Doing Business with the Government – Accounting System Readiness

If your company does or plans on doing business with the government, you must be prepared to deal with a host of compliance regulations which are located in the Federal Acquisition Regulation, more commonly known as the FAR.   Specifically, it is FAR Part 31 that governs the contract cost principles and procedures, and provides the guidance for establishing a government compliant accounting system. A proper accounting system is critical to satisfying government auditors and to providing the information necessary for planning, budgeting, proposals, and maximization of cost recovery.  Without it, you may not be awarded a contract or grant, or may need to delay billing.

The key elements of a government compliant accounting system are:

  • Proper segregation of direct and indirect costs.
  • Identification of a final or intermediate cost objective, usually in the form of a job, project or task.
  • Direct costs must be identified and accumulated by contract/grant under a job order cost system. Subsidiary cost records for each individual contract should be available.  Direct costs must be identified by contract line item.
  • There must be a logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives.
  • Costs must be accumulated under general ledger control.
  • The timekeeping system must identify employee labor by intermediate or final cost objectives, and maintained on a daily basis within the accounting system.
  • The labor distribution system must charge direct and indirect labor to the appropriate cost objectives.
    An interim (at least monthly) determination of costs charged to a contract through routine posting of books of account.  This requires a monthly accrual basis closing of the books.  FAR requires the books to be kept on a GAAP basis.
  • The accounting system must separately identify or accumulate unallowable costs pursuant to FAR Part 31.

In addition to these elements and the detailed requirements that go along with each, the company must have written policies and procedures at a minimum for the following:

  • Accounting system controls
  • Planning and budgeting
  • Time reporting procedures
  • Work at home policy
  • Personnel policy handbook

As previously noted, your accounting system must be compliant with the FAR regulations in order to satisfy the government auditors.  Various Federal government departments and agencies perform numerous audits of one type or another. If the department or agency does not a have an audit function, they will contract with the Defense Contract Audit Agency (DCAA) to perform various types of audits of which some of the more common are:

  • Pre-award accounting system
  • Annual cost submission of indirect rates
  • Financial capability
  • Budget proposal
  • Post award
  • Contract close out

The DCAA has recently focused more on pre-award and budget proposal audits.  In other words, they are auditing the costs before monies are spent rather than historical costs. This approach makes a lot of sense for the government to try and reduce fraud and abuse.

Also, the pre-award accounting system audit is now a pass or fail audit.   If your accounting system fails you can possibly lose the award.  You will have time to cure any deficiencies but this can delay your award for months.   In any type of audit, if the DCAA determines there are deficiencies in the accounting system’s ability to identify and accumulate costs, the company can be stopped from billing which can cause serious cash flow problems. 

Once your company obtains its first government contract, it is important to update and maintain your accounting system regularly for maximum efficiency.   Upon request for documents by the DCAA for an audit, the company is expected to produce the records within three business days.  If the records are not produced in this time period, the accounting system can be rendered inadequate which can result in a potential loss of the contract/grant or billing delays. 

If you are going to do business with the government, it is critical for your accounting system to be able to withstand an audit.  Though the accounting system is very often the last thing addressed when submitting a proposal, it is much more cost effective to set it up properly on the front end rather than wait for the government auditors to come.

The material in this article is meant as general information and should not be acted upon without prior professional consultation. 


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