Job costing and the detailed tracking of costs associated with specific contracts or grants is at the core of doing business with the federal government. This is not news to most aspiring contractors and to those who are just getting ready to bid on their first flexibly-priced contract, but what does this actually mean? Does one really need an industry-specific accounting system to track costs, or can any system that includes a job costing module suffice?
The DCAA is allegedly accounting software agnostic, but if you want to take a major step towards successful audits, you should make certain that whatever accounting software package you implement will include the following capabilities:
Labor Distribution - This is a common tripwire when it comes to pre-award audits where contractors without an adequate Labor Distribution system can fail. Proper costing of labor, and particular salaried labor and uncompensated overtime, is not commonly found in your typical accounting or ERP software.
Indirect Rate Calculations - While the need for indirect rates is not included as a requirement on the SF1408 survey, DFARS 252.242.7006 does include the capability to "readily calculate indirect cost rates from the books of accounts". Therefore if you are seeking to work with the US Department of Defense, this feature is required and will be reviewed as part of your pre-award audit.
Indirect Cost Allocations - Unlike direct costs, indirect costs are those expenses that cannot readily be identified to a particular project or contract. Types of indirect costs include but are not limited to fringe, overhead and general and administrative (G&A) expenses. These expenses must be allocated to direct costs associated with a project or task. For example, you will need a system that will allocate overhead to direct labor dollars charged to a contract.
Invoicing - Once you have entered into a cost reimbursable contract vehicle, the need for a suitable billing system becomes a must- have feature. This is where using manual, mistake-prone spreadsheets for invoicing can cost you money since no one contract award is negotiated without concessions and particular invoicing rules will apply. For example, you may bid full G&A on long distance travel, but that is often one cost element that does not get fully burdened as most Other Direct Costs do when it comes to billing your government customer. Therefore, having a billing system that includes the flexibility of specifying the amount of burden or fee by element of cost is essential.
Incurred Cost Electronically (ICE) Schedules - The incurred cost submission is a series of schedules that are designed to "true up" your projected (i.e. provisional) indirect cost rates used when bidding on a contract with your actual costs incurred. Not having the system capability to produce the schedules in the format that the DCAA prefers means that many long, tedious hours will be spent cobbling together data to produce the calculations and ensuring that the schedules reconcile. Fortunately, you can freely download a sample ICE model for guidance, but that is just the tip of the iceberg.
While there are other useful features in addition to the five "must-haves" that can be found in government contract cost accounting software, the features noted above are the main discriminators that should strongly be considered before you make a software selection. While it is noteworthy that a multitude of accounting software options can be properly configured to meet the scrutiny of DCAA prior to the award of a contract; why operate at a disadvantage? If you are an emerging contractor and want to get a jump on your competition who might still be using a popular small-business bookkeeping software package and struggling to make it work after a contract has been awarded, then you'd be wise to make the right investment upfront to avoid headaches in the future.