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What Accounting Policies Should a GovCon Implement? (Part 2 of 4)

28 January, 2025
What Accounting Policies Should a GovCon Implement? (Part 2 of 4)

Key Details: Adequate and compliant accounting policies and procedures are essential in government contracting. Establishing, maintaining, and revising your policies and procedures from the start of your business will create good habits and allow you to quickly ramp up your system as larger and more complicated contracts are awarded. An adequate accounting system will help ensure compliance with general accepted accounting principles (GAAP), federal acquisition regulations (FAR) and Defense Contract Audit Agency (DCAA) Standard Form (SF) 1408, ensuring you can be awarded complex contracts such as const reimbursement type contracts.


From creation to implementation, Ryan & Wetmore is poised to take your business and accounting system to the next level. The article below will highlight the most common accounting policies and procedures you should have as a government contractor. Readers should note that there may be additional policies applicable to your business. As such, government contractors are encouraged to contact us today to begin their accounting system compliance journey.

View Part 1 here . Part 2 of this 4-part series dives into each type of cost policy a government contractor should establish. For a discussion of accounting system or compensation and HR related policies, stay tuned for future updates.

Note that this article only discusses adequate accounting system policies. Contractors should also aim to have other compliant systems in place such as a purchasing and estimating system.

Direct Cost Policy

The purpose of a direct cost policy is to define the cost accounting practices for accumulating and allocating direct costs to final cost objectives under applicable government regulations such as the Federal Acquisition Regulations (FAR) and Cost Accounting Standards (CAS). A direct cost is any cost that can be identified to a specific contract or final cost objective and only benefits that one contract or cost objective. A final cost objective is a cost objective that has allocated to it both direct and indirect costs in the cost accounting system and is one of the final accumulation points of costs. This can include contracts, task orders, and finished goods inventory.

Government contractors should aim to have the following procedures documented in their direct cost policy:

  • Costs are consistently classified and charged to final cost objectives as indirect or direct.
  • Accurate charging of direct costs:
    • Establish and maintain an adequate chart of accounts that clearly separates direct costs from indirect.
    • Establish and maintain procedures for charging costs.
    • Provide employee training on cost charging.
    • Perform periodic self-reviews to ensure accuracy and consistency.
  • Identification of direct costs by contract:
    • Charge the appropriate cost code in the general ledger and assign the applicable project.
    • Ensure this process is consistent across all contracts.
  • Direct labor is identifiable to a single final cost objective, and labor distribution is managed through the timekeeping system for both direct and indirect objectives.
  • Other direct costs include direct travel, bonuses, incentive payments, direct subcontractors, and direct materials.
  • Reconcile direct costs recorded on the general ledger with the profit & loss statement by job or contract to ensure accurate cost charging within the accounting system.

Indirect Cost Policy

An indirect cost policy should define the practices for accumulating and allocating indirect costs to final cost objectives in accordance with applicable FAR, CAS, and other regulatory requirements. As such, the indirect cost policy should describe how costs incurred for the benefit of several and/or all contracts/tasks that cannot be identified to a specific contract/task are recorded and allocated. The following general guidelines should be implemented under an indirect cost policy:

  • Per FAR 31.203, indirect costs are captured in logical and homogeneous cost pools and accumulated at the expense account level within each indirect cost center.
  • Use an allocation base common to the cost objectives to which the cost pool will be allocated.
  • Ensure the allocation base:
    • Reflects a causal/beneficial relationship to the indirect cost pool.
    • Represents the assignment of indirect costs to cost objectives in reasonable proportion to the benefits received by the indirect cost pool.
  • Set up account names and numbers that clearly distinguish each cost pool where costs are incurred and subsequently charged and accumulated.
  • Provide applicable staff with training to ensure compliance with this policy.
  • Typical indirect cost center and associated allocation base components are shown in the table below. Government contractors should note that this is a general sample, and a personalized version should be crafted for your company. Reach out to an advisor today to learn more.

 

Indirect Cost Center

Allocation Base

Fringe Benefits

Total labor dollars of all employees.

Overhead (OH)

Direct labor costs of all employees plus allocated fringe benefits. Also included are bid & proposal (B&P) labor costs, plus allocated fringe benefits.

General & Administrative (G&A)

Direct labor costs of all employees, plus allocated fringe benefits allocated to government direct labor, plus overhead costs allocated to the government direct labor and allocable fringe benefit costs, plus other direct costs of government projects.

Facilities

Service center costs are allocated between the OH, G&A, and unallowable cost pools based on square footage and headcount utilization of facilities.

Job Cost Policy

A job cost policy aims to set forth the framework and criteria under which incurred costs are captured and identified by contract or task. This ensures the company fully complies with job cost segregation principles in government contracting regulations. Essential procedures to include in a job cost policy are as follows:

  • Projects are controlled under the general ledger, and job cost summaries reflect and reconcile. Any errors or discrepancies are reviewed and resolved.
  • The job cost system provides costs by individual project, task order, or required contract program level, allowing monthly identification of actual direct and allocable indirect costs by contract. Actual direct costs are also identified at the cost element level.
  • The job cost system can segregate contract costs incurred before the contract award.
  • Upon receipt of a new project or contract, the Controller establishes a job number, task order number, or other identification code in the accounting system.
  • The company will consistently classify direct versus indirect costs in accordance with FAR Part 31.
  • All direct costs will be identified and charged to the appropriate job or task numbers as they are incurred, with supporting documentation coded based on the related job or task order.
  • Prior to posting direct costs to the applicable contract, costs will be reviewed for allowability. Unallowable costs will be posted to the unallowable accounts.

Unallowable Cost Policy

An unallowable cost policy ensures that costs are properly identified as allowable or unallowable for costing, billing, and pricing purposes. Unallowable costs should be accounted for according to FAR Part 31, Cost Accounting Standard (CAS) 405, and other related contract terms or regulatory requirements. Additionally, unallowable expenses should be identified and accounted for consistently. Companies should aim to include the following procedures in their unallowable cost policy:

  • Cost control procedures
    • Define the criteria for several types of unallowable costs.
    • Establish separate unallowable cost accounts.
  • Understand the basis of allocability and reasonableness and the limitations outlined in FAR Part 31.
  • Ensure employees are trained on the identification and segregation of unallowable costs. Unallowable costs typically fall into four categories:
    • Expressly unallowable costs such as those named in FAR Part 31.2 or agency supplements.
    • Costs are agreed upon between the agency and the company as outlined in the contract.
    • Costs that are unallowable based on a written decision by a contracting officer.
    • Costs generated due to another cost but would not have been incurred had the other cost not been incurred.
  • The accounting department should review expense reports to determine the allowability of costs.
  • The chart of accounts contains general ledger accounts set up to record unallowable costs. Unallowable accounts are reviewed periodically, and new accounts are established as needed.
  • Unallowable costs coded to unallowable accounts are not included in customer billing.

Importance of Policies and Procedures

Accounting policies and procedures provide the framework for all business-related matters, offering clear guidelines and standardized processes to enhance financial transparency, accuracy, consistency, and reporting. These policies are crucial for government contractors to ensure compliance with federal regulations such as the FAR and other agency-specific requirements, thereby avoiding legal and financial repercussions. Standardized procedures promote consistent and accurate recording of financial transactions, which is essential for reliable financial reporting and smooth contract management and auditing. Well-documented policies ensure preparedness for audits by agencies like the Defense Contract Audit Agency (DCAA), providing straightforward evidence of compliance and proper financial management. Furthermore, effective accounting policies help identify and mitigate financial risks and prevent errors, fraud, and mismanagement, thus securing long-term operational stability. Streamlined processes also enhance operational efficiency, allowing employees to perform tasks more effectively and boosting overall productivity. Adhering to stringent accounting standards builds trust and credibility, which is vital for maintaining existing contracts and securing future opportunities.

Conclusion and Action Plan

For government contractors, maintaining robust accounting policies and procedures is not merely best practice but a necessity. These guidelines ensure compliance, accuracy, efficiency, and credibility, supporting the successful fulfillment of government contracts. Contractors are encouraged to take the following steps to ensure compliance:

  • Conduct a policy review and assess existing accounting policies and procedures to identify gaps and areas for improvement.
  • Ensure all policies align with current federal regulations and applicable contract clauses.
  • Assess accounting system compliance against DCAA standards.
  • Create policies that are clear, concise, and easily applicable.
  • Provide employees with training sessions to ensure they understand and can effectively follow the established policies and procedures.
  • Set up regular internal audits to ensure compliance with policies and procedures.
  • Discuss with an advisor any additional policies and procedures your company should implement.

Government contractors should note there may be additional policies and procedures your Company must maintain. Our article series is not meant to be exhaustive. We highlight the most common policies and procedures.

For additional information, expertise, or to discuss accounting policies and procedures templates, contact Ryan & Wetmore.

 

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About Peter Ryan
Partner, Co-founder, & CPA

Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.

Read Pete’s full bio.

 

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About Rosie Cheng
Finance Consultant

Rosie Cheng is a Finance Consultant at Ryan & Wetmore. She focuses on government contracting services and produces many of the firm’s government contracting newsletters. Rosie graduated from Georgetown University with a Master of Science in Management and from William and Mary with a Bachelor of Business Administration.

 

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