Project Cost Considerations for Government Contractors

ERIC POPPE: Welcome to Cherry Bekaert's GovCon podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward.

ERIC POPPE: My name is Eric Poppe. I'm a managing director with Cherry Bekaert as part of the Government Contract Services Group. With me is Jonathan Reed from our outsourcing team, who focuses primarily on government contractors. Jonathan is a director on the team. Jonathan, thanks for joining us today.

JONATHAN REED: Thanks, Eric. I appreciate it. Glad to be here.

ERIC POPPE: This is our second podcast focusing on accounting considerations for government contractors. You work with a lot of different contractors, small and large, and you lead outsourced accounting engagements. We wanted to have this discussion around a topic that often pops up and, while not always exciting, is very important for government contractors: project cost considerations and project reporting considerations.

ERIC POPPE: The reason we decided to do this topic is the huge impact from the compliance side and cost accounting, especially as contractors move into more cost-plus and flexibly priced contracts. It also has a big impact on financial reporting, system setup, month-end transactions, quarterly close, monthly financials, and working with auditors.

ERIC POPPE: To jump right in, for companies you work with or clients you're onboarding, when discussing project costing considerations from a financial reporting perspective, is there anything specific you walk through with them?

JONATHAN REED: Absolutely. When we work with new clients or existing clients that get a new contract, we take time to dig into the primary compliance aspects of that contract. Then we have a deeper conversation about how they want to set up the project in their system so they can meet invoicing and reporting requirements and also get value from project-level reporting.

JONATHAN REED: A simple example is a contract with one CLIN—a single line item—that's fixed price where you're delivering professional services roughly evenly over the period of performance. In that case, we usually default to a straightforward setup: recognize revenue evenly over the contract life and record costs, primarily labor, as incurred. The best method there would be percent complete, but sometimes a practical expedient can be used depending on the contractor's size.

JONATHAN REED: On the other hand, if it's a larger contract—maybe a cost-type contract or a cost-type contract with a fixed-price or T&M component—it's important to take time to set up the project appropriately in the system. Key considerations are staying compliant so the customer can receive invoicing and cost-level details, and setting up the project so the client gets the most value from the data.

JONATHAN REED: For example, if there are 20 CLINs, we may need to set up each CLIN individually so we can recognize revenue appropriately and track costs for each CLIN. Ultimately, it comes down to how we set up the contract to answer the main questions: remain compliant and provide useful reporting for the client.

ERIC POPPE: You can have multiple CLINs that require different revenue recognition methods because one CLIN might be fixed price and another cost plus. That has a significant impact.

JONATHAN REED: Yes. We often see a CLIN with a large deliverable where control doesn't transfer to the customer until the end, so we shouldn't recognize revenue until that deliverable is met. Conversely, a T&M CLIN delivering labor services requires recognizing revenue based on billable hours times hours worked.

ERIC REED: That affects revenue recognition, taxes, cash collections, and more.

JONATHAN REED: For sure. I've seen travel-related or ODC claims on contracts that carry specific burdens. Projects can get complicated, and accurate project setup is necessary to capture all nuances.

ERIC POPPE: From a financial statement audit perspective, are there project setup considerations auditors focus on?

JONATHAN REED: Yes. From an audit perspective, we need consistent categorization. For midsize or larger contractors with different organizations, revenue streams may be captured separately on financial reports. We must set up projects and contracts so revenue and cost items are captured correctly across those organizations in the accounting system.

JONATHAN REED: It's about identifying key components to capture so management can make informed decisions and so the financial data has integrity to answer auditor questions.

ERIC POPPE: Switching to compliance, in the context of having an approved or adequate accounting system, there's a requirement to track costs directly to a contract level and to a CLIN level where specified. Anything to highlight there?

JONATHAN REED: It's critical to set up cost structures correctly in the accounting system and to place costs in the right buckets. You also need to define those buckets properly. If something is categorized incorrectly, correcting it can be time- and labor-intensive. Investing upfront in correct setup avoids many issues later.

ERIC POPPE: It's not just billable contracts that need tracking. IR&D, bid and proposal, and internal projects like system implementations also need to be identified. We see this a lot on the M&A side where companies create project names like Project Dragon or Unicorn. Collecting indirect costs matters, and that also affects JVs and subcontractor relationships.

ERIC POPPE: That can impact consolidation depending on ownership structure and whether the JV is equity method or subject to full elimination entries.

JONATHAN REED: Absolutely. When setting up indirect rates, ensure the appropriate pool and rate structure is in place so you can record costs correctly. Mapping out the structure at the start, particularly during system implementation, prevents issues later.

ERIC POPPE: We've discussed financial reporting, dealing with auditors, revenue recognition, and the compliance side, including DCAA requirements and project costing. What about companies that operate in both commercial and government spaces? For example, an IT company that sells commercial products and also sells to government agencies like the CIA—what would you tell them about project costing differences?

JONATHAN REED: There's always a compliance aspect, more stringent with government contracts, but the basic principles apply to both. It depends on the value that different levels of reporting provide to the organization. If a commercial client only needs one line item for revenue and one for direct costs with indirects separated, we can set it up that way.

JONATHAN REED: If they want more granular reporting, we can incorporate that as long as the structure is set up correctly. At a basic level, some companies want one line for government revenue and one for commercial revenue on the income statement. Others want multiple revenue streams under each category. It depends on the value of detailed project-level reporting.

ERIC POPPE: Granular reporting reveals the true cost of commercial programs. It can show that programs a company thought were highly profitable are actually low margin or losing money and buffered by other projects.

JONATHAN REED: Exactly. Project-level reporting tied to financial reporting gives clients a clear view of where they stand on each project. That visibility helps adjust pricing or factors in future bids. Also, indirect rates may not apply to certain projects, and you want to see that in the financial system. It all depends on how you set it up.

ERIC POPPE: Any closing thoughts on project costing considerations for a company?

JONATHAN REED: It's about understanding the value of project-level reporting and recognizing that it requires a time investment to set things up so you can make informed decisions.

ERIC POPPE: Determine what you need from your reporting—compliance, financial reporting, stakeholders like banks—and set up your systems accordingly. Jonathan, thank you so much for joining me today on Cherry Bekaert's GovCon podcast.

JONATHAN REED: Absolutely. Thanks, Eric. And thank you to everyone for tuning in and listening. Make sure to follow and subscribe wherever you get your podcasts.

ERIC POPPE: Jonathan, thank you, and have a great day, everyone.