Governmental Accounting Basics & FAQs
This page will provide a brief overview of the basics of governmental accounting. Get the answers to your most frequently asked questions about government contractor accounting here.
When bidding as a subcontract, what cost information is appropriate to share with the prime contractor?
Most contractors are aware that your teammates this week will be your competitors next week. Thus, they share only the necessary information and consider all else proprietary. The subcontractor would share loaded costs or loaded rates, the fee rate or amount, and the escalation. They will be careful not to provide information that allows the prime contractor to “back into” their loading.
Do I need a Forward Pricing Rate Agreement?
Numerous RFP’s ask contractors whether they have a Forward Pricing Rate Agreement (FPRA). I see very few contractors that do. Typically, this in the arena of large or major contractors. Many times the government will accept provisional indirect rates in lieu of a FPRA. If neither are available, the contractor will have to prepare an indirect cost budget in support of the indirect rates proposed.
Is a Forward Pricing Rate Agreement the same as a Provisional Rate Agreement?
No. A forward pricing rate agreement is an agreement between a contractor and the government of the indirect rates that will be utilized for pricing in the period (year) covered. A provisional rate agreement is an agreement between a contractor and the government of the indirect rates that will be utilized for billing on cost plus contracts in the period (year) covered.
What should be the basis for the indirect rate component of cost proposal submitted to the government?
The basis for the indirect rates proposed should be either a forward pricing rate agreement, a provisional rate agreement, or you indirect costs budget for the period of performance of the contract proposed.
What should be the basis for direct costs proposed?
- Direct Labor
- Current employee’s payroll records, or contingent hire agreements, or labor survey data, or the Wage Determination Schedule
- Subcontractor / Consultant
- Subcontractor’s / Consultant’s cost proposal
- Fee Competitive Assessment
- Joint Travel Regulation / Airline, Rental Car
- Indirect Rates
- FPRA, Provisional Rate Agreement, Indirect Cost Budget
- Competitive Assessment
Approved Accounting Systems
Do I need an approved DCAA accounting system to bid on CPFF contracts?
No. However, the FAR states that the contractor must have an “adequate accounting system to be awarded a cost reimbursable contract.
What is an adequate accounting system?
An adequate accounting system is defined by the SF1408 in the FAR. However, an auditor from the government must review your accounting system and issue a report that approves your system as adequate. Sometimes, government agencies will accept the report from an independent CPA firm in lieu of a report from a government auditor.
What is the basis for an auditor to approve a contractor’s accounting system?
The SF1048 contains the list of criteria that must be met for an accounting system to be considered adequate.
What is an accounting system review?
Guided by a review program that is based on the SF1408, an auditor will collect and review evidence that your accounting system is adequate.
What is the SF1408?
The SF1408 is a standard form in the FAR (Part 53). It is a checklist of criteria that an accounting system must meet in order to be considered adequate.
Are there any approved accounting systems?
Accounting systems are approved when an auditor from the government reviews the accounting system of a contractor and issues a report that the system as adequate / approved. Sometimes, government agencies will accept the report from an independent CPA firm in lieu of a report from a government auditor.
If I make changes to my accounting system after gaining approval from DCAA, will DCAA need to come back and review it again?
Typically, an accounting system review report is good for 5 years or more; depending on the resources and focus of DCAA and the type of contracts the contractor possesses. The more cost plus contract, the higher the importance in having an adequate accounting system. However, if the contractor changes the accounting software, the government will not consider the prior report acceptable
What is the difference between a pre-award review and a post-award review?
A pre-award audit accounting system review is engaged when the contractor has no previous cost reimburseable contracts and this is the first accounting system review. Conversely, a post-award accounting system review is engaged when the contractor already has cost reimburseable contracts or that this is not the first accounting system review. Typically, the pre-award accounting system review is:
• Do I need to separate my accounting for commercial work from my accounting for government work?
• Where should I charge the payroll costs of an employee that does not work on or support government contracts?
• Which Quickbooks version is appropriate?
• What are the requirements for an electronic timekeeping system?
Incurred Cost Submissions
What are Incurred Cost Submissions?
It is a group of schedules submitted annually to the ACO or DCAA. These schedules document your costs direct and indirect costs incurred for the prior year ended. In addition to documented costs, there are schedule used to document administrative data of contracts. The incurred cost submission is used by the government to assess the degree to which a contractor may have under-billed or over-billed cost reimbursable contracts. Typically, the auditor’s focus will be on direct costs incurred versus billed, the indirect rates billed versus incurred on cost plus contracts, unallowable costs claimed in the submission, and contractual terms and conditions that may limited billable costs.
When are Incurred Cost Submissions due?
No more than 6 months after the contract’s fiscal year end. If a contractor is going to miss the do date, they should request an extension from the ACO. This keeps then in compliance with the contract.
When does a contractor need to prepare incurred cost submissions?
Hierarchy going from a definite yes to a maybe:
First, look to see if your contract contains the FAR clause 52-216-7. If it does, the government is expecting a submission. If it doesn’t, use the hierarchy below:
1. You have a cost plus contract (prime or sub) with DOD, DOE, or NASA, or the State Department.
2. You have a cost plus contract (prime or sub) with other agencies.
3. You have a T&M contract as a prime with DOD.
1. You have a T&M contract as a prime with non-DOD agencies.
2. You have a T&M contract as a sub with DOD.
For situations d. and e., agencies may not police or care. If you think that you should not have to provide the annual incurred costs submission, request a waiver from the ACO and ask to have your contract modified to have the clause 52-216-7 removed. This keeps you in contract compliance.
Does a contractor need to prepare a full-blown incurred cost submission when they have T&M contracts only?
No. If a contractor has T&M contracts only, the majority of the schedules do not need to be submitted.
After we submit our incurred cost submissions will the government be coming back to us to ask for money back?
No, at least not immediately. First, a company’s final indirect rates have to be lower than the indirect rates that they have billed. If the actual indirect rates are lower, the process still takes time; probably years. Here’s the process:
- Final Indirect rates calculated for year
- Incurred cost submission sent to DCAA
- DCAA initial review
- DCAA incurred cost audit
- Final indirect rates and total costs per CPFF and T&M contract calculated by DCAA
- Adjustment invoices (payback would occur here)
Also note that the calculation of under or over billing is handled in contract to date terms. Thus, if the contractor is under billed in year one and over billed in year two, the billings and costs for both years will be added and netted.
Is there any reason we can’t pay the owners a substantial bonus?
Bonuses to the owners of the company are allowable costs. Also, to be allowable, bonuses must fit certain criteria.
- There must be a written bonus policy. Or that the bonus practice if follow so consistently that policy is suggested.
- The bonus must be based on successful performance. Written performance evaluations are critical to this.
- The amount of the bonus must be reasonable.
- Bonuses should not be based on profit of the company as distribution of profit to owners is an unallowable cost.
- The policy must be in place prior to the beginning of the year.
If I propose a certain amount of costs on a government contract and my actual costs come in lower, will I have to pay the difference back to the government?
No. On cost plus contracts, the contractor bills only those costs that are incurred for the period. The cost proposal may be the driving factor in determining the contract value; however, it does not determine the actual amount billed from month to month. On T&M contracts, the contractor is billing hours incurred by labor category and negotiated fixed priced hourly rates.
What are some examples of instances where contractors would have to pay money back to the government?
1. On cost plus contracts, there is always under-billing or over-billing. Usually these are caused by the contractor using estimated (provisional) indirect rates, rather than actual indirect rates. The estimates and actual rates rarely end up being exactly the same. Also, in auditing a contractors indirect costs, unallowable costs may be discovered as included in the indirect costs pools. Removal of claimed unallowable costs will cause a lowering of the indirect rates. This is the process of an incurred costs audit.
2. On T&M contracts, an auditor may discover that the contractor incurred fewer hours per labor category than they billed to the contract. Or, the contractor may have billed rates to the government that were higher than the rates documented in the contract. Or the contractor may have billed less than qualified or experienced employees as compared to the requirements for labor categories in the contract
3. Defective Pricing: The government may discover that the contractor inflated cost elements during the pricing and negotiation phase of the contract award. The Truth In Negotiations Act gives the government the ability to recover the excess.
How do I determine my cognizant agency?
The cognizant agency is the agency where the contractor has billed the most revenue.
How do I determine my cognizant audit office?
DCAA has an office locator function on their website: dcaa.mil
Can Other Direct Cost be loaded?
Yes. Typically, the loading is your G&A rate.
If I am a subcontractor to a prime, do I have to have the same contract type as the prime contractor?
No. This is something that is negotiated with the prime contractor. Note that there is much more oversight and administrative costs related to cost plus contracts. So, if the prime has a cost plus contract, it is better for the subcontractor to negotiate a T&M subcontract.
Should employees on travel use the per diem amount or actual charges on their expense reports?
Utilizing the per diem rates from the JTR is much simpler than tracking and billing actual travel costs incurred. Actual costs entail documenting and retaining the documented costs in support of the travel costs billed.