Commercial versus Government Contracting –
In a commercial contract, the deliverable is a package of goods and services. In a government contract, another ingredient is added for the contractor: Administrative reporting to assure that costs billed to the contract are allowable by the government. “Reporting” in this case means not only routinely submitted reports such as justification for contract billing, but also the ability to produce on-demand responses to government auditors’ request for information.
The DCAA’s heaviest scrutiny falls on contracts with cost reimbursable provisions including cost-plus, T&M, and yes, even selected types of fixed type contracts. Failure to comply has significant penalties, risks and costs for contractors.
To improve change of winning a government contract and performing acceptably, a contractor should move to incorporate DCAA compliance into its pre and post-proposal planning. Before the award, the contractor may need to devote extensive resources to justify its proposed costs. In the post-award phase, a first-time government contractor may need to implement processes for entirely new reporting requirements.
Generally, to comply with DCAA standards, a contractor must:
1) Be prepared for various types of audits, including extensive pre and post-award proposal and system reviews
2) Use manual effort if necessary to compensate for any deficiencies in its accounting and reporting systems
3) Keep good timekeeping records that track employees’ time on work activities
4) Maintain detailed, accurate accounting records of costs incurred, with accurate differentiation of direct and indirect costs.
How difficult is compliance for government contractors?
A key factor is the quality of systems and processes the contractor has in place.
Contractors that rely on piecing together information from various sources are a competitive disadvantage. Inefficient procedures and poor controls typically leave these contractors ill-prepared for audits. These contractors are vulnerable to a host of penalties or other consequences of non-compliance. Unfortunately, this is the category that most small businesses fall into due to either a lack of knowledge of requirements or a lack of adequate resources.
For other contractors, DCAA compliance and audit preparation is a less disruptive, more routine process. For projects (contracts, jobs, products, etc.) in both government and private sectors, these contractors use project planning, accounting, labor and timekeeping management systems to gain better control, efficiency and profitability. DCAA compliance becomes a by-product of their focus on strong accounting and labor management systems.
Checklist to Impress
During a pre or post-award review of a contractors accounting system, an ideal system from an auditor’s perspective would address some main questions. Although not an all-encompassing list, the items as generally outlined on the Standard Form 1448 (SF1448) are:
1) Can the system segregation of direct from indirect cost
2) Can the system accumulate direct cost by contract (commonly referred to as a job costing system)
3) Is there a logical and consistent method of allocation of indirect cost to cost objectives (i.e. contracts)
4) Can the job cost and other sub-systems be reconciled to the general ledger
5) Does the timekeeping system have documented controls that meet the requirements of DCAA
6) Can the timekeeping system track employees’ time on direct and indirect labor activity through labor distribution
7) Are costs routinely posted to contracts and indirect cost grouping
8) Segregation of unallowable costs
9) Is there a segregation of responsibilities for labor-related activates such as timekeeping and payroll accounting.
10) Can the accounting system produce appropriate reports, on at least a monthly basis, that show results of charges to contracts and indirect cost grouping
11) Can the accounting system identify costs at a more detailed level, such as by Contract Line item (CLIN) or Units, if required by contract
12) Can the accounting system segregate preproduction from production costs if required by contract
Understanding these issues is important to even the smallest contractor. Designing, Revising, and Implementation does not have to be a nightmare. The key is understanding what, why, and how to begin the process.
And yes, you can do it! But you must take this serious and commit resources to the process.
These issues are demystified and covered in detail in our Cost and Pricing for Government Contractors Workshop – Part 1 (Live and DVD). We discuss the what, why, and how these issues can be addressed by “Every Serious Small Business”. And it is presented in a manner that is realistic, practical, attainable and affordable right out of the gate!
For more information on our group live workshops, the DVD, and other tools specific to contract cost and pricing, visit www.paulgunn.com.
Paul Sr.