the age of the asset affect the facilities capital cost of money?

Yes, indirectly. The age of an asset affects its accumulated depreciation, which in turn reduces its net book value. An older, highly depreciated asset will have a lower NBV and therefore contribute less to the FCCM calculation than a new asset.

7. Is the facilities capital cost of money considered profit?

No. In fact, FAR specifically prohibits applying a profit or fee percentage to the FCCM amount. It is treated as an allowable cost, not a base for calculating profit.

8. How does a business combination or acquisition affect NBV?

In a business combination, assets are typically revalued to their fair market value. This can result in a “step-up” in the book value of facilities, which would then increase the base for calculating future facilities capital cost of money. This is governed by FAR 31.205-52.