Under FAR, is it permissible for a wholly owned subsidiary to bill the parent company for work subcontracted on the parents contract with the government (including normal markup)?  Also, can the parent company add their normal markup?

Should you keep your outstanding line of credit and pay down like a loan or should you pay it back in full once invoice funds come in?

Where can you assign the cost for your FSO? 
The best place would generally be to Overhead.  Depending on the type of function performed the cost could also go to G&A or Both.

INQUIRY 1: B&P labor – didn’t you say something about recording B&P labor as direct labor?  If so, where can I look that up online to make sure we’re doing it right?  RESPONSE: The FAR at 31.205-18 provides that all contracts...........

INQUIRY 2: Unallowables – I remember you saying something about splitting our unallowables between OH and G&A.  Where can I look to get a clear understanding of how this should be broken down?  RESPONSE: This is referred to, somewhat indirectly, in several FAR clauses with one at the FAR 31.203(c) provision as it reads,.......

Hi, Mr. Gunn, I come from the private industry and have not done government accounting outside of what I learned in school some time ago.  We are trying to get in compliance with DCAA and I was working on setting up the chart of accounts.  Would the chart of accounts I have attached be in compliance with the DCAA?  I did watch your Cost and Pricing Workshop Part 1 DVD and what a great tool!  I am trying to ensure that I am going in the right direction so that we will be in compliance with the next audit.

A lot is being said about the DCAA moving to providing only a Pass/Fail option for a firms accounting system.  Along with this misinformation are many scare tactics designed to influence the small business to invest large sums into the design, setup and implementation of their accounting systems and related controls.

Situation: You price a product/job/contract based on best available information.  You submit your proposal.  Eureka, You Win!  You submit an invoice and your customer informs you that they will be paying by credit card.  You say great, we will get paid early.  And you know that any processing fees can be claimed as an allowable cost. 

However, did you consider this cost when you prepared your proposal?  Did you take into consideration that if the government decided to pay by credit card it would cost you between 1.5% and 4.0% in processing fees?

Why recreate the wheel when you can start with the wheel and adjust it to meet your mobility needs.

Codes of Business Ethics and Conduct Policies are typically very generic in nature.  Therefore they lend themselves to be used by almost any firm, especially within an industry.  This type of information is typically not proprietary nor confidential because most organizations want their customers and public to know their company philosophy on this. 

Why Unallowable G&A costs, excluded from the G&A Pool, SHOULD NOT be included in the G&A Base.  This issue has been brought to my attention more than once.  Therefore, let’s address it openly, honestly, and with common sense.  It is important for you the contractor to understand the guidance and what you should or should not be forced to do. 

All items that are part of a Total Cost Input Base, do not include unallowable G&A costs.  G&A costs, allowable and unallowable, do not have G&A costs reapplied to them.  There is no pro rata share of G&A costs that are allocated to G&A costs.  It does not make common sense!

INQUIRY Paul: I just reviewed part of your presentation to the audience at the American Legion.  I have a concern.  Your Indirect Costs include Fringe Benefits and Payroll Taxes.  In my experience, if I have a clerk assigned to a particular contract, I classify that clerk’s wages, H&W, payroll taxes, worker’s compensation and general liability as direct costs. This is ok as long as that clerk devotes his/her full work day to that contract.  Is there a problem here?

RESPONSE - Good question and it shows colleagues such as you are delving into the issues, statements and opinions.  We received great response on this overview presentation. Feedback, such as yours provide our members/readers with valuable insight from various points of view. 

First of all, there are various ways to classify cost and it depends on a company and industry.  In making presentations I strive to select what may be typically used as examples of a “concept”.  As a matter of fact, someone could look at the methodology in your inquiry and question it because it is different then there’s.  But read on and hopefully your question gets addressed. 

The Answer: It depends!  Either way could be okay, as long as the method results in a fair and reasonable assignment of the costs to final cost objectives (contracts) AND the method is consistently used.  It must also Not result in double charging of a cost to contracts.   Let's go deeper....

Pre-award versus Post-award - Survey versus Audit - Understanding the Intent and Letter of the law as it pertains to small prospective contractors accounting systems.  

Despite all of the various focus and opinions that are discussed on this topic, the following depicts my SME interpretation and preferred applicability of the current guidance and objectives to auditors, government procurement staff, and the small contractor as it relates to the pre-award survey of the accounting system, and the post-award audit option.   

The interpretation of the guidance and ensuring the customer requesting the review understands the options they have and the limitations of a small contractor are important to this process.  The post-award audit option is an important issue that the requesting customer should be aware of.  As a contractor, you should know what to share when supporting your opinion. 

According to the DCAA Audit Program and DCAAM 7640.1Guidance The major objectives of the pre-award audit are to obtain an understanding of the accounting system to appropriately complete the Pre-award Survey of Prospective Contractor Accounting System, SF 1408, and to opine as to whether the design of the contractor’s system is acceptable for the award of a prospective Government contract.

Let's break this down and explain what it means to you the contractor.....

Do you need them? Should they be documented? How do you start developing them? How detailed should they be? 

Yes you do and Yes you should move toward documentation!  Everyone has them.  That’s right, I said everyone has them.  You see, your policies and procedures are simply the methods you use day by day within your business to meet goals and objectives and to comply with guidelines and requirements as applicable.  

Everyone has policies and procedures in some form or another.  They may or may not be very good policies or procedures and they may or may not be documented, but they do exist. 

Unfortunately, most small businesses do not have policies documented, or documented adequately, nor do they know where or how to start! Policies and procedures are a roadmap of what you do and how you do it in your company.  They will help others in your firm and those looking in your firm to understand how you operate.  They will help your firm to be consistent in it’s’ operations and provide confidence to auditors, bankers, contracting officers, prime contractors, and customers in general.

Now lets address this in more detail and answer the other questions....

INQUIRY: Can you tell me how long we need to keep Time sheet records? I have heard 4 yrs and several others. Not sure which is correct. Also expense reports? RESPONSE: There are General Guidelines but other factors pertaining to the specific contractor and even contract type may come into play.  FAR 4.7 is the key reference on this issue.  Excerpts from FAR 4.7 listed below indicate that 2 years seems to be the answer however, many firms hold to the 4 years for most of their records, just in case.

Situation: A General Contractor doesn't have a lot of labor associated with their contracts and, in fact on some projects, may not have much at all compared to other projects.  DCAA material suggested to use "direct labor" as an allocation base.  My question Mr. Gunn is: can another method be used such as sales or total direct cost instead of direct labor? (Provided that we use a consistent method that has stable results?), and 

If such an alternative method is acceptable, would we (can we) then put all direct payroll taxes and direct workers comp. associated with a project in "direct costs" (and directly job cost it) instead of an "indirect pool" allocating these costs?  Any guidance that you can extend would be greatly appreciated.

The answer to your first question is Yes with some cautionary notes.....

INQUIRY: I received a vendor discount when I paid the invoice early on a FFP (Firm Fixed Price) contract and I do not know how to enter that into my accounting system under DCAA regulations. RESPONSE: FAR states the contractor is responsible for having a system in place for seeking and taking advantage of cash discounts, trade discounts, quantity discounts, rebates, and freight allowances.  FAR 31.205-26 (b), Material Costs states:

(b)   The contractor shall-

(1)   Adjust the costs of material for income and other credits, including available trade discounts, refunds, rebates, allowances, and cash discounts, and credits for scrap, salvage, and material returned to vendors; and
(2)   Credit such income and other credits either directly to the cost of the material or allocate such income and other credits as a credit to indirect costs.

INQUIRY: Hey Paul, I had a quick question that I’ve been unable to find the answer for.  We have some employees that have excess PTO (Paid Time Off) at the end of the year and would like to let other employees without PTO use the time.  As a company, we generally don’t see a problem in doing that, but I wanted to see if this was okay under DCAA regulations and if there were any guidelines regarding how to do it.  If you know, can you please pass any info along?   Finance Manager

RESPONSE: Smile - another “quick question” - smile!  I don’t know off-hand a specific reference or guidance on this issue, but I do remember discussing this issue at one time.  For now consider following any “Family and Medical Leave Act (FMLA)” laws and regulations on this issue and I will let you know what I come up with as it relates to government contract accounting.

However, my initial response would be that PTO would be applied or charged according to donating employee and “How Earned” and not according to receiving employee and “How Shared/Donated”.  It is important to show all PTO according to how earned so it can be charged and tracked accurately.

What will make one small contractor/subcontractor stand out from others?  What will increase a firms chance of survival and success through various cycles of economic changes?  What will separate the corporate winners from the losers over the next 5 to 10 years?   

Three Key Factors: #1-Training; #2-Training; and #3-Training.  You would think that all organizations and managers recognize the importance of training.  But, they don't.  Why?  Managers and organizations fall prey to the five management myths of training. 

INQUIRY: How do I determine if my cost or pricing data is adequate, or not deficient? RESPONSE: There is no set formula for determining when cost or pricing data is deficient enough to be reported to the contracting officer by an auditor.  However, the following are some examples of cost or pricing deficiencies that should be checked prior to submitting data:

(1) Significant amounts of unsupported costs.

(2) Significant differences between the proposal and supporting data resulting from the proposal being out of date or available historical data for the same or similar items not being used.

(3) Significant differences between the detailed amounts and the summary totals (e.g., the bill of material total does not reconcile with the proposal summary).......

Inquiry: I am trying to determine if I can use the excess vacation hours  we pay an employee in the calculation of the H&W rate. The contracting officer feels the benefit must be actual cash paid for 2080 hours times 3.24. I read that "bona fide" benefits include vacation. For 5 years, we are required to pay them 3 weeks of vacation but we actually pay 168 hours; I read that the excess is a bona fide benefit and can be used in the minimum calculation. We certainly want to be compliant. Response: Let’s look at the Federal Guidelines under the Code of Federal Regulations (CFR) to determine compliance and applicability.  These guidelines are generally applicable to The McNamara-O'Hara Service Contract Act (SCA) contracts.

If you are like most start-up government contractors, you’re using Quick Books Pro for your accounting software.  1) Can Quick Books Pro (QBP) be DCAA Compliant? 2) Will DCAA approve your accounting software?  3) How long will I be able to use QBP for my accounting system?The answers are 1) yes, 2) no, because DCAA doesn’t approve any accounting software, and 3) probably until you reach 20 employees or receive your first prime contract.  This article is the first in a series that will explain answers to those questions.