The Basics of Accounting System Requirements for Government Contractors

The Costpoint team at Redstone GCI recently concluded a great event with Deltek, during which DCAA representatives gave a great keynote session on Accounting System Requirements (or SF1408), which was followed by another informative session by our group on how Costpoint meets those requirements. With this article, I wanted to review some of the key points from both presentations for those who missed the event. Now, I will warn you that this is written for those new to the idea of an approved accounting system and its associated requirements. It is not written for the hard-core government accounting system veteran. I will not cover every aspect or criteria related to the standard accounting system audit; instead, I will try to find a somewhat entertaining way to talk about accounting systems and the SF1408 requirements, in particular.

So, let’s get started!

Although it would be nice, you cannot purchase an “approved accounting system.” Even DCAA would tell you that it is not the system itself that is approved but the design, use, and procedures surrounding the system that are approved. DCAA has outlined the requirements for achieving an approved system in their standard form (SF) 1408. The SF1408 defines the specific criteria an auditor verifies the system CAN do and confirms the system IS being used to meet those criteria. You cannot request for DCAA to perform an audit of your system to get it approved, any request for an accounting system audit must come to DCAA from a federal entity. As mentioned above, the SF1408 defines the specific criteria of the accounting system, and there are some aspects of the audit that we will not cover in this article, such as company info, document requests, and overall system compliance with accounting standards (GAAP). I will primarily focus on the system requirements and how Deltek’s Costpoint can meet those requirements.

DCAA Approved Accounting System Requirements

First, DCAA is going to be concerned with CAN the system:

1. Adequately Segregate Costs Between Direct, Indirect and Unallowable

The first question might be, “What are direct versus indirect costs?” Direct costs are those that can be traced or tied to ONE specific contract. If a cost is not for one specific contract, it is automatically indirect. It’s as simple as that. If you buy 100 widgets, which will all be used on Contract 123 and only Contract 123 - direct cost. If you buy 100 widgets, anticipating some might be used on Contact 123, some might be used on Contract XYZ, others on a research and development project, and some might even be used to fix the break room door because it squeaks and drives everyone up the wall - indirect.

Can your system distinguish between the 100 widgets specifically purchased for Contract 123 and those bought to do multiple things for the company, like fixing that annoying door? Costpoint accomplishes this segregation by using the numbering of the chart of accounts and system controls such as Project Account Groups (PAGs), which define what accounts can be used with projects/contracts. These PAGs ensure that only direct related accounts are used with direct projects and indirect accounts with indirect activities (squeaky doors).

Wait, you say that’s direct and indirect, but what about that unallowable you mentioned? Yes, the dreaded unallowable. Unallowable can mean different things, as we will see below, but in this instance, we mean costs that have been specifically deemed unallowable by Federal Acquisition Regulations (FAR). FAR31 gives a list of types of cost that are expressly unallowable and cannot be billed to a contract and/or included in indirect allocations (discussed later). I am not going to even try to list all the types of costs that are unallowable. Still, I will say that any alcohol that comes to your mind later when I talk about partying would definitely be considered unallowable.

Costpoint segregates FAR31 unallowable costs using the same controls described for direct versus indirect, i.e., the chart of account numbering and PAGs. However, DCAA will also want to verify that you have some kind of program in place to ensure that the people entering costs into your system have an understanding and knowledge of what costs are considered unallowable per FAR31. So now is the time to make sure you regularly have some training for existing and new personnel as they join the finance/accounting team.

2. Distinguish Timesheet Labor by Direct and Indirect

We discussed the difference between direct and indirect and how Deltek Costpoint ensures that separation for non-labor. However, for an approved system, we need that separation to extend to timekeeping for labor costs. So, when Joe fills out his timesheet, can he capture the time while putting 99 widgets on an Apache helicopter for Contract 123 versus when he used 4 widgets to fix that stupid squeaking door? And before you ask, one of the widgets for the helicopter slipped out of his fingers, dropped on the floor, and rolled under a 300-pound toolbox - what do you want? Those widgets are small!

DCAA will want to see and understand how your system ensures that Joe is correctly entering his time between direct and indirect, as well as that Joe is charging time to the correct direct contracts. Deltek Costpoint also uses the chart of account numbering, and PAG controls mentioned above with the timesheets, but it is “behind the scenes” so that Joe only needs to select the project/contract that he worked on, and Costpoint does the rest. Additionally, Costpoint uses a control called Workforces to define who can charge which projects/contracts. So, if Joe is not in the workforce for Contract 123, not only will he not be able to put time against it on his timesheet, but he will not even see it as an option.

3. Identify Direct Costs by Contract and Contract Requirements

Now, you might be saying, “contract requirements?” Wasn’t it enough that I figured out the 100 widgets were direct on Contract 123? Well, to use the accountant’s favorite word - maybe. If Contract 123 has no additional requirements and your project management/control group has no additional requirements, then get the chips-n-dip and start the party; you are good to go. But I wouldn’t recommend partying too hard because it is extremely unlikely the party will last long, as most contracts, especially government contracts, will not be so simple. The contract will have task orders, contract years, deliverables, contract line numbers (CLINS), and, if the contracting fairies are really mad at you, subcontract line numbers (SLINS) and ACRNs. Don’t even ask me what that stands for!

To get approved, the accounting system needs to accommodate all those contract requirements. So, if those 100 widgets on Contract 123 were associated with the second option year of the contract, on CLIN 2012, SLIN 140, ACRN AB, your system needs to be able to capture that information. Costpoint handles this with layered project numbering that is customizable by project, so each project can be established to capture costs as needed by that specific contract. It is one of my favorite parts of Costpoint! There is no need to make every shape of contract known to man fit into the same square contract hole; you make that hole whatever shape it needs to be to accommodate each specific contract!

I feel obliged at this point to also mention here those project management/project control folks I alluded to earlier because they typically have their own requirements in the form of work breakdown structures (WBS), project phases, and/or work groups that they may want/need to track costs to for budgeting or planning purposes. Again, the beauty of Costpoint’s layer of customizable project structuring means you can incorporate not just the government contract requirements but also those of your project management. And just think of the party then; the more the merrier, right? Get them to bring the pizza!

4. Limit Costs and Billings Based on Contract Requirements

Yes, we’re adding another layer of complexity here, but every party needs limits. Can your system handle any limits established by contract requirements? Let’s go back to our Contract 123. Let’s say those 100 widgets cost $1012.00, but there is a funding cap for material on CLIN 2012 of $1000.00. The system needs to be able to prevent the extra $12.00 from being billed to the government. Or, as another example, if Contract 123 does not allow any travel costs but Sally had to fly into beautiful Huntsville, Alabama (it really is beautiful, come visit us!) to inspect the installation of the 99 widgets on the Apache helicopter, the system needs to be able to identify those costs as unallowable for Contract 123. This is another type of unallowable; these costs are not expressly unallowable per FAR31 and are not allowed to be billed on Contract 123.

Costpoint can ensure any of these types of limitations are followed using several available controls. Contract award and funding amounts are recorded in project modification screens and can be used to ensure costs do not get billed beyond any award or funding amounts. Project ceilings and overrides can be used to set limitations on various costs, burdens, and/or fee amounts. Using any of these controls, or a combination of these controls, ensures any contract limitations can be established within the system and controlled automatically.

5. Allocate Indirect Costs Logically and Consistently

Okay, let’s see who has been paying attention. Did you catch another new term? “Variety of costs, burdens, and/or...” If you did, excellent, gold star, you get to be at the front of the line for the pizza! So, what are burdens? You may have heard of these under a different term - pools, allocations, rates, or indirects. There are many terms for them, but simply, it is the process of spreading (or allocating) the indirect costs to direct contracts. You may be more familiar with the examples of types of allocations, e.g., fringe, overhead, G&A. An approved accounting system needs to be able to spread/allocate the indirect costs that have been accumulated in a logical and consistent manner. Yes, before you ask, I will go back to our widgets. We bought 100 that we used exclusively on our Apache helicopter, but we also bought 100 that we planned on using for a couple of different efforts. We could keep track of them in some kind of inventory and move costs for each widget we use. Still, we could also group the cost with other similar indirect costs (maybe office supplies) and allocate it to some predetermined equitable method.

Now, the allocation of costs is a whole topic. I have been told this blog shouldn’t be a novel about widgets, helicopters, or partying, so I will limit myself here to say again for an approved accounting system, your system needs to be able to calculate and allocate these indirect costs the same way each month. Costpoint has a special section where these allocations are established once and then calculated by the system on a regular basis. Easy peasy.

Additional DCAA Requirements

As we discussed, an auditor is verifying the system can meet the criteria above, but DCAA will also check IS the system:

1. Being Used Regularly and Consistently as Described in Policies and Procedures

You can have wonderfully written policies and procedures (P&Ps), all the controls in place within your system, and a well-planned monthly closing schedule. Still, if you regularly circumvent the controls, deviate from the policies, and don’t follow the closing plan, DCAA could find your system deficient. Your P&Ps do not need to be professionally created, but they do need to reflect your business’s actual and correct practices. If they do not, you need to either revise the P&Ps or change how the processes are practiced to ensure reality matches the documentation. Likewise, you do not need to meet all the closing steps on schedule, but you need to be able to show that you follow a regular closing schedule.

2. Including Regular and Consistent Reviews, Approvals and Reconciliations

This is what we like to call the “At Least 2 Sets of Eyes” principle. At a minimum, are transactions entered into your system seen by at least 2 sets of eyes? Typically, this is the person entering the transaction and reviewing the entry before it is recorded. In Costpoint, many of these reviews/approvals can be recorded within the system, creating a digital record of the second set of eyes. A digital record is the best, but it is not required to be within the system; if you can prove that someone is reviewing transactions (maybe by dated initials, a review page, or some other mechanism), that is enough. These reviews should be on anything that goes into the system: vendor invoices, customer billings, journal entries, and the huge one - timesheets. All these transactions need to be reviewed by someone. Ideally, you would have 3 sets of eyes: one at entry, one at review prior to recording, and finally, one as part of your monthly account reconciliation process. Although DCAA does not specify account reconciliations in the SF1408, this is considered standard practice for the monthly closing process.

Just to reiterate, you can have the best-designed system, but if it is not being used consistently and according to your stated procedures, it can be found deficient. And speaking of deficiencies, the most common ones per DCAA relate to the same topics we have covered, specifically:

• Inconsistent processing (i.e., not monthly)
• Improper segregation of direct and indirect costs
• Improper timekeeping (this again could be a whole other article)
• Non-exclusion of expressly unallowable costs
• Inadequate procedures

If you are on the road to getting your accounting system reviewed, make sure your system CAN perform the items listed above, and then make sure you are using the system and have appropriate processes in place to support that system. We, the Costpoint team at Redstone GCI, obviously think Deltek’s Costpoint is the best option for an accounting system that will meet DCAA requirements, and we would be happy to go into greater detail about the benefits of Costpoint. Redstone GCI also has resources that can help prepare policies and procedures that match your business practices and prepare you for a system review of whatever system you use. We’re just a phone call or email away.