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What you should know about creating an “approved” accounting system for government contracting

Do you wonder about what is necessary for a small business to have an accounting system suitable for government work?

We were faced with that question when we needed to set up our accounting system to allow us to work on government contracts. I had a head start because I had been a Government auditor for 10 years, but I faced new challenges when I had to set up my own accounting system versus working with accounting systems that were already in place. I want to share what I have learned and give you some resources for learning more about accounting for government contracts.

First of all, the basics…a compliant government cost accounting system must:

• Track all costs for any individual government contract
• Accumulate actual direct costs by labor category and job/task
• Accumulate actual indirect costs and allocate these costs using provisional, budgeted, or actual burden rates
• Track and segregate unallowable costs (as defined by Federal Acquisition Regulations)
• Account for uncompensated overtime
• Account for bid and proposal and research and development costs
• Track employee labor by intermediate and final contract objectives
• Generate accurate and timely invoices
• Have an adequate and consistent underlying accounting system

There may be some terms in the list that are important but are not familiar to you, like direct costs, indirect costs, burden rates, unallowable costs, uncompensated overtime, intermediate and final contract (or cost) objectives. These can be found in resources in the web sites listed below and also will be discussed in later blog entries.

To get an accounting system approved, it must be audited, in our case by the Defense Contract Audit Agency. First, there is a pre-award accounting system survey which is an examination before contract award to determine the acceptability of a contractor’s accounting system for accumulating costs under a prospective Government contract. If the contractor’s accounting system is found adequate, then another accounting system audit may be performed after contract award. The major objective is to determine if the contractor’s accounting system is adequate for accumulating and billing costs on Government contracts.

There are various resources that can be found on the internet, such as:

  •  DCAAP_7641.90 dated June 26, 2012 Information to Contractors. This is a document that provides an overview of the Defense Contract Audit Agency (DCAA) and what they do (Page 6 – 11) and information and explanations of pre-award surveys of accounting systems (Page 12 – 19). This is a good discussion of the types of audits, what they are looking for, and an overview of requirements for the basic systems. It can be found at www.DCAA.mil in the Publications list.
  • Federal Acquisition Regulations can be found at www.ecfr.gov. Title 48 includes regulations for many government agencies. Title 48, Part 31 discusses Contract principles and Procedures. Subpart 31.2 discusses Contracts with commercial organizations and includes explanations of composition of total costs, direct costs, indirect costs and application of principles and procedures to name a few of the topics.

What do you think? Are you ready for government contracting? Check back for more discussions about the elements of a compliant cost accounting system.

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