Nuts and Bolts of Government Accounting

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Nuts and Bolts of Government Accounting

• Andy Habina
• Dynamics Research Corporation

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Agenda

• Acceptable accounting systems
• Indirect rates
• Cost Accounting Standards
• DCAA Audits

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Accounting Systems

• There is no one system that has to be used
• Key pieces of information has to be obtainable
• Cost by job (job cost or process cost)
• Job cost at actual cost or standard cost with
  appropriate variances
• Most companies who sell services use actual job
  cost
• Direct costs are key
• Labor, material, travel, other direct
• Labor hours generally required but can be in
  subsidiary ledger

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Factors impacting accounting requirements

• Type of contract
• Cost type
• Fixed price
• Time and Material (TM)
• Basis of award of contract
• Negotiated contract
• Competitive award
• GSA Schedule award
• Prime of subcontract

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Factors impacting accounting requirements

• Most accounting detail needed for
• Cost type contract that is negotiated
• Least accounting detail needed for
• Fixed price competitively awarded contract
• TM is in between
• GSA or competitively awarded still requires data
• Negotiated requires more information up front

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Indirect Rates

• Many factors to consider in developing rates
• Size and complexity of organization
• Variety of products in the business unit
• Mix of government v. commercial sales
• Basis of award
• How many rates?
• Overhead
• GA
• Material handling
• Others

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Indirect RatesPool and Base Considerations

• Overhead Pool
• Expenses related to providing the product or
  services but are not part of the end product e.g.
  facility costs, fringe benefits, supervision
• How many overhead pools
• For most companies, the fewer the better
• If pool is small, rates are difficult to predict
  and manage
• GA
• Expenses for overall operation of business as a
  whole
• CEO, CFO, CIO

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Indirect RatesPool and Base Considerations

• Overhead Base
• Generally direct labor dollars
• Some companies include fringe for direct labor
• Material and/or Subcontract Handling
• Material and Subcontractor dollars
• GA Base
• Total cost input ( all direct and indirect costs
  except GA)
• Value added (all direct and indirect costs except
  material and subcontractor costs)
• Sinlge element- usually direct labor

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Indirect RatesPool and Base Considerations

• How to chose a base
• General criteria for GA
• What base best represents the total activity of a
  business unit in a typical fiscal year
• Overhead
• What base best allocates the expenses to the
  final cost objectives to reasonably reflect the
  benefits received
• If you are subject to CAS, the allocation base
  options are narrowed but the general criteria is
  the same as above.

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Indirect Rates Question

• A small software company sells a software product
  commercially and also sells it software services
  to the Department of Defense on a TM basis. The
  same people who write the commercial code also
  work on the DOD contracts.
• How many pools would be appropriate for this
  company and why?

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Cost Accounting Standards (CAS)

• Purpose of CAS
• Consistency of accounting for companies that have
  significant negotiated government contracts
• Two key elements
• Standards a company is subject to
• Disclosure Statement

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CAS Exclusions

• Small Business is not subject to CAS
• Business must have received at least one
  CAS-covered contract in excess of 7.5m before
  any CAS applies
• Major exemptions from CAS (Subpart 9903.201-1)
• Sealed bid contracts
• FFP contracts and subcontracts for the
  acquisition of commercial items
• FFP contracts and subcontracts awarded on the
  basis of adequate price competition without
  submission of cost or pricing data

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CAS Standards

• Full CAS coverage (all 19 Standards)
• Business unit receives a single award CAS-covered
  award of 50M or
• Business unit received 50M or more in
  CAS-covered awards during the preceding cost
  accounting period
• Modified CAS-Coverage
• Subject to only to CAS 401, 402, 405 and 406
• If business unit is eligible for modified
  coverage, it must elect modified coverage-
  otherwise, it is subject to full coverage.

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CAS Standards
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CAS Standards
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CAS Standards
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CAS v FAR Cost Principles

• Many of the CAS standards are incorporated, all
  or in part, in the Cost Principles, Part 32 of
  the FAR
• Many companies not subject to CAS, including
  small business, must follow FAR and so there is a
  linage to the CAS, however, noncompliance with
  the FAR cost principles is not a noncompliance
  with CAS.

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CAS Thresholds

• CAS-Covered awards are counted if and only if
• Business unit has an initial award of 7.5M and
  then
• All subsequent CAS-covered awards ( as either a
  prime or sub) greater than 500K are considered
  CAS-covered awards.
• Thresholds are being revised upward for inflation
  but final rules not yet published
• 50M to 56.5M
• 7.5M to 8.5M
• 500K to 550K

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Disclosure Statement (DS) Thresholds

• First threshold- if any company, together with
  its segments, received net CAS awards of 50M or
  more in its most recently completed FY, then
• A DS is required for any segments that has
  CAS-covered awards unless
• The contract of subcontract is exempt from CAS or
• In the most recently completed cost accounting
  period the segments CAS-covered awards are less
  than 30 of the total segment sales and less than
  10M.
• Note- DS threshold of 50M is at company level
  while threshold for full or modified coverage is
  that business unit (segment) level.

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CAS Observations

• Whats the big deal about CAS?
• CAS narrows the choices for allocation of
  indirect costs
• CAS clauses requires a cost impact statement if
  you make a change in costs accounting practices
• If a cost accounting practice changes increases
  costs on CAS-covered contracts, the Government
  does not have to reimbursement you for those
  increased costs
• Administrative costs of CAS compliance are high
• CAS discourages commercial companies from some
  government contract awards

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DCAA Audits

• The type of audits and even if DCAA can audit
  depends on
• Basis of contract award
• No audit of awarded based on competition or GSA
  schedule
• Same is true if you are subcontractor
• Negotiated Prime contract where cost or pricing
  data is submitted is when DCAA is generally
  requested to audit
• If you are a subcontractor that submitted cost or
  pricing data, the prime is responsible to doe the
  audit. If sub refuses access to records to
  prime, DCAA may be asked to audit.

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DCAA Audits

• Pre-award Audits
• Accounting system review
• Proposal review- rates, basis of estimate, etc
• Post-award Audit
• Vouchers (invoices)
• Incurred cost audit ( final indirect rates for
  the FY)
• Post award review (defective pricing)
• CAS
• Systems audits ( if revenue is large enough)

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DCAA Audits

• Role of DCAA in process
• Advisory to buying command on proposal review
• Reports to ACO on incurred cost and CAS audits
• If PCO or ACO do not accept DCAA recommendations,
  they may have to justify the reason why
• Best to attempt to resolve issues prior to
  getting in report if possible

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Helpful Websites

• http//farsite.hill.af.mil/reghtml/regs/far2afmcfa
  rs/fardfars/far/farapndx1.htm (CAS)
• http//www.arnet.gov/far/ (FAR)
• http//akss.dau.mil/jsp/default.jsp ( DOD
  references including DFARS)
• http//www.arnet.gov/GSAM/gsam.html (GSA)