Are government accounting system requirements only applicable for Cost Reimbursement Type Contracts?

This is a widely misunderstood concept.  Many contractors feel that they do not have to worry about audits since they do not have any cost plus fixed fee (CPFF) type contracts. Others feel that since their contract(s) are small they are okay.

Boy do they find out the hard way that this is not true.  Let me tell you how it generally works, but before I start I do not want you to get overwhelmed okay.  With the right support and tools, You Can Do This!  At the end I have provided links to Tools proven to help you gain a realistic and practical understanding of government contract cost and pricing.  You are not alone!  

True, your accounting system is more likely to be audited with CPFF type contracts, but it is more accurate to use the term Flexibly Priced Contracts of which CPFF types are included. 

Here is a list of some other types of contracts that may be included under the umbrella of Flexibly Priced Contracts:  Time and Materials (T&M), Labor Hour, and Fixed Price Level of Effort among others.  FAR Part 16 describes in more detail types of contracts.

Don't be misled though! You can also be audited if you have Fixed Price contracts.  As a matter of fact, in reality, you can be audited under just about any type of contract or grant with the government (federal or state).

As a consultant specializing in government contract audit, cost and pricing issues, I am usually called by a contractor that has been contacted by the government informing them of an audit that they felt would never happen to them.

It is so sad that you as a contractor are not made aware of many issues and situations that could affect you long into the future.  You see, your contracting officer assumes you know, or that you will learn what you need to know.  As a matter of fact, when you submit bids or proposals and when you sign a contract you are certifying either directly or indirectly that you Know What You Are Responsible For and that you adhere to All the requirements as set forth under FAR, Related Supplements, or any other of the many other specific regulations that may apply to your contract or grant type.

So what's a contractor to do!  Well, Cover Your Self.  Although it is impossible to be totally prepared for every type of audit situation you may encounter, you can develop your strategy so you are prepared for most situations you will most likely encounter.

Don't bury your head in the sand.  I have been involved in this business for a long time now, and can tell you that it will happen when you least expect it and are least prepared.  You may save a few hundred or even thousand dollars now but the cost down the road will be far, far more.  And I don't mean just in money that has to be repaid.  I mean the cost of your company's very existence.

And what gets me is that if you price your product to include the cost of implementing and maintaining an adequate accounting and contract cost system, you will find the impact on your price should still be acceptable.  Why?  Well you tell me what successful company does not incur the types of accounting, finance and contract administration costs many are trying to avoid.

So my recommendation has always been and continues to be this: Set up your accounting and related cost & pricing systems so that they will be acceptable under Most contract types and with the DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency).  This is where our proven Workshop has helped thousands.

This way you do not have to be as concerned with each type of contract.  You will feel more confident that your setup addresses most situations anyway.  And it is not that difficult to do, if you Know The Basics.  And it all hinges on your Accounting and related systems structure.

It amazes me how little importance management of many companies, especially small ones, place on the accounting and related functions.  This area is critical to your success and sanity.

Where do you start?

First, lets look at the makeup of a typical accounting system.  These are areas that any good accountant should know.  What does it include?  

  • Accounts Receivable - A/R
  • Accounts Payable - A/P
  • Payroll & Payroll Taxes ? Inside or Outside Service
  • General Ledger
  • Invoicing  Billing 
  • Bank Reconciliation  Managing cash flow
  • Job/Contract Costing
  • Timekeeping, and
  • Reporting 

Wow!  Quite a lot of stuff isn't it.  You bet.

Now lets look a little deeper and see what's the foundation of all of these activities.  

  1. Your Coding System
  2. Your Coding System
  3. Your Coding System

This is not a misprint!  How you establish your coding (numbering) system is the Key to having all of these activities flow accurately and produce the desired results for internal management purposes, and external reporting.

So in this article I want to talk about the Coding System.

What is a coding system?  It is a system designed to accumulate cost in a manner that meets specific requirements and goals.  Under government contracting this includes:

  • Government guidelines and requirements,
  • Financial and management reporting, and
  • Tax reporting.   

A good coding system is setup based on Numbers, not just descriptive names. Most people can follow a numbering system much better than a wording system.  The more uniform the numbering system, the easier it is to maintain, track, audit, and adjust as required.

Many of you who have attended my workshops, or other workshops on the accounting system, have seen one of my preferred setup.  Others of you are most likely working with a coding system also, and it may be fine.

However, if you are one of those who wants to, or needs to make adjustments to your coding system for government contract purposes or just to make things a little simpler, than read on.
Heres one of the coding (numbering) system that I recommend for your basic Chart of Accounts.

  • 1000-3999  Balance Sheet Accounts
  • 4000-4999  Income Accounts
  • 5000-5999  Direct Costs or Cost of Goods Sold Accounts
  • 6000-6500  Fringe Benefits and Payroll Taxes Accounts
  • 6500-6799  Optional Intermediate Accounts for Occupancy & Maintenance
  • 6800-6999  Optional Intermediate Accounts for Supplies & Services
  • 7000-7999  Overhead Indirect Cost Accounts
  • 8000-8999  G&A (General and Administrative) Indirect Cost Accounts
  • 9000-9499  Unallowable Cost Accounts (Direct, Overhead, and G&A)
  • 9500-9899  Federal Income Tax Accounts
  • 9900-9999  Suspense Accounts

    This can also be applied under a system with only a 3 digit field or more than a 4 digit field as shown above. 

Well, there you have it!  Sounds simple? Well, with this basic structure, you can do wonders with your accounting system.   Fortunately, many systems now allow you to change your numbering system without recoding information.  If yours does not, then it is best to pick a break time in your financial cycle that allows a good time for the changes.  For example Year-End, or at Mid-Year, etc.