CHAPTER 3 Accounting System Requirements

An accounting system is a combination of records, internal controls, and written policies and procedures, all of which function together in the process of estimating, accumulating, and reporting financial data. An adequate accounting system is important for any business; however, an adequate accounting system is especially important for government contractors. A government contractor must establish an accounting system consistent with “generally accepted accounting principles” (GAAP) and any other contractual requirements.

In addition to establishing an accounting system that meets GAAP requirements for financial reporting, government contractors must establish a system that records the incurrence of contract costs in accordance with government laws and regulations, particularly the cost accounting standards (CAS) and the Federal Acquisition Regulation (FAR) cost principles. Basically, contractors must establish an accounting system that accomplishes the following:

1. Segregates costs by contract and contract line item, depending on the type of contract and the work being performed

2. Provides actual cost data at interim periods to allow for contract repricing or negotiating revised contract targets

3. Accounts for specific unallowable costs as established in FAR Subpart 31.2, and augmented by CAS 405

4. Separates preproduction and nonrecurring costs from production and recurring costs

5. Generates reliable data for purposes of pricing new and/or follow-on procurements

6. Identifies and segregates direct and indirect costs

7. Identifies varying levels of indirect costs (e.g., fringe benefits, labor-related overhead, material-related overhead, services usage, and general and administrative—G&A—cost).

The Defense Contract Audit Agency often includes additional criteria, such as a contractor being current on the annual indirect cost rate submission and timely submission of adjustment vouchers for cost-type contracts. The government cost regulations do not require the use of any specific or uniform cost accounting system or method of determining contract costs. Accordingly, contractors are free to develop and use the type of accounting system that is most appropriate for their business. For example, there are no requirements regarding use of either a job order cost system or a process cost system. In addition, no specific direction requiring the use of actual costs versus standard costs in costing and pricing contracts is provided. However, contractors are required to incorporate certain basic elements into an accounting system before it is considered to be adequate for government contracts.

The size of the firm and the extent of its government contracts can also dictate the depth and breadth of a cost accounting system. Smaller companies with fewer government contracts can probably generate the necessary cost data using a relatively simple manual system. However, a multidivisional or multinational company engaged in developing or manufacturing complex products may require much more. In this case, it would be almost mandatory that the company establish some type of computerized cost system to ensure that its own and the government’s interests are adequately addressed. Certainly, in any enterprise engaged in government contracting, regardless of its size, costs must be addressed in logical, sensible, and suitable terms.

Manually maintained books and records are acceptable. Software that does not accommodate government contracting requirements may be supplemented with spreadsheet analyses. However, if a contractor follows this approach, care should be taken to ensure that the spreadsheets are reconcilable to the official books and records. Software especially designed for government contractors is commercially available as well.

If a contractor wants to advance into the increasingly complex government contracting arena but does not currently use a commercially available government contract-oriented accounting software package, the contactor should consider initiating a Request for Proposal (RFP) process. Through this process the contractor can seek to replace its current system with government-compliant software that will interface as necessary with corporate transaction and reporting requirements. The RFP should emphasize project management, government cost accounting and reporting, timekeeping, labor distribution, billing, revenue recognition, contract management, and financial reporting functionality.

Historically, very few cost accounting systems have met the specific needs of the government contracting marketplace. In fact, this marketplace was once dominated by a single major vendor. Recently, several products with national and international market reach have entered the market, providing more choice to the government contractor customer. These packages have been tried and tested in the commercial market as well as in the government contracting arena. These new packages offer substantial functionality, ease of use, and flexibility.

Deltek has been the major supplier of enterprise resource planning (ERP) software to both large and small corporations; one of the company’s key market areas has been defense contractors. Recently, Microsoft and other vendors have begun competing in this area. Through some careful acquisitions and development efforts, Microsoft has rolled out a suite of products targeted at government contractors. The company has developed software specifically for government contractors as well as other types of companies.

Project-based software packages such as Deltek GCS and Costpoint are geared to service contractors. While the original Deltek GCS is less expensive, the code and file formats present certain limitations. Costpoint is more robust and better for larger firms. Manufacturers might consider SAP or Oracle, being careful to understand that additional configurations may be necessary for government contracting compliance. For example, SAP often incorporates standard cost features that are not relevant to a company circumstance. Microsoft’s Dynamics SL or Dynamics NAV provide benefits to both service contractors and manufacturers based on their ease of use and seamless integration with Microsoft Office applications and Microsoft technologies. Microsoft systems also tend to be more open; therefore, a contractor is not dependent on just the Microsoft suite of products to handle all its ERP needs. However, any software can be supplemented sufficiently for use on government contracts. Modifications are even available to permit the use of Quick-Books for government contract purposes.

When configured correctly and implemented properly, these project-based packages provide major benefits. Billing, allocations, revenue recognition, time and expense recording, project profitability analysis, access rights, and organizational restructuring can be quickly and easily completed in accordance with federal and internal corporate requirements.