So your technology company has won its first government contract. Now what? Do you have a full understanding of the nuances and reporting requirements that come with that contract award? The government understands that it’s dealing with taxpayer money, so all costs need to be reasonable, allocable and allowable, and there’s a lot to uncover behind these terms.
Join Cherry Bekaert’s Craig Hunter and Eric Poppe for the third episode of this podcast series, as they compare the three major contract categories in which companies can engage, and how costs and reporting must be handled. They’ll also talk about the number one cultural hurdle tech companies must address when they are new to government contracting.
Stay tuned for our next episode which outlines several important areas that need attention to stay compliant with the government.
If you haven’t already, be sure to catch up on part one and part two of this series:
- Should Your Tech Company Work with the Government?
- How Tech Companies Can Successfully Capture Federal Business
- The Keys to Sustaining Growth Through Compliance: Government Contract Compliance Checklist for Tech Companies
- Protecting Your Tech Company’s Intellectual Property in a Government Contract
MAGGIE: Hello, and welcome to Cherry Bekaert's Technology Podcast. This is the third in a series focused on how technology companies can benefit from working with the federal government. If you haven't already listened to the first two, you can check those out on this platform, wherever you listen to podcasts, or visit cbh.com.
MAGGIE: Today, we're joined by Craig Hunter and Eric Poppe, two members of Cherry Bekaert's Government Contracting Group. They'll address important matters to keep in mind and first steps to take once you've won your first contract. And now, Craig and Eric.
CRAIG HUNTER: Thanks, Maggie. Following on from the last two podcasts, the next logical step is: you have a government contract — now what? To help us address some key topics, we have Eric Poppe, a senior manager in Cherry Bekaert's Government Contracting Services Group. Welcome, Eric.
ERIC POPPE: Thanks, Craig. Thanks for having me today. I'm happy to join.
CRAIG HUNTER: Eric, as we said, we've got a contract. There are a lot of compliance matters we need to be concerned about. What should companies be aware of and be doing as they get this first government contract?
ERIC POPPE: The Government Contracting (GovCon) consulting group I am part of helps companies transition to working with the federal government. Many clients come from the commercial side and have just won their first award, so we tackle this question a lot.
ERIC POPPE: The first question we always ask is: have you fully read the contract? People often say they understand the statement of work, but do they really understand the reporting requirements, who the key players are, and the compliance requirements? Do you understand the contract type and the nuances that come with it? There is a lot of substance in those large contract documents beyond the statement of work.
ERIC POPPE: Many terms are incorporated by reference, and there is significant variation between contract types in how you accumulate and report costs, and in how you bill and claim to the government.
CRAIG HUNTER: You mentioned a good point, Eric. Commercial contracts are often less intensive than government contracts. The positive side with government contracts is that, despite their length, they are very clear about the obligations of each party.
ERIC POPPE: Many government contracts span two to five years. From the government's perspective, this is taxpayer money, so all costs need to be reasonable, allocable, and allowable. There is a lot of scrutiny around those terms. People like working with the government because it is the largest buyer and it generally pays on time.
CRAIG HUNTER: You mentioned three main types of contracts. Would a company have any ability to alter the contract type after award? The contract type will drive much of the follow-on compliance work.
ERIC POPPE: The contract type drives the level of compliance required in reporting, accounting, and system requirements. Typically, no — the contract type is dictated during the solicitation and proposal stage. Sometimes there are hybrid contract types or more discussion with the government, but you generally know the contract type when you develop your pricing proposal. That pricing proposal is often incorporated into the contract award.
ERIC POPPE: We think of three main buckets: fixed-price, T&M (time-and-materials), and cost-reimbursable (cost-plus). Fixed-price is just that — a fixed price for the contract term. The risk is on the contractor: if you overrun, margins suffer; if you underrun, margins improve.
ERIC POPPE: T&M is typically labor-based with a fixed hourly labor rate and materials at cost. You bill the hours worked at those labor rates. Cost-reimbursable, or cost-plus, places more compliance requirements on the contractor. The risk is on the government; you bill allowable direct costs, add indirect costs associated with those direct costs, and then add fee.
ERIC POPPE: For example, if an individual's salary is $100,000 for the year, you use that as the starting point, then add fringe, overhead, G&A, and fee to arrive at the cost submitted to the government for reimbursement.
CRAIG HUNTER: So commercially available items and software products would typically be under a fixed-price arrangement, whereas staffing the work might be T&M, and cost-plus is often used when there's no basis to establish a fair market value.
ERIC POPPE: Correct. Research and development projects or statements of work that are more fluid might be cost-reimbursable, while very well-defined purchases are more likely fixed-price. Many IT services like call centers are often on an hourly basis. The agency's mission and needs can drive the contract type.
CRAIG HUNTER: Which contract types are more compliance-intensive and more difficult to administer?
ERIC POPPE: Fixed-price is generally easier with fewer compliance worries. T&M and cost-reimbursable have more compliance requirements and "teeth." Companies new to government contracting sometimes choose only fixed-price work to avoid the compliance burdens of T&M and cost-reimbursable. With T&M and cost-reimbursable, you must make additional submissions, and your accounting system must be set up to collect costs compliantly. The upside is you get reimbursed for all allowable costs. As you grow as a government contractor, those requirements remain, especially the need for an approved accounting system.
CRAIG HUNTER: Labor is a significant element of cost. When companies are recording time, what do they need to be aware of for timekeeping?
ERIC POPPE: Timekeeping is probably the biggest cultural hurdle for companies entering government contracting, particularly as fewer people record time in commercial environments. If you work with the federal government, you must record time and have a timekeeping system.
ERIC POPPE: Timekeeping is used for cost accumulation, billing, and allocation of costs in the accounting system for cost-reimbursable and T&M contracts. It is also used for fixed-price work as the basis for future estimates. Timekeeping should be recorded typically on a daily basis, kept accurate, and include indirect personnel such as project management, business development, sales, HR, recruiting, legal, and general administrative staff because it feeds your indirect rates.
ERIC POPPE: Managers need to approve time, and you should have proper controls and notifications for changes. Timekeeping is one of the biggest areas of risk from the government's perspective.
CRAIG HUNTER: There are many timekeeping systems with built-in controls and approval workflows that integrate with general ledger accounting systems, which is a positive.
CRAIG HUNTER: Eric, you mentioned accounting systems. That's a significant topic, and we'll make it the focus of our next podcast. Accounting systems will be a major piece on their own.
CRAIG HUNTER: Eric can be contacted at epoppe@cbh.com. Our next topic will focus on staying compliant with the government through accounting systems. Dealing with the government is not a one-off, as contracts can span multiple years, so it's important to stay compliant throughout that time.
CRAIG HUNTER: Remember that revenue will also be recognized over multiple years. I look forward to talking with you then. Thanks, everyone.
