Common Accounting Mistakes That Get Government Contractors in Trouble

Government contracts can be a great opportunity. They often come with stability, a steady income, and the chance to scale your business. But they also come with strings attached: a detailed set of rules and expectations, especially when it comes to your accounting. Unfortunately, many government contractors learn about those rules the hard way, which is after they’ve already made a mistake. In this article, we’ll walk through some of the most common accounting mistakes that can derail even experienced contractors, cost you money, or worse, jeopardize your contracts.

Not Using Job Cost Accounting

This is one of the most common and costly mistakes we see. Government contracts don’t just want you to track your numbers; they expect you to know exactly which project every dollar belongs to. That means using a job cost accounting system that can assign labor, materials, and other costs to individual contracts or task orders.

Without that level of detail, it’s nearly impossible to calculate indirect rates accurately, understand your margins, or pass an audit. And don’t assume that just because your accounting software has a “job costing” feature that you’re covered. You still need to structure it properly and use it consistently in a way that meets government requirements.

Failing to Separate Direct and Indirect Costs

Another big trap: blurring the line between direct costs (such as labor or materials for a specific contract) and indirect costs (like office rent or administrative salaries). If those aren’t clearly separated, your indirect rates will be off and that can lead to billing errors, disallowed costs, and unhappy auditors.

This isn’t just a best practice, it’s a requirement. In fact, the DCAA looks for this on Standard Form (SF) 1408, the checklist they use to evaluate whether your accounting system is acceptable for cost-reimbursable work. If you can’t clearly show how you separate these costs, you may not even make it past the pre-award phase.

Ignoring Indirect Rate Calculations

Indirect rates, such as fringe, overhead, and general and administrative (G&A), are the backbone of your billing structure. Yet too many contractors treat them like a one-time estimate. Perhaps you established your indirect rates when you started the business or submitted a proposal last year, and haven’t reviewed them since.

That’s a problem.

Outdated or inaccurate rates can result in underbilling or overbilling, either of which can create big headaches later. And it doesn’t just hurt you after the fact. Bad rates can ruin your margins before the contract even begins. If you bid with rates that don’t reflect your true costs, you could win the job but bleed money trying to deliver.

That’s why the FAR (42.704) specifically calls for keeping your provisional billing rates aligned with your expected actuals and allows for revising them as needed. Contractors should monitor indirect rates monthly, compare actuals to projections, and adjust accordingly. Effective rate modeling is essential for both winning and retaining profitable contracts.

Mixing Unallowable Costs into Billable Expenses

The FAR clearly outlines what you can’t charge to the government. That includes items such as alcohol, entertainment, lobbying, and penalties. If those costs show up in your billing, you’ll likely be forced to repay them. Worse, repeat offenses can damage your relationship with your Contracting Officer or raise red flags for auditors.

One area that trips up even the most careful contractors is travel. Travel is often necessary, but it comes with some of the most complicated cost rules. First-class flights, excessive per diem, high-end hotels, alcoholic beverages, and personal excursions? All unallowable under FAR 31.205-46.

If you’re not reviewing travel charges closely, these things can sneak into your indirect pools or even hit your direct job costs. A good policy, consistent reviews as part of your monthly close process, and strong documentation can go a long way in ensuring compliance.

Poor Timekeeping Practices

If you’re new to government work, you might be surprised to learn just how important timesheets are. Labor is often your biggest cost and also one of the most heavily audited. The DCAA expects daily time entries, with specific charge codes for each job, even for salaried employees.

Some common mistakes we see include letting people fill out time weekly, skipping approval processes, or failing to maintain an audit trail of edits. These issues can lead to disallowed costs and failed audits. Worse, if your timekeeping system isn’t compliant, you could be disqualified from cost-reimbursable work altogether.

Get the Support You Need to Stay Compliant

Government contract accounting leaves little room for error. Solid policies, clear training, and reliable systems are critical, especially when it comes to timekeeping and cost tracking. Don’t wait until an audit to find out your processes aren’t up to par. Our team assists contractors in implementing compliant accounting systems, calculating indirect rates, and maintaining accurate cost separation and documentation. Whether you’re preparing for an audit or building scalable practices, we’re here to support your compliance from day one.