How can you tell if you have outgrown your current accounting system? Members of Cherry Bekaert’s Government Contractor Consulting group, including John Carpenter, Curt Smith, Eric Poppe, and Javier Diaz participate in a roundtable discussion on some of the key indicators that a contractor has outgrown its accounting system, including:
- Increasing or change in contract types (e.g., Firm-Fixed-Price, Time & Materials (“T&M”) and/or Cost Type)
- Increased organizational complexity and complex rate structures
- Continuously adding General Ledger accounts to keep up with tracking requirements
- If you have multiple Excel worksheets used to reconcile and get information from your accounting system for Defense Contract Audit Agency (“DCAA”) request or other agency reporting requirements
Related Podcasts
- Adequate Accounting Systems Requirements for Government Contractors
- DFARS Cybersecurity Requirements: NIST 800-171 Compliance for Government Contractors
- VOSB and SDVOB Changes that Government Contractors Need to Know
HOST: MAGGIE: 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. 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. Please enjoy this conversation.
CRAIG HUNTER: Thank you, Maggie. 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 there, can we kick off with that?
ERIC POPPY: Happy to. Craig, it's great to join you again talking about getting into Government Contracting if you're a technology company.
ERIC POPPY: As we discussed last time, there are many compliance requirements depending on the contract type—fixed price, Time-and-Materials (T&M), or cost-plus. Timekeeping is a big cultural hurdle if you're doing work with the government.
ERIC POPPY: Those contract types really drive what a company might need to implement or start to track for reporting, accounting, and compliance. If you have a T&M contract or a cost-reimbursement contract, your accounting system should be set up to meet government criteria to properly accumulate, allocate, and bill costs to the government.
ERIC POPPY: For cost-reimbursement or T&M contracts, you will at some point need an improved accounting system. From a GovCon standpoint, the accounting system is not just the ERP software—it's the system, the people, the processes, the controls, and the training. Think of the accounting system as a wheel; each spoke is a different piece—training, compliance, ethics, accounting accumulation, general ledger control—and government requirements hit all those areas.
ERIC POPPY: If you're getting into federal work, about to win a cost-plus contract, or already have one, you might be asked to get an approved accounting system by being audited by the government or by a third party. That criteria is based on SF 1408, the Pre-Award Accounting System Survey, which is backed by a FAR clause.
ERIC POPPY: Key items to consider for compliance include identifying direct costs versus indirect costs, having a timekeeping system that properly tracks contract costs and non-contract costs to the appropriate cost objective, billing appropriately, and being able to show cumulative billings to contracts and clients. You must identify unallowables and segregate them from any potential claim to the government, track contract funding and costs for the award, and be GAAP compliant.
CRAIG HUNTER: I know that was a lot. I've seen a number of companies using QuickBooks and thinking it's too simple for Government Contracting, but companies can put processes in place so QuickBooks can be a compliant system and pass a government review. Is that right?
ERIC POPPY: Yes. Depending on whether you're using QuickBooks Online or QuickBooks Desktop, there are different features you can use within the system and processes you can implement outside the system, such as Excel spreadsheets for rate calculations. There are also many third-party tools and apps that bolt on to QuickBooks to help track compliance.
ERIC POPPY: More broadly, regardless of system, it comes down to being able to track contract cost at a detailed level. Contracts can be broken into contract line items, and you may need to track materials, labor, travel, and other direct costs to that contract line item level, which then rolls up into the contract. It's essentially detailed project cost accounting for many reporting requirements.
CRAIG HUNTER: You mentioned direct versus indirect cost. Can you touch on that briefly?
ERIC POPPY: Direct costs are those specific to a particular contract or contract line item. Indirect costs benefit a pool of contracts or the general and administrative operations of the company as a whole.
ERIC POPPY: Typically, indirect costs fall into three pools: fringe costs, which are payroll-related benefits; overhead costs, which support revenue-generating activities; and G&A, which supports the organization as a whole. The key is that the company understands all its costs as they're posted to the system because the government could audit them.
CRAIG HUNTER: The government wants to ensure any costs allocated to a particular contract line are indeed valid direct costs, correct?
ERIC POPPY: Correct. Direct costs support a single cost objective; if you removed that contract or program, the cost would not occur. Indirect costs support multiple cost objectives; you might remove a couple of programs and still incur recruiting costs because the organization must continue to function.
CRAIG HUNTER: Eric, you also mentioned allowable and unallowable costs. At a high level, can you give some examples?
ERIC POPPY: Sure. FAR Part 31 contains the cost principles for commercial organizations and lists various cost categories. Examples include public relations or marketing, legal and professional fees, entertainment, and lobbying.
ERIC POPPY: There are expressly unallowable costs that are never allowable to bill to the government. These remain normal business expenses commercially—for example, a company party where alcohol is served—but you cannot pass those costs on to the government. The rule of thumb is that anything primarily for entertainment cannot be billed to the government.
ERIC POPPY: Lobbying costs are unallowable. Some public relations and marketing costs are unallowable, while FAR Part 31 gives examples of costs that are allowable. You must identify and segregate unallowables from your claim.
CRAIG HUNTER: So while those are valid costs of doing business, the government simply will not reimburse them.
ERIC POPPY: Correct. One more point: this is different from IRS reporting, so they are not one-for-one. Assuming all costs are in your system and allocated direct and indirect, billing or invoicing the government differs from commercial practice.
ERIC POPPY: The contract will specify how you need to bill. Typically, you must show at the contract level, and potentially the client level, your direct costs and the indirect costs applied to those direct costs. You must show hours worked, labor rates, and any materials. For cost-reimbursable or T&M contracts, you often must show labor rates, hours, and materials at a detailed level.
ERIC POPPY: Invoices may also require period of performance, funding information, cumulative billings to date, and the indirect rates applied. Much of this depends on the contract terms since they dictate the required level of billing detail.
CRAIG HUNTER: When we're billing and working with the government, who are the people on the government's side we'll work with regularly on a contract?
ERIC POPPY: The contract will identify the person with decision-making authority—the Contracting Officer. They approve modifications, sign changes, and approve key personnel. You may have a Contracting Officer's Representative (COR) or Contracting Officer's Technical Representative supporting the Contracting Officer.
ERIC POPPY: Auditors or reviewers from DCAA or DCMA may perform audits and provide reports to the Contracting Officer, but the Contracting Officer is the decision-maker who interprets audit findings and approves resolution. You should develop a relationship with the Contracting Officer.
CRAIG HUNTER: Based on what you said earlier about unallowable costs, we can't cultivate the relationship by buying a bottle of wine for the Contracting Officer, as tempting as that might be.
ERIC POPPY: Correct. That would be unallowable.
CRAIG HUNTER: Eric, you mentioned contract types and the individuals involved. As we close, technology companies are concerned about commerciality and intellectual property and whether those cross over to the government. That's a larger topic.
CRAIG HUNTER: We encourage everyone to join us for our next podcast in the series, where we will address intellectual property and commerciality in more detail.
HOST: MAGGIE: Eric, thank you for your input and time. Thank you, everyone.
