As government contractors grow to gain new clients and hire more staff to perform the obligations, the accounting system must grow too. Small and emerging government contractors can properly account for costs incurred on government cost-type contracts without overcomplicating the process. The basic requirements are included on GSA Form SF1408, Pre-Award Survey of Prospective Contractor- Accounting System. The following are just a few of the points to help government contractors simplify their accounting methods.
1. Fully Account for Employees’ Total Time
The timekeeping system should identify the sum of all employees’ labor by intermediate or final cost objectives, and must charge direct and indirect labor to the appropriate cost objectives. This is accomplished by using “total time accounting” through the use of which requires employees of all levels including technical and administrative, to record all authorized hours, paid or unpaid, to the appropriate charge number or accounts. Direct program labor hours, IR&D and B&P labor hours, and all indirect labor hours such as those listed below, should also be included.
- sick time
- military duty
- other paid-time-off (PTO)
Total hours recorded during any given pay period are used to distribute the total employees’ pay for that period. For salary employees, their effective rate per hour will vary from pay period to pay period depending on the number of actual recorded hours worked; hence, the term total time accounting.
2. Regularly Post Books of Account
This posting requirement helps determine the costs charged to a contract monthly to help the contractor assess cost and performance information, but is a process often overlooked by many government contractors. Limited Excel records perhaps lack a designated time-period and financial transactions for the prior fiscal year might be processed nine to 10 months after the year-end, allowing several months to pass with no posting activity. This lack of routine posting becomes very evident during a DCAA audit and often reveals itself by the un-timeliness of responses to audit data requests of information that should be readily available.
Even though the accounting system may be capable of accepting and reporting routine monthly transactions, if the reports are not complete, the accounting system is deemed inadequate and contracts will be lost for not being able to adequately monitor and provide the required profit results.
3. Consistently Allocate Indirect Costs to Objectives
Not using a logical and consistent method to allocate indirect costs to intermediate and final cost objectives will not help to simplify the accounting system. It will not be clear as to what a direct cost is, nor will it be easy to see what is incurred because of contractual requirements or which indirect cost was incurred to support direct efforts, i.e. fringe benefits and overhead costs, and to manage the entire business, i.e. general and administrative expenses.
Written documentation should include:
- Costs considered direct to serve as a basis for the allocation of indirect costs
- Indirect costs included in the expense pools for allocation
Fringe benefit expenses paid for by the contractor are for the employee’s benefit. The related costs are generally applicable to all direct and indirect labor, including IR&D and B&P, although there may be situations where certain employees receive significantly less or more fringe benefits and multiple fringe benefit rates are applied.
Overhead expenses are those incurred to assist the direct labor in doing their jobs and are applied to the applicable direct labor and applied fringe benefits. General and administrative expenses are those incurred in the operation and management of the entire business and are not associated with a specific contractual effort.
Completing a Cost Accounting Standards Board DS-1 Disclosure Statement is a preferred method to help document accounting processes and established cost structures. It helps to provide system documentation and when provided to DCAA, facilitates the audit process and when used internally, helps ensure the understanding of what costs are direct and indirect while helping protect against non-compliances.
4. Build a Strong Infrastructure
When many small businesses and government contractors are starting out, working capital is at a minimum and the owner can wear too many hats. While this may initially work with only a few employees and contracts, once the organization starts to grow, it will become essential an adequate infrastructure be set up. Back office support roles such as accounting, human resources, and procurement, just to name a few, should be assigned to knowledgeable personnel familiar with the compliance requirements associated with performing on government contracts. When one individual tries to multitask these critical functions, invoicing and debt collection can become delayed, compliance with contractual obligations can slip, subcontractors are possibly paid late and auditors may lose confidence in the company and the timely availability of financial data.
By following the four suggestions above, government contractors can improve their accounting system and properly account for costs without making it too complicated. Contact PBMares to learn how smaller government contractors can make sure they have a good accounting system in place.