We previously published a blog post “Contractors Prove Business Systems to Defense Department” that discussed the importance of compliant business systems in the proposal, negotiation and management of defense contracts. It is important for government contractors in developing their business systems and offering them up to the government as representative of their compliance with the published requirements to understand what a “system” is in the context of government compliance.
The Merriam-Webster Dictionary defines the word “system” as a regularly interacting or interdependent group of items forming a unified whole. When related to government contracting and compliance with the business system rules established in the DFARS in 2011, a “system” should be defined as a cohesive set of policies, procedures and practices designed to accomplish a common goal. It is not a compilation of disparate pieces of information, written and unwritten, developed for other purposes and not generally available as an organized guide to continued and repetitive compliant performance.
Each of the subject business systems: Accounting and Billing (DFARS 252.242-7006), Purchasing (DFARS 252.244-7001), Estimating (DFARS 252.215-7002), Government Property Management (DFARS 252.245-7003), Material Management and Accounting (DFARS 252.242-7004) and Earned Value Management (DFARS 252.234-7002) have the requirement for WRITTEN policies and procedures stating the requirements for compliance, and defining the established processes to be implemented to ensure compliance.
Policies and procedures need to be developed to support each of the identified areas of required system compliance. It is not an easy task but shows your company’s understanding of the specific compliance requirements and establishes your company’s commitment to compliant performance. Implementation of compliant business systems takes time. It is critical that you get started before your proposals or contracts require it.
Cost Accounting System Requirements
Let’s start with the basic policy and procedure requirements for a compliant cost accounting system required by DFARS 252.242-7006 and itemized on the Standard Form (SF) 1408, Preaward Survey of Prospective Contractor (Accounting System). Documentation should be prepared for each requirement below that defines what is to be done, how it is to be done, when it is to be done and who is responsible for getting it done.
- Develop guidance on the process of identifying the costs incurred between direct costs required for the contract performance and indirect costs incurred in support of all contractual/business efforts.
- Establish a process for identifying and accumulating all direct costs by contract or internal cost objective (i.e., bid and proposal efforts, independent research and development projects, etc.).
- Develop a logical and consistent process for allocating indirect costs to contracts or other internal cost objectives that provides an accurate picture of actual costs incurred.
- Ensure that all costs, direct and indirect, are recorded and accumulated under general ledger control (everything ties).
- Define a process for identifying and accounting for unallowable costs so that they, along with any directly associated costs are not included in any billing, claim or proposal to the Government.
There are more accounting system compliance requirements, but these are the basics and help provide a strong foundation for the development of a compliant cost estimating process.
Cost Estimating System Requirements
The cost estimation process should be very closely aligned with the cost accounting processes. FAR and the Cost Accounting Standards (CAS) call for consistency between estimating and accounting of costs.