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How Accounting for Government Contracts differs from Commercial Methods

For a company that has been awarded a government contract or is in pursuit of a federal contract award and has the need for a DCAA-compliant accounting system, the notable differences between government contract accounting versus commercial accounting are often more procedural than process related. However, there are just a few significant differences to consider.

Regardless of what accounting system you are using, project accounting is at the core of government contract accounting. There are several industry-specific project accounting software packages - including those designed for construction and architecture & engineering firms - that will track time to projects, generate invoices by project and provide "some level" of job costing. Some level, but not the level of detail that you will need to fulfill the cost reporting requirements that will follow once the government contract has been awarded. This is because most project accounting software focuses more on billing and revenue by project and less on expenses (direct and indirect) incurred. The ability to calculate and allocate a three-tier indirect expense rate structure across your projects and tasks doesn't exist within accounting systems that are not designed specifically for government contracts. What it boils down to are three key differentiators (besides verbiage) that set apart government contract accounting from commercial accounting. These include:  

Cost-reimbursable (CPFF) contracts  - While commercial contracts are typically either structured as Firm Fixed Price or Time and Expense, Cost-reimbursable contracts are unique to the government contracting world. FAR 16.3 addresses the circumstances where the award of a Cost-reimbursable contract would apply. Where in the commercial world, while it is essential to know your cost of doing business and your break-even point, with Cost type contracts you must prove your actual costs of doing business using historical data, and project your costs into the future including direct, fringe benefits, overhead and general & administrative costs. In other words you'll need to disclose in your bid; here is how much we are paying in salaries and wages to our staff who will be working on the contract, here is what we actually pay for the materials we've proposed, here is the amount of rent that we pay monthly for occupancy....and so forth. And then, when you have proven your actual costs and projected your indirect rates for billing purposes, then you can negotiate a fee to apply to your costs. That will represent your profit.  Chances are slim to none that you would be bidding on a CPFF (or CPIF, CPAF) contract for a commercial project.

Unallowable costs - Unallowable costs are expenses that are incurred - but are not reimbursable - when performing on flexibly-priced (e.g. CPFF) contracts. You cannot expect your government customers who are funded by taxpayer dollars to pay for entertainment expenses, including alcoholic beverages, for example.  Expressly unallowable costs as such that are charged to the federal government are subject to penalties. Therefore, you must be careful not to include unallowable costs in your expense pool when calculating your Indirect rates. If, on the other hand, all of your contracts are of the firm fixed price variety and therefore your invoices to the federal government consist of fixed dollar amounts from one month to the next, then the allowability of costs is less of a concern, as would be the case when performing on commercial projects. 

Finance charges - While it is customary to charge your commercial customers finance charges when invoices become past due by a certain number of days, sending invoices with finance charges applied to your government customers is a waste of your time. The same is true of sending monthly Statements. The Prompt Payment Act ensures that if your invoices are not paid on time that interest will be automatically added to the amounts past due. 

Beyond these  fundamental differences, as a government contractor, you are bound by the provisions of the FAR and in some awards by the CAS. While some may think that indirect rates are unique to federal contracting, the reality is that every business will incur indirect expenses. In particular, businesses that are performing on projects whether they are government or commercial will need to take indirect costs into account when preparing full cost ledgers by project in addition to direct costs. At its core, SYMPAQ is a commercial cost accounting system that has built-in business rules in place to handle the nuances of Cost--reimbursable contracting with the federal government while meeting the criteria set forth on the SF1408. . . 

 

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