Federal Government Contractor Guidance

Setting Up an Adequate Accounting System

Most companies have an accounting system that is adequate for tax reporting and conducting business in a commercial setting. 

Federal Government cost reimbursable contracts require the accounting system to be adequate for accumulating and billing costs per the Federal Acquisition Regulation (FAR). An adequate accounting system provides improved cost information. The benefits include improved management information and decision making as well as compliance with statutes, regulations, and laws. Good cost information provides insight as to which contracts or jobs are profitable and to what extent. Company managers can make better operational decisions that have a positive impact on the bottom line, based on reliable financial data. In the present budgetary environment, government customers that have trust in an organization's cost control and performance are more likely to commit funding to reliable suppliers.

The Defense Contract Audit Agency (DCAA) auditor will evaluate the design of an organization's accounting system following the elements of the Standard Form (SF) 1408.

The Accounting System should:

• be in accord with Generally Accepted Accounting Principles (GAAP), accrual basis;
• segregate direct cost from indirect cost;
• identify and accumulate direct costs by contract or job;
• employ a logical and consistent method of allocating indirect cost to contracts;
• accumulate costs under general ledger control;
• employ a timekeeping system that identifies employees' labor by contract;
• employ a labor distribution system that charges direct and indirect labor to the appropriate cost objectives;
• allow for an interim determination of costs charged to government contracts through at least monthly posting of books of account;
• exclude costs charged to government contracts that are not allowable under the terms of FAR Part 31 (Contract Cost Principles);
• identify costs by contract line item (CLIN) and by units, if required by the contract;
• segregate preproduction costs from production costs;
• generate cost information sufficient to compare with contract cost limitations;
• be able to support progress payment billings; and
• generate adequate, reliable data sufficient to price follow-on contracts.

Concurrent with the SF-1408 criteria, the Defense Federal Acquisition Regulation (DFARS) stipulates the system shall provide for:

• A sound internal control environment, accounting framework, and organizational structure;
• Reconciliation of subsidiary cost ledgers and cost objectives to general ledger;
• Approval and documentation of adjusting entries; and
• Management reviews or internal audits of the system to ensure compliance with the Contractor's established policies, procedures, and accounting practices.

The Accounting Staff needs to have training or experience with the Federal Contract Cost principles.  It is an important element of government invoicing to exclude unallowable costs and all allowable incurred expenses need to have adequate support documentation to limit the likelihood that costs are questioned during an audit.

Kline & Company is available to set up your adequate accounting system that is compliant with the FAR and DFARS.

This article was authored by Mac Young of Kline & Company for the purpose of providing guidance to our existing and potential clients.

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