When Will You Exceed 75 Percent of Contract Funding? Why Does it Matter?

Accounting systems for Government contracting must meet many requirements that are not necessarily needed to properly account for costs under commercial work. Most of these requirements are centered upon cost accounting - accumulating costs by contract, recording time by contract, establishing indirect rates to apply to direct costs by contract, etc. - as opposed to financial accounting.

There is one criteria that most new and prospective contractors and subcontractors have difficulty understanding and implementing. It shows up as Item 3.a on the SF 1408, Pre-Award Survey of Prospective Cotnractor - Accounting System, or Item 18 on DCAA's (Defense Contract Audit Agency) Preaward Accounting System Adequacy Checklist and Item (c)(15)(i) of the DoD FAR Supplement Clause 252.242-7006 and it requires contractors to notify the contracting officer when it is about to run out of money on cost-reimbursable contracts.

Specifically, contractors (and subcontractors) performing under cost-reimbursement Government contracts are required to notify the contracting officer, in writing, whenever they have reason to believe

• the costs the contractors expect to incur under the contracts in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the estimated cost of the contract, or
• the total cost for the performance of the contracts will be greater or substantially less than estimated.

Consider, for a moment, the data and accounting information necessary to comply. First, lets point out that no accounting system, except very expensive systems catering to Government contracting, costing hundreds of thousands of dollars to license and implement, is capable of providing this information. So if you're using QuickBooks or another entry level accounting system, you will need to augment it with will something else. Most contractors use Excel.

Obviously to project what costs will be in the next 60 days will require some sort of budgeting or forecasting system. This is where a lot of contractors fail - they do not perform budgeting. Some contractors will look at their historic 'burn rate' and project off of that. That usually results in imprecise estimate and moreover, its not necessarily tied in to the accounting system.

The other data point to the required analysis is 75 percent of the funded amount. It is surprising the number of contractors and subcontractors who haven't bothered to calculate this number. Without it, there is no means of determining whether contract costs will exceed that number in 60 days.

If you need some assistance in setting up a system to comply with this accounting system requirement, give us a call.