For most small businesses - and especially for those in the early stages of their life cycle - Quickbooks is an excellent option and an almost fundamental starting point when considering an accounting software from which to grow your company. It is cost effective, easy to use, and given its popularity and presence in the market, training resources are readily available. But is it a viable option for Government Contractors?
According to the Small Business Association (SBA), nearly 25% of all government contracts each year are awarded to small businesses. That’s great news for small businesses – and even better, when properly implemented, Quickbooks software is perfectly capable of passing a DCAA pre-award audit (i.e. an accounting system adequately designed to accumulate and report costs on cost-type contracts). Sure, you’ve heard stories of government contractors sinking tens of thousands of dollars into multifaceted ERP systems that can tell you how many Direct Labor hours you’ll have left on ACRN 0109 AB on Tuesday April 20th, 2021, but that’s typically a long-term solution for a mature contractor with large, complex government contracts. But for purposes of an initial foray into government contracting, Quickbooks is perfectly acceptable and adequate, if you know it’s limitations.
Here are a few tips that will help keep your books in good standing in the eyes of DCAA while you continue to expand your presence in the government contracting world:
1. Always Enter your Bills into the ‘Enter Bills’ Module
While it is tempting to simply use the ‘write checks’ function to pay a bill in Quickbooks in order to save time, doing so will compromise the accrual based reporting requirement for government contracts. Quickbooks’ ‘write checks’ function will allocate the expense to the month in which the check was written, instead of the month in which the expense should be allocated according to accrual-based accounting.
2. Prepare Labor Accruals on a Monthly Basis
Similar to the ‘write checks’ issue above, Quickbooks allocates labor cost on a cash basis – by default, all labor is allocated to the month in which your payroll is paid rather than the month in which the work was performed. An adjusting journal entry should be made at month end (and subsequently reversed in the following month) to allocate labor cost to the appropriate period.
3. Prepare PTO Accruals on a Monthly Basis
Your PTO expense reflected on the P&L should be the sum of each employee’s total accrued hours, multiplied by their respective hourly rates. By default (again), the amount that shows up on the P&L in Quickbooks is based on the number of PTO hours used, not accrued.
4. Prepare Revenue Accruals on a Monthly Basis
Revenue recognition from a Quickbooks perspective is always based on billing – and the period in which revenue is recognized is driven solely by the date that you enter on the invoice in Quickbooks. An adjustment should be made each month based on your internal revenue recognition policies and procedures.
5. Reconcile your Direct Costs on the P&L to your Direct Costs on the P&L by Job
The P&L by Job report is easily one of Quickbooks’ most useful tools for Government Contractors. It is essentially a consolidated snapshot of each individual project broken down by cost element and profitability. However, it is also one of the most commonly inaccurate reports – and the solution is simple: For every transaction you enter into Quickbooks that should be allocated to a project (including journal entries) be sure to select the appropriate project in the ‘Customer: Job’ field.
Acceptable Accounting Systems for Government Contractors
In summary, there are potentially acceptable (adequate) accounting systems which won’t break the bank, but keep in mind that there is nothing which is categorically a “DCAA approved accounting software” (DCAA does not issue a “seal of approval” or otherwise endorse a particular product). A product might work, but only if it’s properly designed/installed and used correctly and regularly.
