Federal contractors face critical challenges in aligning accounting methodologies with the demands of the comparatively stringent requirements of their target market, the US government, vs. requirements of the commercial market base. Issues include maintaining constant audit readiness, the need for diligence and adroitness in information leveraging to develop a robust accounting operation, and the demand to stay on the cutting edge of applicable technologies and accounting workforce proficiencies, among others.
Managing difficult financial and accounting challenges has been the status quo of operating for government contractors. The simple reality of government contracting is that the standard is higher than for businesses in the commercial market. And, the government has tightened up systems over recent years, to prove its efficiency in protecting taxpayer funds. Consequently, contractors must even more meticulously demonstrate compliance of their accounting systems, policies, procedures, infrastructures.
But, achieving impeccable systems is an ever-faster moving target in the environment of continuously changing and increasingly complex and strict federal regulatory requirements in government contracting. Accounting to government agencies can overwhelm mid-sized and smaller businesses. Those who show exceptional capacity for adaptability to newly imposed requirements have an enormous advantage over competitors.
Below is information about some of the most common yet overlooked financial management and accounting concerns of government contractors. It is provided to help you assess and improve your firm’s accounting systems, as necessary to increase your competitive advantage as a government contractor and your likelihood for success in your evaluations in that role.
1. Clear Understanding of the Government’s Requirements for Contractors
Businesses that embark on contracting with the US government assuming that government accounting merely varies somewhat from commercial business accounting will experience a shock. The government’s already voluminous requirements are constantly changing.
Just a few of those criteria handed down from the Financial Accounting Standards Board (FASB), with which government contractors must comply, include:
For example, the federal government limits compensation for an executive to a maximum that the government determines is “reasonable”. Compensation higher than this ceiling is deemed “unallowable”, which means that your company is not permitted to charge such amounts exceeding the limit to the contract or to recover such amounts under the contract.
Understanding the government’s various areas of emphasis in audits is fundamental. For example, companies must be clear on what the DCAA views as contractors’ responsibilities include in accounting for management of subcontractors, such as DCAA scrutinization of:
- timeliness of payments to subcontractors
- documentation of contractor oversight of subcontractors
- documentation of enforcement of flow downs
- documentation of support for subcontractor billings
- documentation of subcontractor reviews
2. Obtaining DCAA Approval of a Government Contractor’s Accounting System
Prospective government contractors meet with an array of special difficulties in qualifying their accounting systems with the Defense Contract Audit Agency (DCAA).
For just a few examples, companies are confronted with challenges such as:
- direct and indirect cost segregation
- cost pools and allocation bases
- timekeeping
- labor distribution systems
- maintaining compliance with invoicing clauses
- a vast and ever-changing complex of other issues
The Defense Contract Management Agency (DCMA) defines business systems requirements and provides direction on audits and approval criteria. Regulatory requirements provide for withholds in cases in which contractors are determined. Contractors assessed as having systems that are deficient in some way(s) can be severely impacted by withholds. So, it is critically important for all government contractors to thoroughly understand the approval requirements as well as how those will be assessed.
3. Using Available Information to Manage and To Achieve Growth
The process of implementing a system for accounting to the federal government, designing special procedures, and implementing regulatory compliance policies naturally generates a wealth of useful information available to the new contractor. However, this cache of information has little value if the contractor does not recognize the benefits of leveraging the information acquired into an understanding of governmental purposes, needs, and larger processes, and then use that knowledge to best manage and methodically grow the company.
For just one example, compliance with government requirements necessitates the correct calculation of an overhead rate. However, if the contractor’s management does not recognize the importance of learning why the rate is significant and does not control spending to manage rate variance, then there is not much use for the company in its mere awareness of the overhead rate and of the fact that conformance relies upon its correct calculation.
Today’s technological innovations afford contractors a much better capacity for compliance with government requirements, permitting employment of systems for management and growth while adapting to keep in step with ever-incoming changes in requirements.
4. Keeping Pace With Changes in Government Rules for Finance Management and Accounting
Managing in a perpetual stream of changes of requirements is the way of business in government contracting. Currently, the increased transparency of government finance motivated by the economic stimulus plan provides a good example. But, with merely the usual turnover of new regulations, continuous changes in government financial management and accounting requirements are an ongoing fact of operating as a US government contractor.
Contractors must be skillful in anticipating and implementing modifications to any policies, procedures, and systems that support compliance, in order to maintain pace with changing requirements for their companies.
5. Timely Preparation for Surprise Audits
As a government contractor, your business must operate under the assumption that it will be subjected to a thorough government audit. Audits can occur without advance notice. Maintain a condition of preparedness. Ensure that you can be confident that your company will receive a positive evaluation.
When a contractor is tagged for noncompliance of its accounting system, the necessary work to regain acceptance by the government is very difficult, labor-intensive, and time-consuming for management. Contracts may be terminated. Opportunities for new business with the government are often wasted as well. And, in some cases, payments may even be withheld on existing contracts, pending satisfactory improvements.
6. Maintaining Sufficient Staff and Training
Accounting errors jeopardize contractors. Inaccurate data, incorrect data entry into the system, or errors in the performance of internal accounting processes (such as erroneous contract cost allocations, for example), put the system at risk. And, personnel who are unfamiliar with common requirements and accounting processes for government contractors frequently expose companies to losses of contracts, and can even have a deleterious impact on a company’s investment in its accounting software.
Contractors must ensure that the entire accounting staff is fully skilled, and must have adequate policies and procedures in place for the prevention of mistakes, and especially for their timely discovery and correction.
7. Flexibility in Change from One Individual Government Point Person to His/Her Successor
Contractors often are required to build a system that meets the requirements that a particular individual in government authority believes is appropriate to the contractor, only to have that government authority (sometimes abruptly) replaced by another person whose ideas about requirements (sometimes starkly) differ from his/her predecessor.
The successful government contractor systematizes its accounting operations, as the company grows, in order to maintain and improve compliance. (The business may bring an accountant on board in a mid-level to senior-level capacity to establish a system.) The backup position businesses should constantly maintain if it is financially possible to do so, is one of readiness for transition, in order to seamlessly maintain the integrity of its system if/when essential people leave the company or become unable to fulfill their roles.
For additional information on setting up DCAA compliant accounting systems, and in clearly understanding the suitability of various technologies in order to avoid unnecessary and excessively costly or insufficient accounting platforms for government contracting, contact us below.
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