Government Contractor Accounting FAQ’s

Most contractors are aware that your teammates this week will be your competitors next week. Thus, they share only the necessary information and consider all else proprietary. The subcontractor would share loaded costs or loaded rates, the fee rate or amount, and the escalation. They will be careful not to provide information that allows the prime contractor to “back into” their loading.

Numerous RFP’s ask contractors whether they have a Forward Pricing Rate Agreement (FPRA). I see very few contractors that do. Typically, this in the arena of large or major contractors. Many times the government will accept provisional indirect rates in lieu of a FPRA. If neither are available, the contractor will have to prepare an indirect cost budget in support of the indirect rates proposed.

No. A forward pricing rate agreement is an agreement between a contractor and the government of the indirect rates that will be utilized for pricing in the period (year) covered. A provisional rate agreement is an agreement between a contractor and the government of the indirect rates that will be utilized for billing on cost plus contracts in the period (year) covered.

The basis for the indirect rates proposed should be either a forward pricing rate agreement, a provisional rate agreement, or you indirect costs budget for the period of performance of the contract proposed.

Direct Labor	Current employee’s payroll records, or contingent hire agreements, or labor survey data, or the Wage Determination Schedule
Subcontractor / Consultant	Subcontractor’s / Consultant’s cost proposal
Travel	Joint Travel Regulation / Airline, Rental Car
Indirect Rates	FPRA, Provisional Rate Agreement, Indirect Cost Budget
Fee	Competitive Assessment

No. However, the FAR states that the contractor must have an “adequate accounting system to be awarded a cost reimbursable contract.

An adequate accounting system is defined by the SF1408 in the FAR. However, an auditor from the government must review your accounting system and issue a report that approves your system as adequate. Sometimes, government agencies will accept the report from an independent CPA firm in lieu of a report from a government auditor.

The SF1048 contains the list of criteria that must be met for an accounting system to be considered adequate.

The SF1048 contains the list of criteria that must be met for an accounting system to be considered adequate.

Guided by an review program that is based on the SF1408, an auditor will collect and review evidence that your accounting system is adequate.

The SF1408 is a standard form in the FAR (Part 53). It is a checklist of criteria that an accounting system must meet in order to be considered adequate.

Accounting systems are approved when an auditor from the government reviews the accounting system of a contractor and issues a report that the system as adequate / approved. Sometimes, government agencies will accept the report from an independent CPA firm in lieu of a report from a government auditor.

Typically, an accounting system review report is good for 5 years or more; depending on the resources and focus of DCAA and the type of contracts the contractor possesses. The more cost plus contract, the higher the importance in having an adequate accounting system. However, if the contractor changes the accounting software, the government will not consider the prior report acceptable.

A pre-award audit accounting system review is engaged when the contractor has no previous cost reimburseable contracts and this is the first accounting system review. Conversely, a post-award accounting system review is engaged when the contractor already has cost reimburseable contracts or that this is not the first accounting system review. Typically, the pre-award accounting system review is:

• Do I need to separate my accounting for commercial work from my accounting for government work?
• Where should I charge the payroll costs of an employee that does not work on or support government contracts?
• Which Quickbooks version is appropriate?
• What are the requirements for an electronic timekeeping system?

It is a group of schedules submitted annually to the ACO or DCAA. These schedules document your costs direct and indirect costs incurred for the prior year ended. In addition to documented costs, there are schedule used to document administrative data of contracts. The incurred cost submission is used by the government to assess the degree to which a contractor may have under-billed or over-billed cost reimbursable contracts. Typically, the auditor’s focus will be on direct costs incurred versus billed, the indirect rates billed versus incurred on cost plus contracts, unallowable costs claimed in the submission, and contractual terms and conditions that may limited billable costs.

No more than 6 months after the contract’s fiscal year end. If a contractor is going to miss the do date, they should request an extension from the ACO. This keeps then in compliance with the contract.

Hierachy going from a definite yes to a maybe:

First, look to see if your contract contains the FAR clause 52-216-7. If it does, the government is expecting a submission. If it doesn’t, use the hierarchy below:

a. You have a cost plus contract (prime or sub) with DOD, DOE, or NASA, or the State Department.

b. You have a cost plus contract (prime or sub) with other agencies.

c. You have a T&M contract as a prime with DOD.

d. You have a T&M contract as a prime with non-DOD agencies.

e. You have a T&M contract as a sub with DOD.

For situations d. and e., agencies may not police or care. If you think that you should not have to provide the annual incurred costs submission, request a waiver from the ACO and ask to have your contract modified to have the clause 52-216-7 removed. This keeps you in contract compliance.

No. If a contractor has T&M contracts only, the majority of the schedules do not need to be submitted.

No. On cost plus contracts, the contractor bills only those costs that are incurred for the period. The cost proposal may be the driving factor in determining the contract value; however, it does not determine the actual amount billed from month to month. On T&M contracts, the contractor is billing hours incurred by labor category and negotiated fixed priced hourly rates.

1. On cost plus contracts, there is always under-billing or over-billing. Usually these are caused by the contractor using estimated (provisional) indirect rates, rather than actual indirect rates. The estimates and actual rates rarely end up being exactly the same. Also, in auditing a contractors indirect costs, unallowable costs may be discovered as included in the indirect costs pools. Removal of claimed unallowable costs will cause a lowering of the indirect rates. This is the process of an incurred costs audit.

2. On T&M contracts, an auditor may discover that the contractor incurred fewer hours per labor category than they billed to the contract. Or, the contractor may have billed rates to the government that were higher than the rates documented in the contract. Or the contractor may have billed less than qualified or experienced employees as compared to the requirements for labor categories in the contract.

3. In defective pricing, the government may discover that the contractor inflated cost elements during the pricing and negotiation phase of the contract award. The Truth In Negotiations Act gives the government the ability to recover the excess.

The cognizant agency is the agency where the contractor has billed the most revenue.

DCAA has an office locator function on their website.

Yes. Typically, the loading is your G&A rate.

No. This is something that is negotiated with the prime contractor. Note that there is much more oversight and administrative costs related to cost plus contracts. So, if the prime has a cost plus contract, it is better for the subcontractor to negotiate a T&M subcontract.

Utilizing the per diem rates from the JTR is much simpler than tracking and billing actual travel costs incurred. Actual costs entail documenting and retaining the documented costs in support of the travel costs billed.