The federal government has extremely strict compliance requirements for government contractors, from confidentiality agreements to detailed requirements for your accounting practices. Those accounting requirements are detailed through the Cost Accounting Standards (CAS) and Federal Acquisition Regulation (FAR), so it’s essential for government contractors to become familiar with those regulatory documents. However, this blog will offer you some of the top signs that indicate you may be falling short of FAR and CAS standards.
Your Employee Time Logs Don’t Show Work Activity
In order to be compliant with FAR and CAS standards and qualify for government contracts, you have to do more than just report the number of hours each employee works on a contract. Your employee time logs need to provide detailed reports of the work activities performed during those logged hours on the contract. Make sure you establish a system and standard operating procedures that require employees to do more than clock in and out when working on a contract; ensure that they’re providing information regarding their work activities as well. Not only does this keep you in compliance with government standards, but it also helps you with the next two common problems on our list.
You’re Lumping Direct and Indirect Costs
On other contract work, it may be acceptable to assign all the costs for a project into a single column. This is a common way to simplify your P&Ls for bookkeeping purposes, but it’s not acceptable if you hope to work on government contracts. FAR states that direct and indirect costs must be accounted separately for every contract that you work on. Direct costs are those expenses that directly apply to the fulfillment of a contract, and include costs such as employee labor hours logged on that contract or supplies purchased specifically for completion of the job. Indirect costs are those daily expenses that are required to operate your business, such as rent on your office space, utilities, commercial insurance, licensing fees, and so forth.
As stated above, detailed employee logs are essential for ensuring that this part of your accounting is accurate and compliant, so let’s look at an example of separating direct and indirect costs for employee hours. One employee logs hours in the office drawing up plans for a building you’ve been contracted to renovate. This is a direct cost, as they are working on one specific contract. Another employee in the office logs hours working the front desk and generating invoices for last month. This is an indirect cost; it’s not tied to a specific contract, but is essential to your business remaining operational.
Though separating direct and indirect costs is a requirement for government contractors, it’s also a good idea for most businesses in general. While it might make your bookkeeping a bit more complicated, it also makes it more accurate and can help you with making important financial decisions and even claiming deductions on your business tax return.
You’re Lumping Pre-Production and Production Costs
This is another area where many new government contractors slip up, because it’s not a common expense breakdown for most businesses. Separating pre-production and production costs for your contracts is a requirement to remain CAS and FAR compliant. Pre-production costs are those expenses that accrue during the exploration and development stages of a project, before actual production begins.
The most complicated aspect of segregating these costs is that they must be applied to both your direct and your indirect costs. So, you can have direct pre-production costs, direct production costs, indirect pre-production costs, and direct pre-production costs for every contract that you work on. Tracking all of these different subcategories can often get very complex, so it’s important that your accounting system is well organized and properly set up to support you in these efforts.
You’re Including Unallowable Costs
The term “unallowable costs” sounds pretty self-explanatory—you’re not allowed to include them. However, some new government contractors still make this mistake simply because they’re unaware of what falls into this category. While your business taxes, the cost of advertising for your company, and other such expenses are essential to running your business, you are not allowed to include them as indirect costs on any government contracts. We encourage you to familiarize yourself with FAR 31 to understand the full list of unallowable costs for government contractors so you don’t make this mistake.
Get Compliant to Get Contracts
Want to step into the lucrative field of government contracting? You need to get compliant with FAR and CAS first. At Peter Witts CPA, we specialize in working with government contractors and helping businesses create compliant accounting practices that allow them to qualify for government contracts. Contact us today to learn more about how we can help get your business compliant.