In this podcast series’ previous episode, we mentioned the need for tech companies contracting with the federal government to have an approved accounting system to properly accumulate and allocate costs, as well as how to bill costs to the government. In this context, the system isn’t simply ERP or an accounting software package, but rather the people, processes, controls and training that comprise an organization. If you’re just getting into working with the federal government, you might be asked to get an approved accounting system in compliance with SF1408 Pre-Award Survey of Prospective Contractor (Accounting System).
Listen as Craig Hunter and Eric Poppe from Cherry Bekaert’s Government Contracting team cover various topics to consider for your company’s compliance:
- Direct vs indirect costs
- Allowable vs unallowable expenses
- How to adjust your current system to track contract costs
- Who the key players are as you work through a contract
Be sure to stick around for the next episode in this series, which will address an important area of concern for many tech companies: protecting commerciality and intellectual property.
And if you haven’t already, be sure to catch up on the first three segments of this series:
- Should Your Tech Company Work with the Government?
- How Tech Companies Can Successfully Capture Federal Business
- You’ve Won Your First Contract – Now What?
- Protecting Your Tech Company’s Intellectual Property in a Government Contract
HOST: Welcome once again to Cherry Bekaert's Technology Podcast Series, exploring how technology companies can get started working with the federal government and how to do so successfully.
HOST: Today we're joined once again with Craig Hunter and Eric Poppy, two members of Cherry Bekaert's government contracting group. Craig and Eric are going to talk about how to stay compliant with the government as your technology company continues to grow and win more contracts.
HOST: Please enjoy this conversation.
CRAIG HUNTER: Thank you, Maggie and Eric. Great to have you again with me here today.
CRAIG HUNTER: In our last podcast, you mentioned the approved accounting system and the treatment of different types of costs. Picking up right there, can we kick off with that?
ERIC POPPY: Happy to. Craig, it's great to join you again to talk about getting into government contracting if you're a technology company.
ERIC POPPY: There are a lot of different compliance requirements depending on the contract type—fixed price, time-and-materials (T&M), or cost-reimbursable. A big cultural hurdle for many companies is timekeeping when you're doing work with the government.
ERIC POPPY: Starting with the accounting system, contract types really drive what a company might have to implement or start to track for reporting, accounting, and compliance requirements. For a T&M or cost-reimbursable contract, your accounting system should be set up to properly accumulate and allocate costs and bill those costs to the government.
ERIC POPPY: If you have a cost-reimbursable contract, you'll at some point have the requirement to have an approved accounting system. When we talk about accounting systems from a GovCon standpoint, we are not just talking about the ERP software like NetSuite, QuickBooks, or Oracle.
ERIC POPPY: We're talking about the system of people, processes, controls, and training. Think of the accounting system as a wheel where each spoke is a different piece—training, compliance, ethics, accounting, cost accumulation, general ledger control. The government's requirements hit on all those topics.
ERIC POPPY: If you're getting into work with the federal government and want a cost-plus contract or are about to win one, you might be asked to get an approved accounting system either through a government audit or a third party. That criteria is based on SF-1408, the Pre-Award Accounting System Survey, which is backed by a Federal Acquisition Regulation (FAR) clause.
ERIC POPPY: Items to consider to be compliant include identifying direct versus indirect costs; having a timekeeping system that properly tracks contract and non-contract costs to the appropriate cost objective or home for that labor; billing appropriately and showing cumulative bill amounts to contracts and clients; identifying unallowable costs and removing them from any potential claim to the government; and tracking contract funding and costs appropriately for the award.
CRAIG HUNTER: I know that was a lot. I've seen a number of companies using QuickBooks and looking at government contracting who assume QuickBooks is too simple to be compliant. Is it true that QuickBooks can be used as a compliant system?
ERIC POPPY: Yes. Depending on your setup—QuickBooks Online or desktop—there are different features you can use and you can also implement manual processes outside the system, such as Excel spreadsheets for rate calculations. There are many third-party tools and bolt-ons to QuickBooks that help track the compliance piece.
ERIC POPPY: Regardless of the system, it comes down to being able to track contract costs at a detailed level. Contracts can be broken into contract line items or CLINs, and you may be required to track costs to that level. You need to track materials, labor, travel, and other direct costs to the CLIN level so they roll up into the contract.
ERIC POPPY: Essentially, you need a detailed project cost accounting system to meet many of these reporting requirements.
CRAIG HUNTER: You mentioned direct versus indirect costs. Can we touch on that briefly?
CRAIG HUNTER: Direct costs are specific to a particular contract or CLIN. Indirect costs benefit a pool of contracts or the company as a whole. At a simple level, indirect costs are typically grouped into three pools: fringe costs supporting payroll, overhead costs supporting revenue-generating activities, and G&A costs supporting the organization as a whole.
CRAIG HUNTER: The key is that the company understands all their costs as they put them into the system because the government could audit that. They want to ensure any costs charged to a particular CLIN are valid contract costs.
ERIC POPPY: You nailed it. Direct costs are program-specific costs that support a single cost objective—if you eliminated that contract or program, the cost would not occur. Indirect costs support multiple cost objectives; for example, recruiting cost supports the organization even if a couple of programs are removed.
CRAIG HUNTER: Eric, you also mentioned allowable and unallowable costs. At a high level, could you give examples of unallowable costs and explain what unallowable means in this context?
ERIC POPPY: Sure. There's some gray area here. FAR Part 31 contains cost principles for commercial organizations and lists buckets of cost such as public relations or marketing, legal and professional fees, and entertainment that could be allowable or unallowable depending on the circumstances.
ERIC POPPY: There are expressly unallowable costs—things that are never allowed to be billed to the government. These are still normal business expenses commercially, like a company party where alcohol is served, but you cannot pass those costs on to the government. You must identify and segregate those costs out of your claim.
ERIC POPPY: Rule of thumb: anything that is entertainment or purely “fun” cannot be billed to the government. Lobbying costs are unallowable. Certain public relations and marketing costs are unallowable. FAR Part 31 gives examples of allowable costs and those that are not allowable.
CRAIG HUNTER: Right, so while they are valid costs of doing business, the government does not reimburse them.
ERIC POPPY: Correct. Also, this is different than IRS reporting; the government’s allowability rules are not one-to-one with tax deductibility.
CRAIG HUNTER: Assuming we've captured all our costs and allocated them as direct and indirect, how does billing or invoicing the government differ from commercial practice?
ERIC POPPY: The contract specifies how you need to bill. Depending on the contract type, you typically must show, at a minimum, direct costs and the indirect costs applied to those direct costs. For T&M contracts, you must show labor rates and hours worked.
ERIC POPPY: You may need to show CLIN-level detail, any materials, and the total amount you're billing. For cost-reimbursable contracts you often show cumulative bill to date and funding information. You may also need to include period of performance and the indirect rates used.
ERIC POPPY: The level of detail required depends on the contract terms, so review your contract to understand the invoicing requirements.
CRAIG HUNTER: When we're billing and working with the government, who are the people on the government side we'll work with regularly and what are their roles?
ERIC POPPY: The contracting officer is the person with ultimate decision-making authority—they sign modifications, approve changes in key personnel, and award contracts. They may be supported by a contracting officer's technical representative (COTR) or other technical staff who assist the contracting officer.
ERIC POPPY: DCAA or DCMA may perform audits or reviews and provide reports to the contracting officer, but the contracting officer interprets audit findings and makes final determinations. It's important to develop a relationship with the contracting officer.
CRAIG HUNTER: Based on what you said earlier about unallowable costs, to grow a relationship, we can't buy the contracting officer a bottle of wine, right?
ERIC POPPY: Correct. You cannot bill the government for that, and offering gifts or entertainment to influence contracting decisions is not appropriate.
CRAIG HUNTER: For technology companies concerned about commerciality and intellectual property, will those issues transfer to the government? That's a bigger topic.
CRAIG HUNTER: We will address intellectual property and commerciality in our next podcast, the fifth in this series.
CRAIG HUNTER: Eric, thank you for your input and time, and thank you everyone for listening.
