Under cost-reimbursable contracts, the Government has agreed to reimburse contractors for their actual costs (up to a certain limit) and that means contractors must have accounting systems that accumulate actual costs (by contract). The accounting system then must feed the billing system and the two must reconcile.
"Reconciling" and "Matching" are two different things. Billings and accounting records do not need to match. They only need to be reconcilable to one another. There are many reasons why billings might not match the accounting records. Auditors refer to these differences as "reconciling items". Differences that cannot be reconciled however, lead to audit issues which often lead to delays in processing payments. Delays impact cash flows.
Here are some items that might account for differences between accounting records and billings:
- Unallowable costs under FAR, agency FAR supplements, and contract terms.
- Costs that are non-billable because the costs do not meet specified criteria for inclusion (e.g. accrued material costs that ordinarily will not be paid within 30 days).
- Costs in excess of ceilings or other limitations.
- Use of approved billing rates that differ from a contractor's "applied" rates.
- Costs that require specific contracting officer approval before they can be incurred or billed (special purchases, overtime authorizations, etc.).
- Specific contracting officer instructions.
It you have a cost-type contract, you will be audited somewhere down the line. One of the first exposures after contract award will be an assessment of the billing system, procedures, and practices. Contractors need to be prepared to explain any differences between billings and the accounting records.