This is the seventh and final installment in our series on Preaward Surveys of prospective Government contracts. We know. In our first installment, we said that we wouldn't be reviewing this last preaward survey form, the SF Form 1408, that covers the adequacy of the accounting system because we had discussed in many times before. But then, this series wouldn't be so nice and tidy if one of the survey forms were missing. So, at the risk of sounding like a re-post, we will discuss the basic requirements for accounting systems. There's another reason to bring it up again. This is the preaward survey form that prospective contractors are most likely to encounter in the process of securing a Government contract. This form is generally completed by DCAA (Defense Contract Audit Agency) and they take their job very seriously. There is nothing half-baked about what they do to determine whether a prospective contractor's system will do the job it needs to do. The Agency has developed an entire audit program around this form and the guidance for performing preaward accounting system reviews takes up a big chunk of Chapter 5 in their audit manual (DCAA Contract Audit Manual, or CAM). So, lets get started, shall we.
The SF Form 1408 lists 15 attributes that an accounting system must be capable of accomplishing in order to be considered adequate. A few of these attributes might apply only to specific types of contracts or contracts with certain provisions or requirements but the majority apply across the board. Here are the 15 attributes:
1. Is the system in accord with GAAP (Generally Accepted Accounting Standards)? This is usually something that is answered in the negative, as in, nothing came to our attention that was contrary to GAAP.
2. Does the accounting system provide for proper segregation of direct costs from indirect costs? First, you will need to define what costs are direct and which are indirect.
3. Dies the accounting system provide for identification and accumulation of direct costs by contract? This requires a job cost system or a system with the capability to accumulate costs by contract. Lots of companies using QuickBooks use the "class" feature for their job costing.
4. Does the accounting system provide for a logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives (a contract is a final cost objective)?
5. Does the accounting system provide for accumulation of costs under general ledger control? Always a 'yes' answer for companies using today's entry-level accounting software on up.
6. Does the accounting system provide for a timekeeping system that identifies employees' labor by intermediate or final cost objective? If you don't have an web-based timekeeping system, get one. They're inexpensive and most of them will satisfy this requirement and DCAA's additional requirements (like an audit trail).
7. Does the accounting system provide for a labor distribution system that charges direct and indirect labor to the appropriate cost objectives? You've got to convert hours on a timesheet to labor dollars so you can charge the appropriate cost objective.
8. Does the accounting system provide for interim (at least monthly) determination of costs charged to a contract through routine posting of books of account. Today's accounting software will handle the reports but its up to your accountants to post the books.
9. Does the accounting system provide for exclusion from costs charged to Government contracts of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions? Most systems can accommodate this but it also requires someone knowledgable with FAR cost principles to make determinations as to what is allowable and what is not.
10. Does the accounting system provide for the identification of costs by contract line item and by units if required by the proposed contract? Again, most of today's accounting software can be set up to account for costs at levels below the contract.
11. Does the accounting system provide for segregation of preproduction costs from production costs?
12. Does the accounting system provide financial information required by contract clauses concerning limitation of cost or limitation on payments? You've got to let the Government know when you are running out of funding.
13. Does the accounting system provide financial information required to support requests for progress payments?
14. Is the accounting system designed and are the records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on acquisitions? For example, will your system tell you what the average labor and material cost to build a sub-assembly so that you can use that information as a starting point to price follow-on effort?
15. Finally, is the accounting system currently in full operation? You better hope that it is otherwise it will complicate matters and the contracting officer will send DCAA back in a few months to test whether the system works.
So there you have it. If you want someone to come in and assess whether your accounting system is adequate (a "mock" audit, if you will), give us a call. We'll spend a couple of days, give you our assessment, and maybe even some recommendations.