As a Federal Contractor, you are required to maintain an adequate accounting system to ensure compliance with applicable cost principles. Fortunately, the cost accounting data from your accounting system is useful in many ways. This data can assist with developing contract estimates, running reports used for preparing invoices for reimbursement of costs, monitoring contract performance and more.
But what does this entail? In this article, we discuss the minimum requirements your accounting system will need, clarify different types of costs and offer examples of each.
Minimum Requirements for your Accounting System
Below is a list of some of the minimum requirements that your accounting system will need to have in place:
- Must operate under general ledger control and have a job cost ledger
- Must be able to segregate direct and indirect costs from one another
- Must be able to accumulate direct costs by contract
- Must be able to accumulate indirect costs into cost pools (i.e., fringe pool, overhead pool, general and administrative pool)
- Must be able to identify costs incurred and charged by contract on a monthly basis
- Must be able to segregate unallowable costs from allowable costs
Allowable or Unallowable?
Is the cost allowable or unallowable? Here is the difference between the two:
- Allowable Costs – are costs that are reasonable for and allocable to the performance of the contract. These costs include direct costs incurred in the performance of the contract and properly allocable and allowable indirect costs.
- Unallowable Costs – there are many costs that may not be billed to or reimbursed by the government, as defined under FAR 31.2. Costs such as bad debt expense, penalties and fines, entertainment costs, alcohol and advertising are examples of costs that are defined as unallowable and non-chargeable to a contract.
Direct or Indirect?
- Direct Costs – under FAR 31.202, a direct cost is one that can be directly identified with a contract (i.e., direct labor, direct travel, direct materials and other direct costs necessary to perform a contract). If direct costs are determined to be unallowable, they should remain allocated to the applicable contract for accounting purposes but should not be invoiced under the contract.
- Indirect costs – under FAR 31.203, an indirect cost is one that cannot be directly identified with a contract but can be identified with two or more final cost objectives. An indirect cost that is allocable to a contract benefits both the contract and other work and can be proportionally distributed.
Indirect cost pools
Here are some common examples of indirect cost pools used by government contractors:
- Fringe benefits – costs incurred in employing your workforce (i.e., holiday and leave pay, payroll taxes, retirement plan expense, health/dental/vision insurance, etc.)
- Overhead – costs incurred in support of the contract but not directly related to the contract (i.e., proportionate share of occupancy costs, training costs, travel costs to a meeting)
- General and administrative costs – costs related to the general management and administration of the company (i.e., salaries of accounting department and administrative staff, proportionate share of occupancy)
Having an adequate accounting system and properly trained staff are key to being successful in the Federal Contracting industry. Whether you’d like to learn more about how you can best utilize cost accounting data or you have general questions about your government contracting business, reach out to our government contractor experts today.
