Accounting Systems - Developed vs. Implemented

We have written frequently about accounting system adequacy. This is one area where, if a prospective contractor's accounting system is deemed inadequate, there is a good chance that the firm will not get the contract it is seeking.

For purposes of determining accounting system adequacy, the Government only requires that a prospective contractor has developed an adequate accounting system. There is no requirement that the system be implemented until there is a successful contract award.

There is definitely a cost associated with setting up an accounting system that is adequate for Government contracting purposes. Some of the required attributes are unnecessary in a purely commercial enterprise. Sometimes companies that do not have Government contracts but are seeking to enter that market, do not want to undergo the time and expenses associated with creating such a system, especially when certain required features are not necessary for their other (commercial) work, and there is no certainty that they will be awarded a Government contract. They might not want to, but they need to do it anyway if they want to stay in the running.

The Government though, is somewhat flexible in these situations. The Government's position is that a prospective contractor must have developed an accounting system that is operable, though not necessarily in use. The contractor must be in a position to demonstrate this new system to the Government and be ready to implement the system prior to incurring any costs on Government contracts.

Here the Government distinguishes development activities from implementation. It says that contractors must develop a system but they don't necessarily have to implement it until contract award. From our perspective, we cannot think of a situation where a prospective contractor would go through the work necessary to develop an "adequate" accounting system and then not deploy it. By the time the system is developed, the costs are sunk costs and the incremental costs associated with implementing would be minimal.

Companies interested in pursuing Government work should measure their accounting system against the minimum accounting system attributes listed in SF Form 1408.

The Myth of DCAA Approved Accounting Software - Part II

In Part I of this series, we warned against buying in to the myth that there are accounting software applications that have been approved by the Government for Government contracting purposes. The Government does not approve accounting software. Nearly every appplication available can be used for Government contracting. If you are satisfied with your current accounting software, you should stick with it. While the Government neither approves or disapproves specific software applications, it is interested in making sure that contractor accounting systems are capable of recording, accumulating, and reporting costs in a manner consistent with contract terms. In this part, we discuss the characteristics of what the Government looks for in an accounting system.

Do not confuse the terms "accounting software" and "accounting system". The two terms are not synonimous. The term accounting system encompasses all aspects of the accounting function including the software, personnel, management, policies and procedures, data entry, reporting, supporting documentation, and internal controls. When evaluating whether a prospective contractor has an adequate accounting system, the Government utilizes form SF 1408, Preaward Survey of Prospective Contractor Accounting System, a series of yes/no questions asking whether the system can accomplish certain tasks including;

1. Is the system maintained in accordance with GAAP (Generally Accepted Accounting Procedures)? The main idea here is whether the accounting records are maintained on an "accrual basis". A "cash basis" of accounting is not GAAP.
2. Does the accounting system provide for proper segregation of direct costs from indirect cost and can direct costs be accumulated by contract? Can direct costs by contract be further broken down by contract line item if required? Can preproduction costs be segregated from product costs?
3. Are indirect costs allocated to contracts in a logical and consistent manner? FAR 31.203 requires that indirect costs be allocated to contracts on the basis of the benefits accruing to those contracts.
4. Do all costs roll up to a general ledger? This is an obvious "yes" when using today's accounting software.
5. Does it include a timekeeping system that identifies labor charges by contract or indirect function?
6. Does it include a labor distribution system (hours generated by the timekeeping system times labor rates from the payroll system) that charges costs to the appropriate contract or indirect cost pool.
7. Can it produce monthly (or more frequent) determination of costs by contract? This means that accrued costs must be computed at least monthly.
8. Are there procedures to identify and exclude FAR Part 31 unallowable costs from billings (see FAR 31.201-6)?
9. Can the system provide financial information to support public vouchers (cost reimbursable contracts) and progress payments?
10. Is the system designed and are records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on contracts?
11. Is the system in full operation?

If your accounting system is capable of accomplishing the foregoing, it is adequate for Government contracting purposes.