For contractors, receiving a government contract can be a lucrative opportunity and a source of steady revenue for the future, since many government agencies will often elect to work with the same contractor many times. However, there are strict rules and regulations that must be followed to ensure compliance with federal laws and regulations. One of the most critical aspects of government contracting is identifying and avoiding unallowable costs in your accounting. Doing this is difficult for even the most experienced contractors, but here at Peter Witts, CPA, we specialize in providing government contract accounting and helping contractors like you avoid these unallowable costs. Keep reading to get tips on how you can identify unallowable costs on a government contract.
What Are Unallowable Costs?
First, it’s important for all government contractors to understand what the term “unallowable costs” actually means. For starters, it does not mean that you aren’t permitted to have those costs at all. Rather, unallowable costs refer to expenses that cannot be reimbursed or included in the billing of a government contract. These costs are generally not directly related to the work performed or services provided under the contract. As such, they are not considered to be reasonable and necessary expenses that can be charged to the government.
Examples of unallowable costs include lobbying expenses, fines and penalties, entertainment costs, alcohol, and personal expenses. Government contractors must have a clear understanding of what constitutes an unallowable cost to avoid any potential compliance issues.
Identifying Unallowable Costs
To identify unallowable costs, government contractors must have a thorough understanding of the regulations and requirements outlined in the Federal Acquisition Regulation (FAR) guidelines. FAR is a set of rules and guidelines that govern the acquisition process for federal agencies. It outlines the procedures and requirements that must be followed by government contractors when providing goods and services to the government.
FAR provides a list of unallowable costs that cannot be charged to the government under any circumstances, but the list is far from comprehensive. Additionally, some costs may be allowable under certain conditions or if they meet specific criteria. Government contractors must be aware of these exceptions and ensure that they comply with the guidelines outlined in the FAR.
Reviewing Expenses
One of the most effective ways to identify unallowable costs is to review all expenses associated with the government contract. This review should be conducted regularly to ensure that all costs are properly accounted for and comply with the requirements outlined in FAR.
Government contractors should establish an effective accounting system that tracks all expenses associated with the government contract. This system should be designed to identify any unallowable costs and flag them for review. If an unallowable cost is identified, it should be immediately removed from the billing or reimbursement request.
Training and Education
Another important factor in identifying unallowable costs is training and education. Government contractors must provide training to their employees and personnel to ensure that they are aware of the regulations and requirements outlined in FAR. This training should include an overview of what constitutes an unallowable cost, how to identify them, and the consequences of non-compliance. While final responsibility for avoiding unallowable costs falls to the business owner, ensuring that your staff is familiar with these requirements (not to mention other FAR and DCAA requirements, such as procedural expectations for timekeeping) can help you avoid future compliance issues.
Working with an Expert
Effectively identifying and avoiding unallowable costs is never as easy as it seems. There are many gray areas, and the exact list of unallowable costs can vary from one contract to another. The best way to ensure you’re effectively identifying and avoiding unallowable costs is to work with a professional like those we have here at Peter Witts, CPA.
Not only can we help you review your expenses to ensure you haven’t itemized unallowable costs for your government contract, but we can also help you to establish and maintain a DCAA-compliant accounting system that makes it simpler and easier for you to keep all of your accounting and bookkeeping in alignment with government standards. Contact Peter Witts, CPA, today to speak with one of our government contract accounting experts, and find out more about how we can help you maintain compliance on all of your current and future government contracts.