It has happened to all of us, something you didn’t know or didn’t think about turns into a big problem and you did not see it coming.  We all know hindsight is 20/20 but today we can talk about one area where we can get ahead, Accounting System Compliance.

Here is a typical scenario for small business owners.  You are working a bid and see a check box that you don’t know how you should answer:

Screenshot of an online form

The Government is asking you to describe whether or not your accounting system is adequate for managing costs and can be audited.  FAR 31 establishes cost principles and procedures as guidelines for contractors.  Use the FAR as your primary resource for cost collection and allocation guidance when implementing a compliant cost accounting system.

Firs of all, let’s outline some common terms to know related to accounting system compliance for basic Government contracts:

DCAA – Defense Contract Audit Agency – provides financial oversight of government contractors

DCMA – Defense Contract Management Agency – provides contract oversight of government contractors

FAR – Federal Acquisition Regulation – The primary guide of rules and requirements for government contracting

Compliant Systems – Accounting and Operational systems compliant with FAR requirements for adequately collecting and billing government contracts

Direct Costs – Costs incurred in performing contract work that can be directly associated with the scope of a contract

Indirect Costs – Costs that cannot be directly associated with a specific contract and are charged into and indirect cost pool or service center

Pools – Costs which are separately collected and included in an indirect cost bucket

Bases – Costs to which the pool costs are attributable

Segregation of costs is the key initial consideration for your compliant accounting system.  Timekeeping and labor collection are typically given the most scrutiny by DCAA in audits.  Labor tracking should be the responsibility of every member within and organization.  Without adequate controls in place, labor costs can be easily misallocated or misstated.

Direct costs must be segregated from Indirect costs.  Unallowable costs must be separately collected as well.  Indirect costs should be allocated to intermediate and final cost objectives through pools and bases established based upon reasonable and consistent methods.

Indirect rate structures typically include an Overhead and G&A pool, however, may be expanded to include additional pools or service centers if necessary.  Indirect costs must be tracked according to their specific pools and allocated to contracts each month before billing.  For contractors with Provisional Indirect Rates, an annual reconciliation of actual to provisional rates must be submitted with six months after the end of each fiscal year.

Tracking and periodic reconciliations of costs collected within your system’s general ledger is critical to compliance.  The system should include a job costing system that captures all direct costs by contract so that the Government can ensure each contract is distinct.  Systems which are accrual based and fully GAAP compliant with financial data both current and posted on a timely basis are imperative.  Billings must be prepared regularly with cost review for accuracy both on a current cost and cumulative cost basis.

Educating yourself on Accounting System Compliance is a sold first step to answering questions and submission requirements and a FAR compliant system.  Setup your system correctly on the front end and you will save yourself headaches for years to come when contracting with the Government!

If you have questions related to your company’s Accounting System or any other Government compliance item, govIRG is here to help. We are passionate about the success of our clients!