Business System Requirements - Accounting

Today we continue our coverage of DoD's proposed regulations to withhold money from contractors that have inadequate business systems. The proposed regulation sets forth specific criteria on what each of six business systems must accomplish in order to be judged adequate. Today's system is the Accounting system. The accounting system is absolutely the most important of all the six business systems. The specific system requirements are essentially the same attributes, with a few modifications, as those listed in the SF Form 1408 that the Government uses as a pre-award assessment tool to determine if a prospective contractor's accounting system is adequate for Government contracting purposes.

An accounting system must comply with applicable laws and ensure the propoer recording, accumulating, and billing of costs on Government contracts, including, but not limited to providing;

1. A basic structure that defines the form and nature of the organization as well as the management functions and reporting relationships (i.e. written policies and procedures);
2. Proper segregation of direct costs from indirect costs;
3. Identification and accumulation of direct costs by contract (i.e. some form of job costing);
4. A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives;
5. Accumulation of costs under general ledger control (automatic with most accounting software);
6. Reconciliation of subsidiary cost ledgers and cost objectives to general ledger;
7. Approval and documentation of adjusting entries (not part of SF 1408);
8. Periodic monitoring of the system, as appropriate (not part of SF 1408);
9. A timekeeping system that identifies employees' labor by intermediate or final cost objectives;
10. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;
11. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account;
12. Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of FAR Part 31, Contract Cost Principles and Procedures, and other contract provisions;
13. Identification of costs by contract line item and by units (as if each unit or line item were a separate contract) if required by the contract;
14. Segregation of preproduction costs from production costs;
15. Cost accounting information as required:
• By contract clauses concerning limitation of cost (FAR 52.232-20) or limitation on payments (FAR 52.216-16); and
• To readily calculate indirect cost rates from the books of accounts;
16. Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms; and
17. Adequate, reliable data for use in pricing follow-on acquisitions.