Many clients in the start-up service contracting business to the federal government have experienced DCAA audit difficulties, suspended billings or negative marks on pricing proposals for not having addressed job cost accounting and business system issues involving Federal Acquisition Regulation (FAR) Cost Accounting Standards (CAS) requirements. This article will address the basics of resolving those issues in a service contracting start-up environment.
“Small to Feds” has addressed the requirements of CAS and the associated business system design requirements previously in the following articles that are suggested for review as refreshers:
DEFINING YOUR COMPANY AND ITS COMPLIANT JOB COST ACCOUNTING – RULES OF THE GAME
Please view the below matters in the context of your business system design at the cost element and job description level:
You must consider the job cost accounting implications of the government contract environment; i.e how do the individual labor charges every day on time cards for the company employees and management get booked to the correct accounts or expense pools and do they or do they not become part of the labor distribution directly to contracts or indirectly though overhead and G&A applications at month end (in effect is the government billed for the cost?).
In most small start-ups the best way to handle this is to write job descriptions for every position, including the owners and executives as well as other employees. Each job description is declared chargeable as direct only, indirect only or in rare exceptions, both direct and indirect chargeable.
Job descriptions are also declared salaried or hourly, exempt and non-exempt under the Fair Labor Standards Act, which drives eligibility for time and one half for overtime. All company personnel are furnished copies of job descriptions and informed of their direct or indirect, salaried or hourly status as a function of their employment offers. (You should generate retroactive offer letters for everyone in the company, have all personnel accept them in writing and put the letters and the job descriptions in the company personnel files for audit purposes)
Job descriptions are assigned to labor cost element codes in the job cost system (as opposed to other codes for materials, subcontract, travel and other direct costs that may require separate cost element codes to distinguish them for accounting purposes.
A direct charge job description will always have a contract charge number every day for every hour of work (typically technical performers) This usually drives the employee eligibility for overtime pay for hours in excess of 40. A company policy should be established early for this matter. Most companies pay straight time for hours in excess of 40 for salaried direct charge personnel. Exceptions are hourly non-exempt personnel who must be paid time and one half under the law.
An indirect job description performer will charge every day on a time card to an overhead or G&A account and the associated labor cost will become part of expenses that are distributed at month end to all contracts, based on the direct labor dollar content of each contract for the accounting period (typically secretaries, administration personnel and the like charge to overhead and the owners and executives charge to G&A (unless an executive is working exclusively in an individual overhead cost center – that person would then charge the overhead charge number for that cost center or directly to a project if performing project-direct effort).
Exceptions to the above would be where a direct charge employee has no contract home and his labor must be charged somewhere. In that instance he would charge to a company overhead account or G&A account outside the overhead pool and his or her labor would not become part of the allocation to contracts, effectively making it come out of the company bottom line (profit). This situation normally drives layoffs or finding the person a contract home to charge.
Labor donated to the company as a form of loan must also be charged in the exceptions manner discussed above (loan labor liability account) and may not be charged or recovered via a contract bill to the government directly or as part of an overhead allocation. DCCA really goes looking for this type of thing.
Where an executive normally charging to an overhead or G&A pool, is a key person on a contract or performing direct effort on a contract for parts of his or her day, that person would charge the contract charge numbers for those efforts and the overhead or G&A accounts for company business of an indirect nature.
The above rules of the game (disclosure practices in DCAA parlance) normally force several business system tangibles. It is suggested that you generate the following as a minimum in your startup preparations for demonstration during a proposal or fact finding audit:
1. Time Cards with a time card policy requiring they be filled out daily and turned in and approved by a supervisor weekly, then booked into the accounting system weekly.
2. Expense Reports bearing charge numbers for accounting as direct or indirect expenses.
3. Written Purchase orders to suppliers bearing charge numbers for accounting as direct or indirect purchases
4. Labor Job Descriptions – specially ear marked in the manner discussed above.
5. Cost element assignments for accounting purposes for 1-4, above.
6. Charge numbers for 1-4 above. A charge number is the combination of an employee number, supplier number, expense report number and a cost element, charged to a unique direct charge contract number, an overhead pool expense account or a G&A expense account.
7. Consider hiring a payroll service company to support salaries and regular paychecks plus tax and withholding for EVERYONE IN THE COMPANY.
8. A monthly closing where direct costs are burdened with indirect costs and billings are generated to customers creating accounts receivable for that which can be billed and liabilities for that which cannot.
9. Revenue accounting upon receipt of a payment from a customer directly to the contract against which a bill was generated with offsetting receivable reductions at the contract level.
10. The discipline and attention to set up 1-9 and demonstrate its operation to a DCAA auditor.
Every successful small business in federal government service contracting has gone through the above; some proactively and others when they have had difficulties with a DCAA audit during a proposal or cannot get paid when they are under contact. The choice is yours. It is not rocket science but it is different and it is a serious matter and must have your attention.