Government Cost Accounting Basics
Identifying and allocating costs on government jobs is a big part of the government's concern about the contractor's accounting systems. The Federal Acquisition Regulations (FAR) specify that "Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type." So the first thing you have to ask yourself as a contractor is what does this mean and how can I do this? The first task is to itemize and segregate all of the organization's costs. The costs are segregated into what the government terms "direct costs" and "indirect costs". A direct cost is generally defined as a cost that is specific to the performance of only one contract. Indirect costs are generally costs that benefit more than one contract (what you would consider Overhead & G&A) . Next the contractor must evaluate each cost for what the government calls "reasonableness" and "allowability". Costs are reasonable if they would be incurred by a prudent person in the conduct of competitive business. Costs are allowable when it is reasonable, allocable, complies with Cost Accounting Standards (if applicable) - otherwise generally accepted accounting principles (GAAP), terms of the contract and are within the limitations of FAR 31.2. Accounting practices that are inconsistent with FAR part 31.2 will result in unallowable costs. Each direct cost must be associated with a specific cost objective (government contract). In addition, each unallowable cost must be identified and withheld from billing to the government either as a direct cost or an indirect cost. This results in an accounting system that is typically called a "job cost accounting system". Obviously, the government has thrown a few more requirements into the system which can be added by knowledgeable personnel (with experience in government contracting). This is part of what ReliAscent does for small businesses. These regulations are a "maze" and often difficult for the un- initiated to understand. We recommend that you hire someone that knows this to perform these tasks for you so you can concentrate on what makes your business money.