Accounting Systems - Problematic Standards - Part 6

Today we conclude our discussion series on accounting system standards that many contractors have found challenging. According the the DoD FAR Supplement (DFARS), there are 18 accounting system criteria and we're only addressing six of those. That doesn't mean the other 12 are less important. It means that they are very basic and fundamentally easy to understand. We are reviewing the ones that, in our experience, cause contractors to trip when being audited or left scratching their heads when trying to understand the meaning and intent of the standard. Today, in conclusion, we are going to take a look at Standard No. 16 -  Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms.

Now obviously, this criteria applies to contracts where billings are based on costs such as cost reimbursable contracts and fixed price with progress payments based on cost. But its also important for T&M contracts where the "materials" costs much trace back to accounting records. Also, more recently, the Government has been checking out progress payments based on milestones to ensure that the amounts received don't exceed actual costs. We spent a great deal of time recently discussion performance based payments. For more on this last point, click here.

There are several problems that come up when contractors bill their actual costs. First, we've seen several cases where contractors bill what they negotiated, not what they've incurred. This usually happens at very small Government contractors who don't understand what kind of contract they've received. Most often, these are non-DoD contracts where billings do not go through the rigors of DCAA oversight. Secondly, some contractors like to include amounts in their billings that are not recorded in their accounting records. We've seen provisions for the business use of privately-owned vehicles and other "soft" costs that may have in some way benefited the contract.

Another problem with billing reconciliations is the capability of some accounting systems to record prior period adjustments. QuickBooks is guilty of this as is other software. These systems have no "hard close" dates so that prior period transactions can be edited at will. If a prior period is edited, suddenly the billings will no longer reconcile to the books. There is no definitive way to reconcile billings to accounting records at this point, other than to guess. Guessing does not typically satisfy auditors.Contractors should avoid editing prior period transactions. If adjustments are required, use journal entries and document the reason for the adjustment.

Reconciliations, in this context, are generally limited to direct costs. Indirect costs are typically billed at an approved provisional billing rate. However, as happens over and over, contractors sometimes try to bill indirect costs as direct. It may be a particular indirect cost that is specifically identifiable to a contract so the contractor rationalizes that it should be billed as direct. Doing so, is usually inappropriate and violates some FAR cost principles on direct and indirect costs.

The last issue we'll bring up today is the one where contractors try to bill certain costs at other than cost. A good example of this is company-owned equipment where a contractor charges the going market rate rather than its actual costs. There are situations where that would be acceptable however, generally, costs to the Government must be limited to the cost of ownership.