Government Contract Accounting Are You DCAA Compliant? Procurement Technical Assistance Program (PTAP)

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1 Government Contract Accounting Are You DCAA Compliant? Procurement Technical Assistance Program (PTAP) NH Presentation October 20, 2010 Presented by: Fred Kline, MBA, CPA Tom Martin MBA, CPA Malcolm Young, Federal Government Accounting Specialist 1

2 Kline & Company, CPA, P.C. Company Overview CPA firm providing Business and Individual Tax Planning and Preparation, Financial Statement Preparation, and Federal Government Contracting Services since 1994 Federal Government Contracting Services include: FAR, CAS, & TINA Government Contract Compliance Cost/price Proposal Preparation Incurred Cost Proposals DCAA Audit Representation Government Accounting System Set-up Government Contractor Outsourced Accounting Compliance Testing Team of 11 professionals including 2 former DCAA Auditors Located in Downtown Nashua, NH 2

3 Topics to be Covered I. DCAA II. Procurement Regulations III. Accounting System Requirements IV. Job Cost V. Timekeeping VI. Billing System VII. What is the Government s Audit objectives? VIII. Annual ICE Submission (Incurred Cost Electronically) (Sample) IX. Typical DCAA Engagements X. The New DCAA XI. Questions and Answers 3

4 I. The Defense Contract Audit Agency (DCAA) Performs all contract audits for the Department of Defense (DoD) and other agencies as requested Provides accounting and financial advisory services in connection with the negotiation, administration and settlement of contracts and subcontracts DCAA reimbursed by other agencies Previously provided advice (Now opinions only) 4

5 II. Impact of the Procurement Regulations on Job Cost Accounting The FAR - FAR is primary reference - Each agency can develop its own supplement to the FAR (DFARS) - General contracting requirements are contained in the FAR - Separate set of regulations for non-profits (OMB s) Key FAR sections - Contracting by Negotiation (FAR Part 15) - Cost Accounting Standards (FAR Part 30) - Cost Principles (FAR Part 31) (Handout) - Contract Management (FAR Part 42) - Contract Clauses (FAR Part 52) - Forms (FAR Part 53) 5

6 III. Accounting System Requirements for Maintaining Compliance Accounting system properly segregates direct and indirect costs Identifies and accumulate direct costs by contract Logical and consistent method for indirect cost allocation to intermediate and final cost objectives (contract) Cost accumulation under general ledger control Timekeeping system that identifies employee s labor by intermediate and final cost objectives Labor distribution system that charges direct and indirect labor to the appropriate cost objectives Unallowable costs excluded and properly identified at source Costs identified by contract line item (CLIN) if contractually required 6

7 III. Accounting System Requirements for Maintaining Compliance Ability to calculate actual indirect cost rates and support requests for provisional rate updates and provide support for progress payments Actual Labor rates collected from Payroll to provide detailed labor distribution Detailed Job Cost Reporting for direct and indirect costs Provides for consistency in bidding, collecting and reporting cost at the same element level for CAS 401 consistency of the system Charge Subcontracts, ODCs & Materials directly to projects or task orders for actual costing for consistent application of cost in accordance with internal procedures Ability to extract information via report writers for off-line calculations (What if proposals and affects to the G&A base for multi-year awards) CAS 402 Consistancy (Consistently charged) in identification (no supplier should be charged as an indirect cost if Bid as direct) 7

8 III. Accounting System Requirements for Maintaining Compliance Indirect Cost Accounts must be properly identified and mapped to the indirect cost pool Typical indirect cost pools include: Fringe Overhead (both contractor and customer site) General and Administrative (G&A) Material Handling Most common pools for small and mid sized contractors are overhead and G&A Labor distribution must allow for the proper assignment of indirect labor to the appropriate pool. 8

9 III. Why are these requirements so important to you? Ensure reliable and accurate billings to the government customer Continuous tracking of contract costs and performance measurement for use by management Reliable cost history for estimating future contract costs and provisional billing rates Enhance ability to maintain profitability Reduce risk of DCAA audit issues and audit report findings Minimize risk of government investigations and payment of penalties (or worse) 9

10 IV. Job Cost Identification & Segregation What DCAA observations will elevate risk to the negotiating parties? Mix of contract types and/or gov t & commercial contracts * FFP- risk at proposal stage for government; on contractor if underbid (no ability for government to change when complete except fraud in negotiation, etc.) * CPFF- ability to audit after completion (DCAA has less risk when awarded because of ability to audit costs) Hierarchy of cost objectives (see hand out) Perpetual & significant contract cost overruns Lack of job cost system, or complex manual system requiring extensive time and effort Late accounting postings to GL or project cost ledger Late billings or overdue incurred submissions System does not identify unallowable costs Prior audits disclosed billed or claimed unallowable costs Direct costs erroneously identified to wrong project System does not clearly distinguish indirect cost centers 10

11 IV. Hierarchy of Cost Objectives Contract * Direct Material * Direct Labor * Subcontracts * Other directly related charges Manufacturing on Engineering Overhead Pool of Expenses * Allocated occupancy expenses * Allocated fringe expenses * Resulting overhead rates (labor base) Material handling expenses * Allocated occupancy expenses * Resulting M/H rates (Direct material base) General & Administrative Pool of Expenses * Allocated occupancy expenses * Resulting G&A rate (cost material base) Unallowable costs 11

12 IV. Job Cost Identification & Segregation Questions to ponder: Is your chart of accounts extensive enough for you to readily identify types of costs as they are incurred? Can you determine cost status of your projects month to month? Are you accumulating your costs consistent with contract requirements? Is your source accounting data traceable to the project ledger? Are indirect costs identified to the correct cost center as they are incurred? Are any of your unallowable costs hidden within generic accounts? Are you concerned about whether you are billing proper costs to the government? 12

13 V. Timekeeping System Deficiencies and irregularities in timekeeping systems have led to more criminal investigations of government contractors than any other type of anomaly found in an accounting system Anytime DCAA notes significant timekeeping deficiencies during an audit, the audit scope will be expanded and possible referrals of suspected irregular conduct to government investigative agencies are likely especially if those deficiencies have gone undetected for a long period 13

14 V. Timekeeping System What DCAA observations will elevate audit risk? Mix of government & commercial contracts Mix of government FFP and cost plus contracts Lack of written or inadequate timekeeping procedures Significant adjusting entries to G/L labor charges Movement of labor charges from one project to another Data indicated on timesheet during floor check does not match time sheet after entered to labor distribution Significant and non-verifiable changes and alterations to employee timesheets Timesheets without employee signature Inadequate demonstration of employee training for preparing time sheets Floor check discloses that employee charging one job (gov t) while working on another (commercial) Significant increases in indirect labor charges vs. direct charges 14

15 V. Timekeeping System Questions to ponder: Do all employees know timesheet preparation procedures? Are all employees aware of repercussions associated with falsification of labor charges? Do you have written timekeeping procedures that are up to date? Do you have a varied mix of contract types? Does your electronic timekeeping system allow for online time entry, approvals and corrections? Are all time sheets carefully reviewed when submitted? Do your employees know how to correctly identify projects & tasks on their timesheets? 15

16 VI. Billing System Perhaps the most important financial system you will want to get right is your company s billing system An adequate billing system should include direct costs from job cost ledgers with the use of approved provisional indirect billing rates An inadequate billing system will significantly raise the risk of overcharging the government during progress billings Overcharging the government during contract performance, or the impression of over charging the government will guarantee increased audit oversight and/or civil or criminal investigations 16

17 VI. Billing System Fundamental requirements: Segregate and exclude unallowable costs per FAR (Part 31) cost principles or contract terms ( see FAR (Part 31) handout) Identify costs in appropriate detail as specified by contract (WBS, CLIN, etc.) Identify costs requiring specific approval of CO (overtime premium, capital equipment purchases, etc.) Exclude costs not billable per specified terms of progress payment or public voucher Withhold costs in excess of current ceilings or not permitted until completion (progress payment liquidations or fixed-fee withholdings) Identify final indirect rates and make timely adjustments to retroactive billings (cost type contracts) Monitor compliance with Limitation of Cost contract clauses 17

18 VI. Billing System What DCAA observations will elevate audit risk?: Materiality of contract price/monthly billings History of inadequately prepared billings to government Losses on FFP contracts Billed/incurred costs that do not reconcile to accounting records Inadequate accounting/timekeeping system Inadequate expression of ETC for progress payment calculations Obvious inclusion of unallowable costs Cumulative billings exceed existing contract price/cp ceilings Incurred cost proposals are significantly late Poor system of contract/subcontract administration 18

19 VI. Billing System Questions to Ponder: Does my accounting system accurately identify project costs on an interim basis? Are my contract administration records up to date? Are cumulative billed costs frequently reconciled with project cost records? Do T&M fixed labor rates match the contract provisions? Do my provisional indirect rates represent my best estimate for the complete fiscal year? Are funding limitations or contract restrictions being adhered to? Are fee retentions/withholdings properly stated? 19

20 VII. Government s Audit Objectives Why are these requirements so important to you? Without an adequate system, the likelihood of being awarded a contract is minimal Allows reliable and accurate costs to be billed to the government customer Continuous tracking of contract costs and performance measurement Reliable cost history for estimating future contract costs/provisional rates Enhanced ability to ensure profitability on future contracts through budgeting Reduce risk of DCAA audit issues and audit report findings Minimize risk of government investigations and payment of penalties, (or worse) TINA applicability 20

21 VIII. ICE Sample ICE Submission IX. Typical DCAA Engagements Pre award review Accounting system review Proposal reviews Incurred cost audits Forward pricing reviews Labor system floor checks Material system review Provisional billing rate change requests Exit conferences 21

22 X. The New DCAA DCAA will no longer report inadequate in part options and will find systems either wholly adequate or inadequate New policies forbid auditors to make suggestions for improvement in contractor s systems As part of the audit process, DCAA has teams of professional personnel solely representing the United States Government to ensure compliance with Government Procurement Regulations. As a Government Contractor, you are entitled to similar professional representation to ensure a level playing field during negations and performance. The costs related to this assistance are fully recoverable as part of your company s indirect rate structure 22

23 Contact Information Fred Kline, MBA, CPA Tom Martin, MBA, CPA (603) (office) (603) (office) (603) (fax) (603) (fax) Malcolm Young Federal Government Accounting Specialist (603) (Office) (603) (fax) 23

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