Government Cost Principles and Accounting Standards

Transcription

1 Government Cost Principles and Accounting Standards Robert M. Craig Director, The Claro Group Jeffery M. Chiow Associate, Rogers Joseph O Donnell

2 Three Questions What is Cost? Direct Indirect What is Cost Allocation? Pools Allocation Base What is Cost Allowability? Reasonable Allowable Allocable 2

3 What is Cost? Total expenses incurred by a company in the normal course of business 3

4 Composition of Total Cost FAR Costs incurred or estimated using any generally acceptable method that is applied consistently Direct Costs Cost s directly associated with production of a product or service (aka Variable Costs ) + Indirect Costs Costs required to support production and/or normal business operations (aka Fixed Costs ) + Cost of _ Money The imputed cost of investment in the business Applicable Credits = Total Cost

5 Typical Direct Costs Material Direct Labor Subcontracts Direct Costs

6 Typical Indirect Costs Utilities Indirect Labor Rent Indirect Costs

7 What is Cost Allocation? A method to distribute total costs to contracts 7

8 Cost Accounting Allocation Standards CAS 403 CAS 410 CAS 418 Allocation of home office expenses to segments Direct allocation to maximum extent practical Residual expenses 3-factor formula Allocation of business unit G&A to final cost objectives Allocation of direct and indirect costs 8

9 Major Concepts Indirect Cost Pooling Homogeneous Pools Beneficial or Causal Relationships Homogeneous Indirect pools must contain costs with common links Base used to allocate those pooled cost must benefit from or demonstrate to have caused the indirect costs to be incurred Allocability FAR Normally expressed as a percentage (i.e., Pool Expenses is the numerator and Allocation Base is the denominator) 9

10 Typical Indirect Pools and Allocation Bases Fringe Pool Health Insurance Vacation Direct Labor Retirement Overhead Pool Indirect Labor Utilities Direct Labor Rent G&A Human Resources Total Cost Input Finance or CEO Value Added 10

11 Full Absorption Costing Material / Subcontracts General Direct Labor Overhead Selling Administrative Product Cost Period Cost Total Project Costs

12 What is Cost Allowability? Costs the Government is willing to pay for! 12

13 Allowable Cost Criteria FAR A cost is allowable only when the cost complies with all of the following requirements Reasonable CAS/GAAP Compliant Allocable FAR 31.2 criteria and limitations Complies with terms of the contract Risks of double and treble damages, plus interest for failure to comply!

14 Reasonableness FAR Factors for determining reasonableness: Nature and amount incurred by prudent person in the conduct of competitive business Recognized as ordinary and necessary Accepted sound business practices, arm s length bargaining, and Federal and state laws and regulations Contractor s responsibilities to customers, owners and employees Significant deviations from contractor s established practices If challenged by the Government, the burden of proof is on the Contractor to prove a cost is reasonable

15 FAR Unallowable Costs Costs Government does not want to pay for! Expressly Unallowable Not considered necessary for Government work Advertising Bad debts Matter of public policy Charitable contributions Alcohol Allowable with limitations Travel Legal fees Must be identified and excluded from all invoices and claims by contractor

16 7 Expressly Unallowable Costs FAR Name Description Bad Debts Uncollectible accounts receivables Contributions or donations Cash or property Entertainment costs Amusements, diversions & social activities Fines and penalties Violations of Government laws or regulations Interest & other financial costs Interest on borrowings Goodwill Price in excess of fair value of assets Alcoholic beverages 16

17 10 Cost Allowable with limitations FAR Name Items of note Public Relations and Advertising Compensation for Personal Services Employee Morale, Health and Welfare Allowable costs: Recruiting Acquiring scarce items Disposing of scrap Communication with public, press Promote international sales Executive compensation limitation Must be reasonable based on: Size Industry Geographic area Bonuses must be based on an established plan Designed to: Improve working conditions employer-employee relations employee morale and performance Allowable costs can include: Company-sponsored sports teams Award dinners Recognition awards 17

18 10 Cost Allowable with limitations FAR Name Items of note Organization Costs Unallowable costs: Planning and executing organization or reorganization Cost incurred in raising capital including Attorney fees Accountants Brokers Patent Costs Allowable costs if incurred based on Government contract requirements are: Preparing disclosures and reports Searches related to invention disclosures Filing a U.S. patent application Costs unallowable if not required by a Contract Except general counseling services Professional and Consultant Costs Generally allowable except for services to: Improperly obtain information or data Improperly influence contract awards Defend violation of any statute or regulation Defense or prosecution of claims against the Government Services connected with patent infringement litigation (unless provided for in contract) 18

19 10 Cost Allowable with limitations FAR Name Items of note Recruitment Costs DCAAM a(2) Allowable costs: Help-wanted advertising Educational testing programs Travel costs for employees to recruit personnel Employment agency fees - not in excess of standard commercial rates Unallowable Costs: Advertising which does not describe specific positions or is not relevant to recruitment See DCAA Guidance Avoid to build backlog of resumes rather than recruiting for actual openings Relocation Costs Cost of Acquiring new residence limited to 5% Must be for benefit of Employer Must not exceed employee s actual expenses Unallowable costs: Loss on sale of old residence Real estate fees and property insurance Mortgage insurance Property taxes Continuing mortgage payments on old residence 19

20 10 Cost Allowable with limitations FAR Name Items of note Travel Costs Lodging and meals limited to daily maximum per diem rates Airfare limited to lowest coach fare available, including company-owned aircraft Costs Related to Legal and Other Proceedings Costs incurred in connection with any proceeding brought by Federal, state, local or foreign Government for failure to comply with laws or regulations are unallowable if: The proceeding results in a criminal conviction The contractor if found liable The contractor is debarred or suspended A contract is voided, rescinded, or terminated for default Disposition by consent or compromise if the proceeding could have resulted in any of the above. Suits between contractors, employees and their employers and companies and their shareholders will require close attention for allowability determination 20

21 Keys to Helping our Clients comply Enforce Policies and Procedures Implement or revise key Business Systems Maintain detailed records Emphasize strong Internal Controls Ensure robust Contract Review 21

22 Thank you for the opportunity to speak with you today! Robert M. Craig Director The Claro Group 4922 Fairmont Ave., Suite 200 Bethesda, MD (202) Jeffery M. Chiow Associate Rogers Joseph O Donnell 750 Ninth Street, N.W., Suite 710 Washington, D.C JChiow@rjo.com (202)