Accounting Issues in Government Contracting
Presented by Ron Crowe of Deltek
January 18, 2001
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"Accounting Issues in Government Contracting" addressed these points and more:
- Tracking of costs according to federal government requirements
- Differences from standard cost accounting
- Contractor accounting decisions
- Typical flow of costs in a government contracting accounting environment
Session Moderator: Today we are pleased to be joined by Ron Crowe, Director of Contracting Solutions for Deltek. Ron has twenty years of experience in the government contracting industry. Prior to joining Deltek ten years ago, he was a division controller for a large defense contractor. He holds degrees from Yale University and the University of Maryland. Today Ron is here to discuss accounting issues associated with government contracting.
Session Moderator: Welcome, Ron!
Ron Crowe: Let me ask each of you first, to tell me briefly what you are expecting this afternoon. Please include your job function.
Michael Firebaugh: I'm an accounting student at the University of Montana... I took government accounting a couple of semesters ago and am here out of curiosity...
Ron Crowe: Well, ok, maybe I'll just jump right in then.
David Schwartz: Still, Ron, I'd like to know what distinguishes government accounting from general accounting.
Mike Seganos: This is my first workshop. I work in the accounting department of a not for profit corp. We have a number of government contracts. I am curious as well.
Ron Crowe: Ok, well, let me begin, in the interest of time...
The fundamental accounting issue in government contracting is tracking of costs according to federal government rules and regulations.
As you may now suspect, this isn't exactly what they usually teach in a university course in cost accounting. In such courses, the emphasis is usually on manufacturing standard cost methods. But a lot of government contractors aren't manufacturers...and even those who are may not need to use the classic methods taught in college.
Session Moderator: Can you give some examples of other types of contractors?
Ron Crowe: Other than government contractors, you mean, Gail?
None of those would be manufacturers, but would have government contracts.
Ok...now I'd like to define a few terms, as they are used in government contracting.
Direct costs are those which can be identified with a specific contract at the time they are recorded in the accounting records. Indirect costs are everything else
Allowable costs are those for which the government will reimburse the contractor. Unallowable costs are those that for any number of reasons are not reimbursable
VERY IMPORTANT: both indirect and direct costs might be unallowable.
Can someone think of an example of an unallowable direct cost?
David Schwartz: Could you give us some examples of unallowable costs, which may on the face of it seem to be allowable?
Ron Crowe: Sure: direct travel costs are usually allowable under a contract, but if they exceed the government limits for lodging, meals and incidentals for the place involved, the excess costs are unallowable.
Sometimes the terms of a contract make something unallowable which otherwise would be. For example, a specific contract might say that subcontractor costs are unallowable under that job. Unallowable indirect costs include federal income taxes, charitable contributions...Christmas parties (the grinches!), in fact, most entertainment costs, especially alcoholic beverages! Sorry guys.
I mentioned earlier that the indirect costs need to somehow get to the contracts. This is done by the use of cost pools. A cost pool is simply the numerator of a fraction, containing a collection or group of indirect costs. The pool base is the denominator of the fraction. It contains either cost elements, or non-cost items over which the costs in the pool (numerator) will be spread
Cost pool example: FICA, FUTA, SUTA, vacation, sick days. These could be in a fringe benefit pool, the pool base for that would be total labor costs.
Now that we have the cost elements defined, lets see how they flow through a contractor's system.
Direct costs (labor, materials, direct travel, subcontractors, etc) are charged immediately to the contract and to general ledger income statement accounts, at the point of original entry into the accounting records. If unallowable, they must be separately identified.
Indirect costs are charged to general ledger income statement accounts, and simultaneously grouped into cost pools. Based on the calculation of numerator/denominator, a rate for the pool is established. The indirect costs are then allocated to the contracts based on the pool rates. The allocation of indirects has no P&L effect. It's a zero sum game. Then, the contractor computes the revenue on the contracts. This is one place where there are no government rules...they don't care how you calculate revenue and there are several GAAP methods of doing so. Some of them are percent of completion; estimate to complete; estimate at completion; Time and Materials.
Ron Crowe: there are others
Mike Seganos: Cost plus fixed fee.
Ron Crowe: True, Mike. That's really a contract type, but it usually has a revenue method associated with it called CPFF
Any other revenue methods anyone can think of?
So now we do the bills...calculate the bills to the government. The amounts of the bills are posted to the g/l. Obviously, debit is to billed A/R. The revenue was posted, and obviously, the credit was to sales (revenue).
What about the other sides of those entries?
Typically, the debit side of the revenue entry goes to an account called unbilled receivables, unbilled revenue, billings in excess of revenue, or something similar.
Well, guess what, the credit side of the billing posting goes to the same account. So the balance in that unbilled receivables account represents the difference between revenue and billing. This is customary, ordinary and usual in a government contracting environment.
Can anyone suggest a reason why there might be a difference between revenue and billing in a given month?
One common reason is retainage...the contractor is often required to withhold a certain percentage of costs until the end of the contract. Of course, when the job is over, revenue and billing will of course be the same, and the unbilled A/R balance will disappear. (hopefully)
Questions so far?
Well, ok, how about two brief case studies then...one good one, one bad one. First the good one.
A government contractor had been including reproduction costs (photocopying) in an indirect cost pool. They added devices to the copying machines requiring an identifying number to be entered before making copies. The result was that copies that were made specifically for a contract were now charged as direct costs to that contract based on a predetermined cost per copy. Benefit: reduced indirect cost rate for the cost pool.
Any comments or questions on that one before the horror story?
A contractor was performing maintenance on military equipment at a base on a Time and Material basis and had been doing so for a number of years. Invoices to the government for the labor costs were being prepared by the contractor personnel at the work site. In other words, the accounting people weren't producing the invoices. During an audit the government discovered huge differences between the labor hours being billed and those recorded in the contractor's payroll records. Payments to the contractor were suspended for nearly 6 months until the contractor could resolve the discrepancies to the government's satisfaction. Talk about a cash flow hit!!!
Any questions on that one?
The lesson is, bill from the accounting records, not from offline records.
For those of you who might be interested, there is a new government contractor certificate program. George Mason University and Deltek have prepared an 80 hour program...5 sessions of 2 days each. Successful completion leads to a GMU certificate in Government Contracting and CPE credits. There are details, cost, and schedules on our website www.deltek.com. It's taught at a facility near Dulles airport. It can also be customized to be presented at a contractor's facility if desired.
Session Moderator: Is the GMU course in session this semester - is this the first semester it is being offered?
Ron Crowe: The first 2-day session is close to the end of this month, I don't have exact dates in front of me. Maybe Allen Farber does?
Allen Farber: For more info on the on the government contracting courses at George Mason, you can call them directly at 703/733-2800, or visit their website at www.ocpe.gmu.edu
GMU does all the registration and administration. Deltek provides Certified Technical Trainers to teach the courses (several of them also CPA's). The courses cover cost accounting standards, federal acquisition regs, timekeeping and labor rules, procurement regulations, and there are a lot of case studies.
Does anyone have any questions about anything we've covered?
Session Moderator: Ron, can you provide an email address where our readers can direct questions later?
Happy to: RCrowe@Deltek.com
Our government contractor solutions group is always happy to assist. You don't even have to be a user of our software!
Session Moderator: Have you had a good response to the GMU class?
Ron Crowe: Yes, we're pleased with the registration so far...some students are only registering for specific sessions, not for the full 80-hours.
Check our website.www.deltek.com; drill down to consulting/government contracting. We try to keep it current with new developments.
Thanks very much for the opportunity to chat this afternoon.
Session Moderator: Ron, thanks very much for presenting this workshop today - there's a lot of great information here!
Ron Crowe: Always a pleasure, Gail, we at Deltek really enjoy this subject.
Kwilner: One of my for-profit clients has asked me to calculate a "multiplier" before he bids on a contract. Is that the same as the fraction you described?
Ron Crowe: No, although it would include the fraction...a multiplier is the raw labor rate, fully burdened or loaded with all indirect costs and including a factor for profit. So you would need the results of the fraction calculation before you calculate the multiplier
Good question, Kwilner!
Ron Crowe: So long, everyone.
Session Moderator: Bye, and thanks again, Ron.
Ron Crowe is Deltek's Director of Government Contracting Solutions. He has twenty years of experience in the government contracting industry. Prior to joining Deltek ten years ago, he was a division controller for a large defense contractor. He holds degrees from Yale University and the University of Maryland.