In the highly competitive business of government contracting with an emphasis on low price, building a sales pipeline is essential to increase your odds of winning your share of new awards. Tracking sales and marketing functions should include using cost accounting data to provide visibility and substantiation for your marketing, sales and bid and proposal efforts. Despite the challenges and regulations, it's a good business to be in when you can recover your costs associated with the preparation of bids and proposals — whether you win or don’t win a sought-after contract award.
With FAR and CAS regulations governing a government contractor's accounting practices, properly defining and segregating sales related activities from a cost accounting standpoint will reduce the risk of costs being questioned by DCAA. Also, outcome of the effort from a business perspective can be more easily quantified. Let's provide some simple definitions of each activity:
Marketing/Advertising
Marketing is about influencing opinions and attitudes. That said, a display advertisement in a business trade magazine, or a radio or television spot are unallowable costs and treated as such in your books of record. Why? Because promotional activities are designed to build your company brand awareness and are of no value to your federal government customer. See FAR 31.205-1 for guidance.
Business Development/Direct Selling
Business development influences and encourages action and is a more targeted effort than advertising. For example, a government contractor's VP of Business Development might attend a bidder's conference where solicitation information is provided by government customers about upcoming procurements. The VP of BD can in turn provide a contracting officer or procurement specialist with competitive information, including but not limited to a capabilities statement and past performance data with the intent of gaining a foothold on future contracting opportunities. Also, the identification and facetime with potential teaming partners that can increase your chances of successful capture of the contract would be another positive outcome of attending the conference. Business development, which is labor intensive and a long-term investment, often involves individuals with substantial compensation packages. Upper management should budget, monitor, and measure business development expenditures to determine the cost/benefit juxtaposed with your overall win rate. The good news is that "Direct Selling" costs are generally considered allowable under FAR 31.205-38.
Bid and Proposal
Bid and proposal (B&P) activities are undertaken in response to a solicitation from a government customer. Risk scenarios and probability analysis are among the determining factors as to whether to pursue a B&P effort associated with response to an RFP or even whether a bid/no bid decision is ultimately made. When your company has elected to pursue a contract opportunity based on the estimated cost of the bid and proposal effort and a high probability of a winning outcome, then there is a unique method to recover the entirety of your allowable B&P costs. While your finance/accounting staff, capture managers and business development team will record their time spent on B&P activities and any related expenses as General & Administrative (G&A) expenses, when a proposal requires the inputs of staff members (e.g., Engineers) who would be otherwise billable to spend time on s B&P effort associated with a technical proposal, for instance, then time and expenses incurred by these individuals will be charged to direct B&P effort. In other words, certain labor costs associated with B&P are handled as direct effort and burdened with Fringe and Overhead accordingly and as though billable. Then, when you calculate your indirect rates, these incurred costs are allocated to your G&A expense tier. Therefore, you are recovering the direct labor associated with B&P effort in your G&A rate in addition to the indirect B&P labor that is charged to G&A. More details with respect to accounting for Bid and Proposal costs can be found in FAR 31.205-18 and in CAS 420.
Whether it is an advertising campaign to promote your company’s brand, business development, or a bid and proposal capture effort, each activity should be tracked from a job costing perspective.
Job costing perspective means based on the materiality of a specific business activity, labor and non-labor costs are identified by a specific set of job cost accounting charge codes that are easily identifiable and fully-burdened cost ledgers sorted by job order number can be produced by your accounting software. This allows management to assess cost versus outcome and provides adequate visibility from a DCAA audit perspective.
Within your marketing, business development, and bid and proposal costs, DCAA will be looking for expenditures such as transportation, lodging, and per diem to determine reasonableness and whether they are allowable. Travel costs associated with building your sales pipeline should be managed and accounted for based on the regulations promulgated by the Federal government.
When using SYMPAQ accounting software, business activities are segregated and accounted for using a cost accounting structure which includes indirect rate calculations and allocations. The job and task segments are used to account for revenue producing efforts, and non-revenue producing activities such as administrative functions, individual bid and proposal efforts, business development, independent research and development, and paid absences.
Due to the long-term nature of building a government contractor's sales pipeline, defining how to effectively account for the various costs associated with marketing, business development, and bid and proposal activities is critical in today's government contractor business climate. Having a cost accounting system in place that can provide detailed visibility is essential and extends beyond just the basics required for DCAA audit compliance.