What Is Facilities Capital Cost of Money?

Facilities Capital Cost of Money (FCCM) is a financial concept, particularly relevant in certain accounting and contracting environments. It is an imputed cost, meaning it is a theoretical cost recognized for accounting purposes rather than a direct cash outlay. This concept acknowledges the opportunity cost associated with a company’s own capital invested in facilities and equipment used for contract performance.

Defining Facilities Capital Cost of Money

Facilities Capital Cost of Money (FCCM) is the estimated cost of using a company’s own invested capital (equity) to finance its facilities, plant, and equipment that are actively employed in fulfilling contract obligations. This differs significantly from traditional interest expense, which is a cash payment for borrowed funds; FCCM is a theoretical cost recognized for reimbursement.

The rationale behind FCCM is to provide equitable treatment for contractors who invest their own capital in assets that benefit specific contracts, particularly those with the government. When a contractor uses its own funds for facilities, it foregoes the opportunity to invest that capital elsewhere for a return, such as in bonds or other profitable ventures. Therefore, FCCM aims to compensate the contractor for this missed opportunity, ensuring they are not financially disadvantaged by making such investments. It recognizes that capital has a cost, even when it is internally generated and not borrowed.

This concept acknowledges that a business’s decision to commit its own capital to facilities for contract performance carries an economic burden, similar to the burden of paying interest on borrowed funds. By recognizing FCCM, the system attempts to create a more level playing field, encouraging contractors to invest in modern and efficient facilities that ultimately benefit the contracting party, such as the government, through potentially lower overall contract costs due to improved efficiency. It serves as a mechanism to account for the economic value of the capital tied up in physical assets supporting contract work.

Key Components and Calculation

The calculation of Facilities Capital Cost of Money typically involves two primary components: the net book value of the facilities capital and a specified cost of money rate. Facilities capital refers to tangible assets like buildings, machinery, and equipment, as well as intangible capital assets subject to amortization, that are used in contract performance. The “net book value” of these assets is determined by their original cost less accumulated depreciation, reflecting the remaining undepreciated value of the investment.

The second component is the cost of money rate, which is a pre-determined rate. This rate is usually established by a governmental body, such as the U.S. Treasury Department, and is often based on interest rates set semi-annually. The intent is for this rate to reflect the cost of borrowing money in the capital markets, providing a standardized and objective measure for all contractors. It is important to note that this rate is not a contractor’s specific borrowing rate but a broad, government-defined rate.

Conceptually, the Facilities Capital Cost of Money is derived by multiplying the net book value of the facilities capital employed by the applicable cost of money rate. For example, if a business unit has a certain net book value of facilities allocated to a particular cost pool, that value is multiplied by the current cost of money rate to arrive at the FCCM for that pool. This computed cost is then allocated to specific contracts using the same allocation bases as the related indirect cost pools.

The methodology ensures that the imputed cost is consistently applied across various contracts and contractors. While the overall approach is straightforward, the specific details regarding asset valuation, allocation to cost pools, and the precise cost of money rate are governed by regulatory guidelines, such as those found in Cost Accounting Standards (CAS) 414 and 417. These standards provide the framework for how capital investments are measured, assigned, and allocated to contracts to ensure allowability.

Role in Government Contracting

Facilities Capital Cost of Money is predominantly relevant for businesses engaged in federal government contracting. This concept is integrated into the Federal Acquisition Regulation (FAR), which governs the procurement process for federal agencies. Under FAR, FCCM is treated as an allowable, reimbursable cost, meaning contractors can seek recovery for this imputed cost as part of their contract pricing. This allowability helps ensure that contractors are fairly compensated for their capital investments when working on government projects.

The inclusion of FCCM in contract proposals is a deliberate mechanism to ensure fair pricing. Without it, contractors might be disincentivized from investing in new, more efficient facilities and equipment, as the interest on borrowed funds for such investments is generally unallowable as a direct cost in government contracts. By allowing FCCM, the government acknowledges the contractor’s opportunity cost of using their own capital, thereby encouraging investments that can lead to long-term cost savings and improved performance for government programs.

Contractors must specifically propose Facilities Capital Cost of Money in their cost proposals for it to be considered an allowable cost. If FCCM is not included in the initial pricing proposal, the contractor typically waives their right to claim it during contract performance. This requirement ensures transparency and allows government agencies to evaluate the full economic cost of a contract during negotiations. Therefore, understanding and properly accounting for FCCM is an important aspect of contract profitability and competitive bidding for government contractors.