In order to work on government contracts, your accounting system must measure up to the Cost Accounting Standards (CAS) of Federal Acquisition Regulation (FAR). These regulations often differ from basic accounting methods, and it’s important you’re using an accounting system that can meet these standards; otherwise, you might be barred from receiving government contracts. How can you tell if your system is up to snuff? Here are 5 signs that it’s falling short.
Direct and Indirect Costs Are Lumped Together
Basic accounting practices tend to assign all project costs to a single column. This simplifies your P&L statements and might work for some businesses—but it’s not sufficient for government contractors. FAR standards require direct and indirect costs to be accounted for separately for every contract. Direct costs are those that go directly into fulfilling the contract, including labor hours and supplies purchased specifically to complete that job. Indirect costs are your general business expenses that you keep your operating on a daily basis: rent, utilities, general office expenses, and so on.
Generally speaking, accounting for direct and indirect costs separately is a good idea for most companies; it makes for more accurate bookkeeping, helps with making important financial decisions, and is important for filing your business taxes and claiming proper deductions. But for government contractors, this form of accounting isn’t just the best option—it’s the only option.
Pre-Production and Production Costs Are Combined
Direct and indirect costs aren’t the only breakdown of expenses required for government contractors. You must also segregate your pre-production and production costs for your contracts. Pre-production costs refer to any expenditures related to exploration and development prior to actually beginning production.
Pre-production costs can be both direct and indirect, which can make breaking out your expenses into all four categories a bit complex. You could have direct pre-production, indirect pre-production, direct production, and indirect production costs for every contract you work on—and your accounting system must be able to track them all separately.
Employee Hours Don’t Show Work Activity
Your accounting method must also be able to provide a detailed report of work activities performed by employees during the hours logged on a contract. Simply clocking in and out for a specific job is not sufficient for a government contractor. Generally speaking, this requirement has more to do with your standard practices for logging employee hours, and less to do with your accounting system’s functionality. However, it is still worth noting here, as proper documentation of your employees’ hours makes it possible to break out those direct, indirect, pre-production, and production costs.
Unallowable Costs Are Included
Your accounting system should not include any unallowable costs under contract expenses. While expenses like taxes, fines and penalties, or business advertisements may be genuine overhead costs for your business, they cannot be included as indirect expenses on government contracts. Under current contract terms in FAR 31, the following types of costs must be excluded from any billing, claim, or proposal for any government contract:
- Donations and contributions
- Fines and penalties
- Advertisements and media
- Entertainment expenses
- Tax expenses
This is not a comprehensive list, and individual contract terms may also include other unallowable expenses. Your accounting system needs to have a method for excluding these expenses from any billing or reports related to your government contracts.
It Doesn’t Produce Interim Reports
All accounting systems have some method of creating reports, but it’s important that yours allows for pulling reports on individual contracts at regular intervals. FAR standards require reports at least monthly, and those reports must display all charges to contracts. If your accounting system limits your ability to create these reports in any way, it won’t meet your needs as a government contractor.
Get CAS- and FAR-Compliant Accounting
At Peter Witts CPA, we specialize in working with government contractors. We know the CAS and FAR requirements for accounting methods, and we ensure our software and processes are up to snuff. If any of the above is true of your current accounting system, it’s time to switch to an accountant who can help you stay in compliance and continue receiving government contracts. Contact Peter Witts CPA today to speak with one of our experienced accountants, and see how we can help you get back in compliance with CAS and FAR accounting standards.