Charting Your Course for Government Contracts
Cost Accounting: Where Do You Start?
When doing business with the government, the cost accounting principles are more complex and rigid than those applied in commercial business practices. But that should not be a deterrent in your quest to pursue government contracts. Instead, use the tips below to lay the foundation for a sound government cost accounting system at your company, which is critical to the successful implementation and delivery of your government contract.
- 1. Develop your Government Cost Accounting System to meet the Defense Contract Audit Agency (DCAA) Standards. When developing an adequate government cost accounting system, as a small business government contractor, you must understand the Federal Acquisition Regulation (FAR), Part 31.2 (Contracts with Commercial Organizations).
In general, FAR Part 31.2 provides direction on how a government contract should be priced, what cost principles and procedures should be used, which costs are allowable under the contract and how they are determined. It also shares which costs are unallowable and how to account for them.
Along with some specific directives outlined in FAR, a cost is allowable only when it meets all these requirements: the cost is reasonable, allocable, meets the Cost Accounting Standards (CAS) or the Generally Accepted Accounting Principles (GAAP) and it meets the terms of the contract.
Understanding the Nuances
Overall, however, the FAR regulations are very brief in their definitions of allowable versus unallowable costs. The only way to fully understand the regulations is to have hands-on experience with how the DCAA interprets the regulations. For example, bonuses are a hot issue with the DCAA and are covered in FAR Part 31.205.6 (f) and (i). They are allowable costs if a written bonus plan has been put in place as of the beginning of the year, includes measurable criteria on which the bonus will be paid, is performance based, and it is not paid based on ownership percentage. If these criteria are not met, the bonuses would normally be considered unallowable.
While some trade show expenses can be allocated under allowable costs, the allowable costs do not include: memorabilia, alcoholic beverages, entertainment and physical facilities that are used primarily for entertainment rather than product promotion; neither are corporate celebrations and new product announcements, costs of promotional materials designed to improve the public image or company apparel (such as logo imprinted shits).
- 2. Get Ready for the DCAA Audit. Winning that coveted contract is just a small step in doing business with the government. What happens when you are audited by the DCAA can make all the difference. You may be subject to many types of DCAA audits. But the two listed below, relate to the government cost accounting principles and are very important to obtaining and/or retaining your government contracts:
- Pre-award survey is a DCAA audit of a prospective contractor’s accounting system including financial statements, tax returns, chart of accounts, trial balance, etc. Upon completion of the pre-award survey the Auditor will issue an opinion stating whether the accounting system is adequate or inadequate (along with conditions and recommendations).
- Post- award audit is a DCAA audit of the contractor’s accounting system includes a more in-depth examination of contract costs and how they were sourced.
Although FAR, CAS, GAAP, DCAA, ICE Model, and other acronyms may sound scary and overwhelming, pursuing government contracts are definitely worth the effort for those who are willing to invest the time and energy to understand the rules and to engage consultants in areas the company is unfamiliar with. It can make a huge difference in your company’s future growth.
Some resources you can use to become more successful in government contracting:
- Free counseling sessions are provided by the Procurement Technical Assistance Center (PTAC) in Orlando, (407) 420-4850.
- Small Business Administration, the Office of Government Contracting provides valuable tools for government contractors. To access them, go to www.sba.gov , click on “About SBA” (upper right corner), then click on “SBA Programs” located in the left side column.
- For more resources on government contracting and to take advantage of the services and government contracting training sessions provided by the Brevard-based Government Contracting Advisory Team visit www.mygcat.com.
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Debbie Goode is the Audit Director with Hoyman Dobson CPAs and the founder of the Government Contracting Advisory Team (GCAT), a network of independent services providers who specialize in providing services to government contractors.
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