As a small (or potential) government contractor or subcontractor, one question you will frequently encounter is if you have a “Job Cost Accounting System.” This may sound like a specific type of software, but it is not. Many different accounting software systems can provide job cost accounting if properly configured. The questions on the SF 1408, Pre-award Survey of Prospective Contractor Accounting System, are designed to discover if you have a job cost accounting system. This still doesn’t tell the non-accounting person what a job cost accounting system is or why it is important (other than to get the right answers on the SF 1408 to qualify for a government cost-reimbursable contract).
The Business Dictionary defines job cost accounting as “an order-specific costing technique, used in situations where each job is different and is performed to the customer's specifications. Job costing involves keeping an account of direct and indirect costs.”
In plain English, job cost accounting is the process of identifying all the costs of the business to the specific “jobs” being performed. These jobs may be subcontracts, contracts, contract line item numbers (CLINs) or any other job you want to identify. In the government world, unallowable costs are often one of the “jobs” tracked. Therefore, a job cost accounting system enables the company to identify, or allocate, all costs to its “jobs.”
This is important for many different reasons, depending on the types of contract. In addition, this process is even important on your commercial work because it helps determine what jobs are profitable.
For cost reimbursable contracts, job cost accounting, is critical. First, you must have in place an adequate system to be awarded this type of contract. Second, you are required to maintain such an adequate system to get paid for the work you perform. If you cannot identify your costs to the specific contract, you will not get reimbursed for them. You must also be able to identify any unallowable costs to exclude them from the costs billed. There are penalties involved in billing the government for unallowable costs.
The importance of job cost accounting for fixed priced contracts is often overlooked. The government auditor is not going to ask if you have an adequate job cost accounting system in place before you are awarded a small fixed price contract. However, if you don’t have a good system, you won’t be aware of your profit/loss ratios on the contract. When you bid on the next contract, you may not know if you bid enough on the prior contract. Too many fixed price contracts that are underbid can spell the end of a small company. If you are in a very competitive market, making too much profit (overbidding) can be equally disastrous because you won’t get the contracts.
If your company has only had small fixed priced contracts or labor hour subcontracts, you need to become familiar with job cost accounting. To promote company growth, you should be apprised of overhead rates, fringe rates, general and administrative rates, unallowable costs and many other terms used in the “language” of government cost accounting.
If this seems overwhelming to you, Redstone can help you learn this “new language.” Together, we have hundreds of years of experience with job cost accounting systems at companies of all sizes, from the smallest to the largest. Let us be your interpreter. It’s a win-win situation.