Any company receiving a government contract for the first time will have lots of questions and changes to their operations as a result of that contract. The question is, will the accounting structure and approach to the company’s accounting practices have to change?
If you are awarded a fixed priced contract or a commercial FAR part 12 contract with the Federal Government with payment on delivery, you should not need to make any changes to your accounting practices based on US Generally Accepted Accounting Practices (GAAP). However, even a fixed priced contract or a commercial (FAR part 12) contract can become complex and require specific accounting be applied should the Government make changes to that contract after award, which they often do, during performance, or terminate the contract for the Government’s convenience.
Understanding GAAP in Government Contracts
In general, GAAP simply requires you to account for your expenses so that the cost of goods sold during your fiscal year can be appropriately presented in your financial statements. In most cases, cost of goods sold is a high-level amount comparable to the revenue recognized for the fiscal year. Most businesses track cost of goods sold to major product lines, but do not assign the cost to each individual contract with its customers. For the most part commercial businesses manage their customer pricing using margins or mark-ups (i.e., a management directed percentage applied to cost of goods sold to account for the cost of operating the business and providing for a reasonable profit). See our Blog on Understanding FAR part 31, Cost Accounting Standards, and GAAP for Government Contractors.
Commercial Work Pricing with the Government
Even when pricing commercial work with the Government a greater level of detail and supporting actual or budgetary data is likely to be requested by the Government.
Cost-Type Contracts and Their Requirements
The other end of the spectrum is a cost type contract or a fixed price contract with interim payments based on cost, these types of contracts do require project level accounting (i.e., your accounting system needs to be able to assign your cost of goods sold plus general and administrative cost to each individual contract. The Government points businesses to two resources to understand the Government’s cost accounting expectations for these types of contracts – Federal Acquisition Regulations (FAR) part 31 and Standard Form 1408. These resources do require some interpretation for most newcomers to Government contracting. The Defense Contract Audit Agency (the auditors of all DoD contracts and the auditors of choice for most other Federal Agencies willing to pay them) do provide additional resources – Information for Contractors and Accounting System Requirements. The biggest take away from the Information for Contractors is the extensive timekeeping expectations in Enclosure 2 Section 4. The Accounting System Requirements presentation does little more than tie the Standard Form 1408 requirements to the Defense FAR Supplement contract clause 252.242-7006(c) accounting system criteria, which mirror the Standard Form 1408 requirements with the addition of a requirement for sound internal controls.
Government's General Expectations for Your Accounting System
In layman's terms, the Government is going to have the following general expectations of your accounting system:
- Your proposal will need to be as consistent as possible to the way costs are collected and assigned within your accounting system.
- You must have a process to review all awarded Government contracts to identify any special billing or payments terms – Government auditors refer to this as briefing the contract. For example, the contract may have funding limitation or caps of indirect costs.
- All costs (allowable or not – See our Blog Unallowable Cost on Government Contracts) must be assigned to all contracts – yes, that includes your commercial contracts with non-government customers. All contracts, Government or not, must use the same accounting practice for project level accounting.
- You must have a process to identify unallowable costs and ensure those cost are not proposed, billed, or claimed on your Government contracts. For example, interest is an unallowable cost often incurred by most businesses. The interest cost must be assigned to all of your contracts but cannot be including in your pricing or billing on your Government contracts.
- You will need a timekeeping system that collects hours worked on each contract directly from the employee and then a process to cost those hours after payroll processing and assign the cost to the contracts where the hours were charged.
- You will need to have documented internal controls to ensure the accounting system is working properly and the Government contracts are correctly costed. Examples of these expected controls include reconciliations, management reviews, training of your staff, etc.
The Importance of an Adequate Accounting System
It is important for any company doing business with the Government or thinking about doing business with the Government to have a good understanding of the Government’s expectations of an adequate accounting system.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding accounting system requirements and supporting companies with training and audit finding resolution. We would be happy to be part of your team.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant