Presented by Albert D. Goldwasser, CPA Government Contractor Consultant
Agenda DCAA s Objectives Accounting 101 Indirect Cost Allocations SF 1408 Passing the DCAA Audit References
What does the DCAA want? What is the DCAA s job? To ensure that taxpayer dollars are spent fairly and properly They do this by: Identifying and evaluating costs Evaluating contractor financial policies, procedures, internal controls Performing audits
How does DCAA carry out its mission? Does the accounting system appropriately control, collect, and allocate costs? Does the system produce GAAP financial statements? Can the system separate one contract from another? Are system modules integrated?
How does DCAA carry Policies and Procedures out its mission? Does your company have them? Are you complying with your own P&P? Do your financial records reflect such compliance? Adequacy of Records Can you produce records/documents to support the financial transactions? Are time cards properly prepared?
Important Definitions Final Cost Objective to the DCAA Cost objective that has allocated to it both direct and indirect costs and is one of the final accumulation points (It s where all the costs gather at the final stop for that particular job)
Important Definitions to the DCAA Indirect Cost Pools Groupings of incurred costs identified with two or more cost objectives but not identified specifically with any final cost objective (G&A, Overhead, Fringes)
Important Definitions to the DCAA Total Costs All costs properly allocable to the contract (Allowable direct and indirect costs) Direct Costs Costs of the contract that are charged directly to that contract (And just to that contract.) Indirect Costs Those costs remaining to be allocated to intermediate or two or more final cost objectives (G&A, Overhead, Fringes)
Accounting 101 Chart of Accounts Group accounts appropriately Segregate, segregate, segregate Direct from Indirect One Indirect from another Indirect (G&A from Overhead) Unallowable from Allowable
Chart of Accounts Acct # Account Description Balance Pool Key Description 000-1120 General Checking - Bank 1 209,395.42 BS Cash 000-1122 Cash - Bank 2 115,872.05 BS Cash 000-1125 Payroll Account - BS Cash 000-1200 Accounts Receivable 1,339,483.73 BS Accounts Receivable Trade 000-1201 Other Receivables 1,307.05 BS Accounts Receivables - Other 000-1220 Employee Advances 300.00 BS Accounts Receivables - Other 000-1400 Unbilled Receivables - BS Unbilled Revenue 000-1600 Prepaid Expenses - BS Prepaid Expenses 000-1610 Prepaid Insurance 39,291.52 BS Prepaid Expenses 000-1700 Inventory 2,987.39 BS Work-in-Process 000-1800 Asset - Equipment 2,870.76 BS Equipment 000-1805 Accumulated Depreciation (1,818.30) BS Less Accumulated Depreciation 000-1900 Deposits 750.00 BS Deposits 000-2000 Accounts Payable - Regular (606,101.26) BS Accounts Payable 000-2001 Outstanding Checks - BS Bank Overdraft 000-2010 Accounts Payable - Accrued (120,772.66) BS Accrued Liabilities 000-2022 Accrued Payroll (91,026.50) BS Accrued Payroll / Taxes 000-2023 Accrued Payroll Taxes (6,963.53) BS Accrued Payroll / Taxes 000-2050 Payroll Checks To Be Issued - BS Accrued Liabilities 000-2065 Vacation Payable (70,000.01) BS Accrued Liabilities 000-2200 FICA & Federal Withholding Payable - BS Accrued Payroll / Taxes 000-2210 FUTA Payable - BS Accrued Payroll / Taxes 000-2220 SUI Payable - BS Accrued Payroll / Taxes 000-2310 State Withholding - BS Accrued Payroll / Taxes 000-2400 Garnishments (369.23) BS Accrued Liabilities 000-2450 Deferred Revenue/Advance Payment - BS Deferred Revenue 000-2490 Notes Payable - MBL (38,943.10) BS Notes Payable Just a Sampling
Chart of Accounts Acct # Account Description Balance Pool Key Description 005-5000 Labor - Overhead 70,848.99 Overhead Labor 005-5002 Labor Accrual/(Reversal) - Overhead (384.64) Overhead Labor 005-6000 Holiday - Overhead - Overhead Holiday 005-6100 FICA/Medicare - Overhead - Overhead FICA/Medicare 005-6110 FUTA - Overhead - Overhead FUTA 005-6120 SUT - Overhead - Overhead SUI 005-6400 Bonus - Overhead - Overhead Bonus 005-7000 Fringe Allocation - Overhead 20,207.05 Overhead Fringe allocation 200-4000 Revenue (7,289,726.56) Direct Sales 200-4100 Revenue - Accrual - Direct Sales 200-5000 Labor 1,611,021.69 Direct Direct Labor 200-5002 Labor Accrual / (Reversal) 15,477.44 Direct Direct Labor 200-5020 Subcontractors 3,240,346.08 Direct Subcontractors 200-5030 Outside Services/Consulting 222,178.28 Direct ODC 200-5140 Lease 6,350.00 Direct ODC 200-5240 Phone/Fax/Net 72.64 Direct ODC 200-5250 Postage/Freight 79.09 Direct ODC 200-5260 Dues & Subscriptions - Direct ODC 200-5280 Travel 383,325.35 Direct ODC 200-5290 Meetings & Seminars 34,729.02 Direct ODC 200-5470 Office Equipment Expense 900.00 Direct ODC 209-6000 Holiday - Job 1 1,211.52 Job 1 Holiday 209-6010 Vacation - Job 1 3,030.82 Job 1 Vacation 209-6015 Sick Pay - Job 1 900.00 Job 1 Sick Pay 209-6100 FICA/Medicare - Job 1 4,894.45 Job 1 FICA/Medicare 209-6110 FUTA - Job 1 42.00 Job 1 FUTA 209-6120 SUI - Job 1 166.40 Job 1 SUI Just a Sampling
Chart of Accounts Acct # Account Description Balance Pool Key Description 900-5000 Labor - Admin 314,238.68 GA Labor 900-5002 Labor Accrual/(Reversal) - Admin (915.38) GA Labor 900-5036 Uniforms - Admin 1,275.75 GA Uniforms 900-5110 Legal Fees - Admin 17,733.67 GA Legal Fees 900-5120 Professional/Consulting - Admin 157,235.49 GA Professional/Consult/Mgmt Fees 900-5160 Software/Licenses/Maint - Admin 10,549.37 GA Software Licenses/Mtnc 900-5170 Business Insurance 68,897.75 GA Insurance - Business 900-5200 Office Lease - Admin 18,663.25 GA Office Lease 900-5210 Building Repair/Maint - Admin 5,980.00 GA Building Repair/Mtnc 900-5220 Office Supplies - Admin 3,426.21 GA Office Supplies 900-5230 Parking Expense 351.00 GA Parking 900-5240 Phone/Fax/Net - Admin 9,859.20 GA Phone/Fax/Net 900-5250 Postage/Freight - Admin 2,706.88 GA Postage/Freight 900-5260 Dues & Subscriptions - Admin 1,720.26 GA Dues & Subscriptions 900-5280 Travel - Admin 11,519.10 GA Travel 900-5290 Meeting & Seminars - Admin 548.12 GA Meetings & Seminars 900-5400 Taxes/Licenses/Fees - Admin 16,635.36 GA Taxes/Licenses/Fees - Business 900-5410 Auto Expense - Admin 2,734.51 GA Auto Expense 900-5420 Depreciation/Amortization - Admin 478.50 GA Depreciation/Amortization 900-5460 Payroll Service Expense 3,059.43 GA Payroll Service Expense 900-5470 Office Equipment - Admin 5,590.22 GA Office Equipment Exp 900-5480 Trade Show Expense - Admin 330.00 GA Trade Show Expense 900-5500 Miscellaneous Expense - Admin 3,823.12 GA Miscellaneous 900-5510 Advertising - Admin 3,603.67 GA Advertising 900-5520 Bank Fees - Admin 4,011.43 GA Bank Charges 900-5550 Business Meals - Admin 5,378.51 GA Business Meals 900-8200 Unallowable Travel 32,545.26 GA Unallowable Cost Just a Sampling
Accounting 101 P&L Top Level Roll-up By Contract + Further G&A Overhead Balance Sheet State of the business Reconciliations Cash Flow
Month YTD Revenue $ 775,408.92 7,289,726.56 Direct Expenses Direct Labor 151,310.60 1,626,499.13 Subcontractors 383,313.97 3,240,346.08 Other Direct Costs 100,517.43 647,634.38 Fringe Benefit Costs 49,021.09 466,431.17 Total Direct Expenses 684,163.09 5,980,910.76 Contract Margin 91,245.83 1,308,815.80 % of Sales 11.8% 18.0% Indirect Expenses Overhead Expense 15,173.33 90,671.40 General & Administrative 101,992.47 816,376.49 P&L Top Level Corporate Total Indirect Expense 117,165.80 907,047.89 Operating Income (25,919.97) 401,767.91 % of Sales -3.3% 5.5% Other Income & Expenses Interest Income - - Other Income - - Interest Expense 562.50 6,924.79 Net Income (26,482.47) 394,843.12 % of Sales Add-Backs Interest Expense 562.50 6,924.79 Taxes - - Depreciation 47.85 478.50 EBITDA (25,872.12) 402,246.41 % of Sales -3.3% 5.5%
P&L Top Level Contract
B/S Top Level - Corporate ASSETS Balance LIABILITIES & STOCKHOLDERS EQUITY Balance CURRENT ASSETS CURRENT LIABILITIES Cash 325,267.47 Accounts Payable 606,101.26 Accounts Receivable Trade 1,339,483.73 Accrued Liabilities 191,141.90 Other Receivables 1,607.05 Accrued Payroll & Taxes 97,990.03 Inventory 2,987.39 Line of Credit 150,000.00 Prepaid Expenses 39,291.52 Deferred Revenue/Advanced Payments - Notes Payable 361,433.29 TOTAL CURRENT ASSETS 1,708,637.16 TOTAL CURRENT LIABILITIES 1,406,666.48 PROPERTY & EQUIPMENT Equipment 2,870.76 Less Accumulated Depreciation/Amortization (1,818.30) STOCKHOLDERS EQUITY NET PROPERTY & EQUIPMENT 1,052.46 Paid In Capital - Distributions (247,600.00) OTHER ASSETS Retained Earnings 156,530.02 Deposits 750.00 Current Year Earnings 394,843.12 TOTAL STOCKHOLDER'S EQUITY 303,773.14 NET OTHER ASSETS 750.00 TOTAL ASSETS 1,710,439.62 TOTAL LIABILITIES & EQUITY 1,710,439.62
Reconciliation Prepaid Insurance Description Term Desc Exp. Account Total Prepaid Total Policy Oct-13 Total Expensed The Hartford - Worker's Comp 6/21/2012-6/21/2013 Worker's Comp. 900-6200 842.00 842.00 842.00 - The Hartford - Business Owners 6/21/2012-6/21/2013 Business Owner's 900-5170 1,282.00 1,282.00 1,282.00 - Rutherford 10/16/12-10/16/13 Worker's Comp/ Defense Base Act 900-6200 34,493.00 34,493.00 1,437.17 34,493.00 - Clark & Sampson, Inc. 10/20/12-10/20/13 Direct & Officer's Insurance 900-5170 3,748.56 3,748.56 3,748.56 - CBIZ Insurance Services, Inc. 07/01/12-07/01/13 Pacific Ins Co. LTD Professional Liab. 900-5170 6,528.66 6,528.66 6,528.66 - CBIZ Insurance Services, Inc. 11/05/12-11/05/13 Foreign Pkg 900-5170 2,500.00 2,500.00 208.37 2,500.00 - CBIZ Insurance Services, Inc. 11/05/12-11/05/13 Defense Base Act 900-5170 25,176.00 25,176.00 2,098.00 25,176.00 - CBIZ Insurance Services, Inc. 11/05/12-11/05/13 Defense Base Act 900-5170 4,320.00 4,320.00 360.00 4,320.00 - Group Benefit services October 2013 Health Insurance GBS xxx-6300 10,637.00 10,637.00 10,637.00 10,637.00 - Group Benefit services November 2013 Health Insurance GBS xxx-6300 10,579.00 10,579.00-10,579.00 The Hartford - Worker's Comp 6/21/2013-6/21/2014 Worker's Comp. 900-6200 1,220.00 1,337.00 111.42 557.10 662.90 The Hartford - Business Owners 6/21/2013-6/21/2014 Business Owner's 900-5170 500.00 500.00 41.67 208.35 291.65 Rutherford 7/1/2013-2014 Defense Base Act - Germany, Italy, Kosovo 900-5170 32,595.00 32,595.00 2,716.25 10,865.00 21,730.00 CBIZ Insurance Services, Inc. 7/1/13-7/1/14 Professional Liability 900-5170 9,041.97 9,041.97 753.50 3,014.00 6,027.97 Balance 18,363.38 163,060.79 39,291.52
Cash Flow Top Level - Corporate Month Ytd Cash flows from operating activities: Net Income (26,482.47) 394,843.12 Depreciation & Amortization 47.85 478.50 Changes in Assets and Liabilities Decrease (increase) in Accounts Receivable (2,384.38) (709,280.15) Decrease (increase) in Unbilled Receivable (2,987.39) 1,937.61 Decrease (increase) in Other Receivable (1,307.05) 15,972.24 Decrease (increase) in Prepaid Expenses 7,784.38 21,228.86 Increase (decrease) in Accounts Payable and Liabilities 209,442.50 748,837.50 Increase (decrease) in Line of Credit - 150,000.00 Decrease (increase) in Capitalized Closing Costs - - Other changes, net - - Net cash provided by operating activities 184,113.44 624,017.68 Cash flows from investing activities: Capital Expenditures - - Sale of equipment, net of loss - - Net cash provided by (used) in investing activities - - Cash flows from financing activities: Changes in Equity - (597,600.00) Net cash provided by (used in) financing activities - (597,600.00) Net increase (decrease) in cash and cash equivalents (calculated) 184,113.44 26,417.68 Cash at beginning of period 141,154.03 298,849.79 Cash at end of period 325,267.47 325,267.47 Cash at end of period per balance sheet 325,267.47 325,267.47
Indirect Cost Allocations Accumulate indirect costs by logical cost groupings G&A Overhead Fringes Allocate grouping by a base that makes sense for that whole grouping
Indirect Cost Fringe Allocation Account Description Year to Date Actual Holiday 36,243.75 Vacation 86,648.26 Sick Pay 9,169.74 Bereavement 1,012.50 Other Paid Leave 4,725.60 FICA/Medicare 171,160.39 FUTA 1,896.25 SUI 7,447.21 Worker's Compensation 28,328.11 Insurance Benefits 90,847.97 Bonus 139,010.16 Total Fringes 576,489.94 Year to Date Account Description Actual Direct Labor 1,626,499.13 Overhead - Labor 70,464.35 G&A - Labor 313,323.30 Total Labor 2,010,286.78 Fringe Rate 28.7% Allocation - Direct 466,431.16 Allocation - Overhead 20,207.06 Allocation - G&A 89,851.72 Total Fringe Allocated 576,489.94
Year to Date Account Description Actual Labor 313,323 Fringes 89,852 Professional/Consulting - Bid 29,703 Legal Fees - Admin 17,734 Professional/Consulting - Admin 127,533 Software/Licenses/Maint - Admin 10,549 Business Insurance 68,898 Office Lease - Admin 18,663 Building Repair/Maint - Admin 6,042 Office supplies - Admin 3,364 Phone/Fax/Net - Admin 9,859 Postage/Freight - Admin 2,707 Dues & Subscriptions - Admin 1,720 Recruiting - Admin - Travel - Admin 11,519 Taxes/Licenses/Fees - Admin 16,635 Auto Expense 2,735 Depreciation/Amortization - Adm 479 Payroll Service Expense 3,059 Office Equipment - Admin 5,590 Bank Fees - Admin 4,011 Business Meals - Admin 5,379 Other Benefits - Contributions 750 Unallowable Travel 32,545 Unallowable Business Meals 3,913 Other Unallowable Costs 9,144 Entertainment 10,738 Indirect Cost G&A Allocation G&A Base: Direct Labor 1,626,499 Subcontactor 3,240,346 ODC 647,634 Fringes 466,431 Overhead 90,671 Total G&A Base 6,071,582 Less Unallowable Expense - Adjusted G&A Base 6,071,582 G&A Rate 13.4% FAR G&A Rate 12.5% Total G&A Expense 816,376 Unallowable Expense 57,091 Total FAR G&A 759,286
Year to Date Account Description Actual Labor - Overhead 70,464 Fringes 20,207 Indirect Cost O/H Allocation Professional/Consulting - Bids/Proposa - Temp Help - Office Supplies - Phone/Fax/Net - Postage/Freight - Dues & Subscriptions - Recruiting - Travel - Meetings & Seminars - Business Meals - Contracts - Depreciation - Office Equipment - Business Meals - 90,671 Direct Labor Base 1,626,499 Overhead Rate 5.6%
Purpose: SF 1408 Determine the acceptability of contractor s accounting system for accumulating costs under a Government contract The Company s Goal in Answering Questions on the SF 1408: Say Yes to each question
Questions on the SF 1408
The DCAA Audit Entrance Conference PBC Request and Auditor Questions Company s response Exit Conference Draft Report Company Response Auditor Follow-up Company Goal: Accounting System is Adequate
PBC Request and Auditor Questions DCAA Audit Requests for Information, via email from Auditor Identify the type/brand of the accounting software used by Company. 1. Identify the type/brand of the accounting software used by Company. 2. Have there been any changes in the accounting system? 3. Provide a current organization chart. 4. Provide current chart of accounts. 5. Provide job cost ledger which accumulates costs by contract. 6. Provide a general ledger trial balance. 7. Provide the actual indirect rates for fiscal year. 8. Provide budgetary data for fiscal year including budgeted indirect rates. 9. Provide formal documentation of the accounting system, with a written description of the contents of bases and pools.
PBC Request and Auditor Questions DCAA Audit Requests for Information, via email from Auditor 10. Provide reconciliation schedule of booked to billed costs. 11. Review the monitoring process to ensure that established manual and computerized controls are functioning as intended. 12. Describe any identified weaknesses or reported internal control deficiencies and related follow-up actions taken. 13. Are interim billings prepared from cost data? 14. Identify controls to preclude direct charging of indirect expense and indirect charging of direct contract costs. 15. Identify controls in place to ensure compliance with reporting requirements. 16. Identify controls which provide for review of contract billing provisions. 17. How often are contract costs posted to the books?
PBC Request and Auditor Questions DCAA Audit Requests for Information, via email from Auditor 18. How often are interim indirect rates monitored? 19. How often are total contract expenditures against contract limitations on price or cost monitored and updated? 20. Identify procedures for accumulating and billing labor costs. 21. Identify procedures for accumulating and billing direct material. 22. Identify procedures for assuring payment to vendors. 23. Identify procedures on items issued from inventory. 24. Identify procedures for accumulating and billing indirect costs. 25. Identify procedures for identifying and excluding unallowable costs. 26. Identify procedures to ensure that subcontractor and vendor costs are only included in billings if payment is appropriately made.
Timekeeping System Condition: Auditor s Report and Company s Response Company lacks proper internal control procedures and adequate timekeeping policies and procedures over their labor charging system to ensure accurate labor charging to intermediate or final cost objectives. The contractor lacks proper segregation of duties for labor related activities. There was a lack of documentation from the employees and supervisors indicating what the change was for and their concurrence with the change. Timesheets also lacked documentation of supervisory approval. We determined that Company does not have documented policies and procedures for the certification or verification of the externally prepared payroll prior to updating their accounting system. Due to the lack of internal controls and adequate timekeeping policies, the payroll recorded by ADP did not reconcile to their accounting system.
Recommendation: Auditor s Report and Company s Response We recommend that Company revise their internal controls and policies and procedures over their labor charging system to ensure accurate labor charging to intermediate or final cost objectives in accordance with FAR 31.202, Direct Costs; and FAR 31.203, Indirect Costs. This will ensure a timekeeping system that can adequately identify employees labor by intermediate or final cost objectives; and specifically require any changes to the timesheets be documented and signed by both the employee and the employee s supervisor.
Contractor s Reaction: Auditor s Report and Company s Response Contractor will revise their internal controls, policies and procedures to ensure that each employee s time card is documented with the appropriate cost objective, that the time card is signed by the employee s supervisor indicating review and concurrence with the time shown, that any changes to the time card will be documented and signed by both the employee and the employee s supervisor prior to data entry into the timekeeping system, and that Company will review and reconcile ADP data to timesheets prior to updating the accounting system.
The Goal The purpose of this letter is to inform you that Company s accounting system is considered approved. This determination is based on the review of all available information. During this review, no significant deficiencies were identified.
References FAR Subpart 31.2 Contracts with Commercial Organizations Rules and Definitions for Costs DCAA Manual No. 7641.90 Information for Contractors The manual is designed to assist contractors in understanding applicable requirements and to help ease the contract audit process
Subpart 31.2 Contracts with Commercial Organizations 31.201-1 Composition of total cost. (a) The total cost of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred. 31.201-2 Determining allowability. (a) A cost is allowable only when the cost complies with all of the following requirements: (1) Reasonableness. (2) Allocability. 31.201-3 Determining reasonableness. (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. (b) What is reasonable depends upon a variety of considerations and circumstances 31.201-4 Determining allocability. A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. A Sampling
Subpart 31.2 Contracts with Commercial Organizations 31.201-6 Accounting for unallowable costs. (a) Costs that are expressly unallowable or mutually agreed to be unallowable shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract. (c)(1) The practices for accounting for and presentation of unallowable costs must be those described in 48 CFR 9904.405, Accounting for Unallowable Costs. 31.202 Direct costs. (a) Direct costs of the contract shall be charged directly to the contract. 31.203 Indirect costs. (b) After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to intermediate or two or more final cost objectives. (c) The contractor shall accumulate indirect costs by logical cost groupings with due consideration of the reasons for incurring such costs A Sampling
Subpart 31.2 Contracts with 31.205 Selected costs. Commercial Organizations 31.205-1 Public relations and advertising costs. 31.205-3 Bad debts. 31.205-8 Contributions or donations. 31.205-11 Depreciation. 31.205-13 Employee morale, health, welfare, food service, and dormitory costs and credits. 31.205-14 Entertainment costs. 31.205-15 Fines, penalties, and mischarging costs. 31.205-18 Independent research and development and bid and proposal costs. 31.205-19 Insurance and indemnification. 31.205-20 Interest and other financial costs. 31.205-21 Labor relations costs. 31.205-23 Losses on other contracts. 31.205-30 Patent costs. 31.205-33 Professional and consultant service costs. 31.205-34 Recruitment costs. 31.205-44 Training and education costs. 31.205-46 Travel costs. 31.205-48 Research and development costs. 31.205-49 Goodwill. 31.205-51 Costs of alcoholic beverages. A Sampling
DCAA Manual No. 7641.90 Information for Contractors A Sampling
Thank you for joining us! Additional Information: «Melbourne Office 321.757.2020 «Orlando Office 407.841.8841 www.bermanhopkins.com Al Goldwasser goldwasser@bermanhopkins.com Phillip Hayes hayes@bermanhopkins.com