Job Cost Accounting Basics For Small Business Government Service Contractors

Small enterprises in the start-up service contracting business to the federal government often experience DCAA audit difficulties, suspended billings or negative marks on pricing proposals for not having addressed job cost accounting and business system issues involving Federal Acquisition Regulation (FAR) Cost Accounting Standards (CAS) requirements.  This article will address the basics of resolving those issues in a service contracting start-up environment.

"Small to Feds" has addressed the requirements of CAS and the associated business system design requirements previously in the following articles that are suggested for review as refreshers:

Establishing FAR and CAS Compliant Business

A Business System Framework

DCAA Audits and Small Business Job Cost Accounting

Provisional Indirect Rates

DEFINE YOUR COMPANY APPROACH AND ITS COMPLIANCE WITH GOVERNMENT REQUIREMENTS 

Please view the below matters in the context of your business system design at the cost element and job description level:

You must consider the job cost accounting implications of the government contract environment; i.e how do the individual labor charges every day on time cards for the company employees and management get booked to the correct accounts or expense pools and do they or do they not become part of the labor distribution directly to contracts or indirectly though overhead and G&A applications at month end (in effect is the government billed for the cost?).

In most small start-ups the best way to handle this is to write job descriptions for every position, including the owners and executives as well as other employees. Each job description is declared chargeable as direct only, indirect only or in rare exceptions, both direct and indirect chargeable.

Job descriptions are also declared salaried or hourly, exempt and non-exempt under the Fair Labor Standards Act,  which drives eligibility for time and one half for overtime.  All company personnel are furnished copies of job descriptions and informed of their direct or indirect, salaried or hourly status as a function of their employment offers. (You should generate retroactive offer letters for everyone in the company, have all personnel accept them in writing and put the letters and the job descriptions in the company personnel files for audit purposes)

Job descriptions are assigned to labor cost element codes in the job cost system (as opposed to other codes for materials, subcontract, travel and other direct costs that may require separate cost element codes to distinguish them for accounting purposes.

A direct charge job description will always have a contract charge number every day for every hour of work (typically technical performers) This usually drives the employee eligibility for overtime pay for hours in excess of 40. A company policy should be established early for this matter. Most companies pay straight time for hours in excess of 40 for salaried direct charge personnel.  Exceptions are hourly non-exempt personnel who must be paid time and one half under the law.

An indirect job description performer will charge every day on a time card to an overhead or G&A account and the associated labor cost will become part of expenses that are distributed at month end to all contracts, based on the direct labor dollar content of each contract for the accounting period (typically secretaries, administration personnel and the like charge to overhead and the owners and executives charge to G&A (unless an executive is working exclusively in an individual overhead cost center - that person would then charge the overhead charge number for that cost center or directly to a project if performing project-direct effort).

Exceptions to the above would be where a direct charge employee has no contract home and his labor must be charged somewhere. In that instance he would charge to a company overhead account or G&A account outside the overhead pool and his or her labor would not become part of the allocation to contracts, effectively making it come out of the company bottom line (profit). This situation normally drives layoffs or finding the person a contract home to charge.

Labor donated to the company as a form of loan must also be charged in the exceptions manner discussed above (loan labor liability account) and may not be charged or recovered via a contract bill to the government directly or as part of an overhead allocation. DCCA really goes looking for this type of thing.

Where an executive normally charging to an overhead or G&A pool, is a key person on a contract or performing direct effort on a contract for parts of his or her day, that person would charge the contract charge numbers for those efforts and the overhead or G&A accounts for company business of an indirect nature.

CHECKLIST
The above rules of the game (disclosure practices in DCAA parlance) normally force several business system tangibles.  It is suggested that you generate the following as a minimum in your startup preparations for demonstration during a proposal or fact finding audit:

1. Time Cards with a time card policy requiring they be filled out daily and turned in and approved by a supervisor weekly, then booked into the accounting system weekly.

2. Expense Reports bearing charge numbers for accounting as direct or indirect expenses.

3. Written Purchase orders to suppliers bearing charge numbers for accounting as direct or indirect purchases

4. Labor Job Descriptions - specially ear marked in the manner discussed above.

5. Cost element assignments for accounting purposes for 1-4, above.

6. Charge numbers for 1-4 above. A charge number is the combination of an employee number, supplier number, expense report number and a cost element, charged to a unique direct charge contract number, an overhead pool expense account or a G&A expense account.

7. Consider hiring a payroll service company  to support salaries and regular paychecks plus tax and withholding for EVERYONE IN THE COMPANY.

8. A monthly closing where direct costs are burdened with indirect costs and billings are generated to customers creating accounts receivable for that which can be billed and liabilities for that which cannot.

9. Revenue accounting upon receipt of a payment from a customer directly to the contract against which a bill was generated with offsetting receivable reductions at the contract level.

10. The discipline and attention to set up 1-9 and demonstrate its operation to a DCAA auditor.

Every successful small business in federal government service contracting has gone through the above; some proactively and others when they have had difficulties with a DCAA audit during a proposal or cannot get paid when they are under contact. The choice is yours.  It is not rocket science, it is different and it is a serious matter and must have your attention.

Multiple-Front Marketing In Small Business Federal Government Contracting

INTRODUCTION:

Your enterprise must market on several targeted government contracting fronts to be successful. Simply registering as a federal government contractor or acquiring a small business set aside designation does not mean that contracting officers will find you or that larger corporations will seek you out as a teaming partner. A GSA schedule or a multi-year IDIQ umbrella contract, purchase agreement or similar vehicle may look promising, but they are really no more than hunting licenses. The game must still be bagged (targeted sales of specific products or service projects to customers).

The prudent small business will target agencies and teaming partners that best fit its products and services, positioning itself to acquire advance information on requirements and displaying capabilities by conveying early solutions to customer decision makers. This article will suggest techniques, approaches and tools to conduct a multi-front, targeted, requirements-driven, marketing campaign for small business federal government contracting.

SELECT YOUR SMALL BUSINESS SET ASIDE DESIGNATIONS CAREFULLY

Your small business designation by North American Industrial Classification System (NAICS) Codes should be thorough and as comprehensive as possible when you register at the "System for Award Management (SAM) web site. Make sure your registration has the maximum number of codes for which you qualify, since the whole federal procurement system rides on those codes. Insure the narrative description of your services is complete as well. Please see the following link for further information on registration:

Federal Government Contracting Registration

The sub-categories of small business set-aside certifications should be chosen carefully and based on your company ownership and specific market research into which categories the agency or prime contractor favors, what their small business contracting plan includes in the way of targets and what their track record has been in awarding contracts. Good information on awards can be gleaned from the federal web site on federal government spending at:

USA Spending

You can also check the SBA small business goaling report at:

SBA Goaling Reports


For further details on each of the 7 small business set aside designations please see the following link:

Small Business Set-aside Programs

TARGET REQUIREMENTS EARLY

Government agencies, like companies, have long range plans and budget cycles. Keep abreast with the latest developments in trade magazines and journals regarding government contracting trends within agencies to develop and market solutions for anticipated requirements.

Monitor agency web sites and forecasts. Be constantly aware of the annual federal budgeting cycle, its development progress in the executive branch and its approval status in Congress. Agencies push to commit excess funding late in the fiscal year and at the same time forecast their next year needs for submittal to higher authorities. In the 1 October to September 30 fiscal year cycle, July, August and September are prime marketing periods.

Watch SAM for sources sought notifications, requests for industry comments on draft RFP's and similar early indications of programs taking shape which will later be advertised in full solicitation. Go after them early enough to market and get them set aside for your small business designation and influence the development of the project with constructive input creating a presence in the eyes of the customer and prospective teaming partners.

MAKE PRUDENT BID/NO BID DECISIONS

Develop a good fit in your bid/no bid decisions. The only thing worse than losing a contract bid is winning it and performing poorly, creating negative past performance notations on your record. Know what your company can do and cannot do. Acquire skilled personnel through contingent hire agreements or incumbent work forces as you grow and carefully choose what you bid. For information on bid/no bid decisions and proposal preparation please see the following link:

Government Contracting Bid/No Bid and Proposal Preparation

EXPLORE SERVICE CONTRACTING AND TEAMING

Other than FAR Part 12 Commercial Contracting for off-the-shelf items, entry into federal government contracting for small business usually occurs through service contracting direct to an agency or teaming as a subcontractor with another firm for a major program. Even for commercial products, particularly new ones on the market, the best way to introduce your solution to a customer is to become involved in a service contact supporting the client's operations.

With regard to larger government contracting corporations to whom you could subcontract, cover the waterfront. Find out what they are bidding and aggressively market a piece of the action as a small business. Find the locations for the largest government contractors nearest you and register at their supplier business sites. Everything they buy for their facilities, their personnel and their operations counts toward the small business goals required contractually of them by their enormous government contracts.

Research their web sites and locate their small business liaison officers. Make appointments and visit them. While visiting, seek the names and titles of managers internal to their companies who manage prime contracts involving expertise your business can supply. Go after those managers.
Form teaming agreements early with good industry partners and begin to develop a winning message to the customer while he is defining his program. The following article provides further details on teaming:

Teaming in Small Business Contracting

OBTAIN A GSA SCHEDULE

The below link is an article on how to apply for and utilize a GSA schedule:

Achieving and Utilizing A GSA Schedule

There are 3 major challenges to going through the GSA schedule application process:

1. Finding an open solicitation that fits your product line

2. Establishing a good working relationship with the GSA Contracting Officer on the schedule solicitation and getting his/her assistance in working the system expediently.

3. Presenting viable, auditable cost history on what you have previously sold your products for to pass the cost/pricing audit portion of the process.

Most companies continue to bid work to the government through FAR Part 12, Commercial Contracting procedures or other contract vehicles discussed this web site while their GSA schedule application is pending. Please examine this site for articles on teaming, marketing, IDIQ contracts, negotiations, subcontracting and many others.

Remember there are thousands of companies out there going through the system, so you will have to be patient. Very few applicants get through it in any less than 6 months. A GSA Schedule is a very valuable item to achieve, but it takes time to do so and there are other forms of government contracting you can use while your application is in process.

DEVELOP A DYNAMIC CAPABILITY STATEMENT

A capability statement (CAPE) is an absolute necessity. It contains the specific information a contracting officer needs to place an order. This information includes such items as your D&B Number, your government registration numbers, your North American Industrial Classification System (NAICS) codes and the like. These items are selected or provided by you or determined by the system when you register your company for government contracting.

Your electronic capability statement (CAPE) for government contracts should be short and hard-hitting. It should be 1or 2 pages and should highlight the salient points of your products and offerings, your personnel and your qualifications. Please see the following link for an example of a capability statement:

Your Capability Statement

WRITE RESPONSIVE PROPOSALS

Writing a winning proposal is an art form. It takes practice and the more proposals you prepare and submit the more artful you will be. You will find yourself utilizing the same materials over again on successive proposals. Management approaches, personnel profiles, win strategies and other major components of a good submission will fill your library and extend your CAPE to specific solutions for specific customers.

The following link contains guidance on writing effective proposals:

Proposal Preparation

SUMMARY

Your reputation as a reputable performer in the small business federal government contracting community is important. Be selective and high performing. Agencies, past performance data bases and other companies will be observing you, recording your performance and passing the word along to others directly and indirectly.

Then insure your web site, your capability statement and your marketing plans are maintained current alive and dynamically reflective of your successes as you pursue new business and carefully develop your library of past performance records by project with accessible profiles to use in your government proposals.

Please see the following link on meeting the past performance requirements challenge in federal government contracting:

The Past Performance Challenge


ABOUT THE AUTHOR:

Small to Feds is maintained by Ken Larson a Veteran of 2 tours - US Army Vietnam.

As a Volunteer Counselor, he assists many small businesses with their planning and operations processes.

Subsequent to his military service Ken spent over 30 years in federal government contract management and 10 years in small business consulting. He gets many inquiries from small companies wishing to enter or enhance their position in federal government contracting or grow their commercial enterprise. This site is intended to assist in answering those questions and others small businesses have in developing and operating a successful firm.

Those wishing a free counseling session may contact Ken at:

Ken Larson MicroMentor

Practical Intellectual Property Management for Small Business Federal Government Contractors

INTRODUCTION

We have previously discussed Intellectual Property (IP) and Proprietary Data (PD) protection for small business:

Protecting Intellectual Property

Difference Between Freelancer and Contractor

The above posts discuss rights in technical data and software assertions, non-disclosure and teaming agreements as well as proprietary data protection involving the government and industry partners.

This article expands those discussions by offering practical operations guidelines involving IP protection for small business government contractors.

DEFINITIONS

The World Intellectual Property Organization defines IP as:

“….creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.

Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs.    Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs.”

What Is Intellectual Property?

OWNERSHIP ENCOUNTERS AND CONTROLS

Bringing IP into existence requires that the tangible property as a result come under control.  For small business this is usually brought about by a series of encounters with IP.  They are discussed below in the relative order in which a small business encounters them.

Company Founding Personnel

A small business usually encounters IP and PD concerns when it is formed.  The operating agreement between the founders must address these matters from the perspective of who brings property to the venture and who owns it as well as the rights to the property developed thereafter. A typical operating agreement may be downloaded from the Box Net “References” cube in the right margin of this site.  Please examine it as a framework and add those elements that are unique to your enterprise.

Employees and Contractors

The next encounter usually entails employees or contractors who apply for work.  It is wise to inquire as a standard practice, and as part of an employment agreement or contract, whether or not an individual has signed a non-compete or proprietary data agreement with prior employers.  If they have, acquire a copy of the agreement and assess whether or not the employment of these personnel poses a risk of IP violations in terms of another company's property or their claim to ownership of what the candidate may develop on your behalf while in your employ. 

Make it clear in your agreements of hire and contracts that IP and PD that employees may participate in developing are the exclusive property of the company, that they will not own it and that they are expected to protect it, even when they leave your firm.

Industry Partners

Declare in your non-disclosure, teaming, and contract agreements the precise definition of the IP and PD ownership brought to the table and the exact share of ownership in subsequent development items.  Most firms use the efforts of their employees (labor records) as a basis to make these distinctions, but further specificity may be necessary on complex projects. 

 

Government Agencies and Prime Contractors

Ensure your policies and practices utilize assertions to document the ownership of IP and sound job cost accounting records for any IP developed at company expense, either in the past or during the course of a contract. The link below discusses the following major rights assertions in detail:

Unlimited Rights

・ Government Purpose Rights (GPR)

・ Limited Rights

・ Restricted Rights

・ Small Business Innovation Research (SBIR) Data Rights

・ Specifically Negotiated License Rights

・ Prior Government Rights

・ Commercial License Rights

Rights In Technical Data and Software

CONCLUSION

Intellectual property and proprietary data protection should be tailored to your organization, its industry relationships, people and practices.  It must grow as the company grows, adapt to changing conditions and be ever-sensitive to risk.

The best intellectual property protections are well understood, practical, teaming relationships among partners, employees, industry and government.  All sides in such relationships lose if disclosure or violations occur. 

Establish sound operations practices and train to insure these practices meet the objectives discussed herein to protect your organization IP. 

What Small Business Should Know About FAR And CAS

 

Federal Acquisition Regulation (FAR) 

& 

Cost Accounting Standards (CAS) 

Rules Of The Game And Developing Your Game Plan

INTRODUCTION

Small businesses consistently encounter FAR and CAS requirements upon entering or growing into federal government contracting.   The purpose of these standards is to supply uniform regulatory guidance to all companies doing business with the government and to the agencies that buy from them. 

A  basic understanding of FAR and CAS is necessary to manage government contracts  as well as design business process approaches to meet the requirements.  

The FAR applies to the full acquisition cycle for all supplies and services the federal agencies buy. 

The CAS apply to consistency in estimating, pricing, job cost accounting, billing and closeout of financial data under the contracts for supplies and services regulated by the FAR. 

FAR and CAS are not "Rocket Science" but they are different than the commercial business sector.  

HOW TO DETERMINE WHAT FAR AND CAS MEAN TO YOU

No one ever reads the full body of FAR and CAS from cover to cover.  They are reference documents, maintained by the government to oversee the contracting process.  From time to time changes to the regulations are offered for public comment at the FAR web site. 

 Such changes are more common in the FAR than in CAS.  The CAS have been constant for several years and are not as dynamic as the detail processes in the FAR. 

The below table contains the principle FAR chapter titles and each of the 19 CAS clauses.  Linked below the table are the web sites that can be utilized to explore these documents. 

(Please Click Image To Enlarge)  

Federal Acquisition Regulation

Determine the regulation basics that apply to any given job considered for bidding.  Examine a few solicitations in your area of expertise at the SAM web site:

SAM Contract Opportunities

Glance through the terms and conditions of a given solicitation and note the FAR and CAS requirements sited.  Use the links to the FAR and CAS web sites as source documents to read in detail the clauses you must understand to effectively bid the job .  

Cost Accounting Standards

Small businesses are generally required to meet modified CAS coverage. Small businesses are generally required to meet modified CAS coverage.  The business system requirements for Modified Cost Accounting Standards (CAS) Coverage are defined by the government as follows: 

Standard 9904.401, Consistency in Estimating, Accumulating, and Reporting Costs

Standard 9904.402, Consistency in Allocating Costs Incurred for the Same Purpose

Standard 9904.405, Accounting for Unallowable Costs

Unallowable Cost Guidance

Standard 9904.406, Cost Accounting Standard―Cost Accounting Period

Modified, rather, than full, CAS coverage may be applied to a covered contract of less than $50 million awarded to a business unit that received less than $50 million in net CAS-covered awards in the immediately preceding cost accounting period.

The following article contains practical business system guidance regarding building a Modified CAS Coverage Small Business System for federal government contracting:

Managing Risk In Small Business Federal Government Contracting Business System Development

If you have confusion regarding interpreting a requirement, seek assistance in the table of contents to the free book at this site offering guidance under the topic in question

SUMMARY

While assessing the impact of FAR and CAS on your company educate yourself on that what directly affects your company first in making the transition to federal government contracting and growing into the field.

Carefully  maximize your existing business processes and systems first before making changes and do not jump to instant fixes with exotic software tools a supplier or consultant has told you will make you compliant or competitive overnight in government contracting. 

FAR and CAS are generally logical bodies of regulation that have come about due to the need to control and make consistent the government and industry approaches to meeting prudent and sound contracting objectives with the necessary  transparency to govern. 

FAR and CAS do not impose business systems.  They do require that you disclose the way you meet regulatory requirements in the way you operate with your processes and tools. Plan the approach and learn to convey it to auditors, contracting officers and industry partners.

Grow into the business by exploring the venue and having it grow into you.  

Managing Risk Under 'The Truth In Negotiations Act (TINA)'

THE RISKS ASSOCIATED WITH DEFECTIVE PRICING 

INTRODUCTION:

 
We have previously discussed at this site the development of credible cost and pricing data. That data is the product of not only estimating and pricing but also job cost accounting for managing contracts, business system design to meet Cost Accounting Standards (CAS) and the integrated aspects of the company business system demonstrating regulatory compliance:

Pricing With Credibility

Pricing Small Business Federal Government Contracts

Small Business Systems Development

DCAA Audits and Small Business Job Cost Systems

The purpose of this article is to cite the specifics of the “Truth in Negotiations Act” and recommend  management techniques to comply with this law and avoid defective pricing claims by the US Government. 

THE TRUTH IN NEGOTIATIONS ACT (TINA)

Public Law 87-653 (codified by 10 USC 2306a) was originally enacted in 1962 to place the Government on equal footing with the contractor during contract negotiations.  The following are the principal features of the law:

• Defines requirements for obtaining cost or pricing data

•  Requires certification that data are current, accurate, and complete

• Delineates exceptions to the requirement

• Addresses data submission for pricing of commercial items, below threshold contracts, and “other information”

•  Provides right of Government to examine contractor records

• Defines cost or pricing data

• Provides rules governing defective pricing

• Downward Contract price adjustment

• ·Recovery of overpayment (cost & profit) & interest (as of 1985)

• 2 M Threshold for contract actions (DOD recently increased from 750 K) Recent Procurement Reforms

• Contract actions include contracts, subcontracts, and modifications

•  TINA applicability is not affected by contract type

•   For subcontracts, the $2M threshold applies to the submission of data from the subcontractor to the prime contractor.

 
FIVE POINTS THE GOVERNMENT UTILIZES FOR ESTABLISHING DEFECTIVE PRICING

 
1)    The information in question fits the definition of cost or pricing data.

(2)    Accurate, complete, and current data existed and were reasonably available to the contractor before the agreement on price.

(3)    Accurate, complete, and current data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer and these individuals did not have actual knowledge of such data or its significance to the proposal.

(4)    The Government relied on the defective data in negotiating with the contractor.

(5)    The Government’s reliance on the defective data caused an increase in the contract price.

MANAGING THE RISK OF A DEFECTIVE PRICING CLAIM

 
A government auditor relates to TINA and defective pricing whether or not it is required contractually and uses the TINA provisions as a frame of reference in how he or she views trend analysis of your company. Even if you do not have the TINA requirement in your bid or your contract, be aware the auditor is forming his or her opinion of your compliance with the law against the TINA framework.

Post award audits can be ordered at any time by a PCO. During such audits your proposal is juxtaposed to your incurred cost and historical data on a given contract. During such juxtapositions, defective pricing stands out glaringly.  If you become aware of an anomaly, cover your tracks by immediately assessing the impact and deciding whether or not a disclosure should be made.  

Integrate your system from pricing to billing to close out utilizing a consistent cost structure template and be aware you are putting audit history in place and that historical trends are what auditors follow.
 

Keep all subsequent disclosures under proposals to the government well documented, serialized and current at the prime and subcontract level, reflecting them in a detail record of negotiation.  

If you have commenced work prior to final negotiations under a letter contract or similar interim arrangement, conduct a sweep of actual costs and commitments and reflect them in an updated proposal to the government prior to negotiation of a final price.  Reassess quotes, escalation factors, indirect costs and related factors in the same manner if a proposal expires and you are asked to extend your pricing. 

If substantive conditions in an open proposal estimate change, document them thoroughly and disclose them to the government based on an astute analysis of your risk if they can be misconstrued as defective pricing by an auditor.  Carefully convey the impact on the prospective contract and its pricing to the contracting officer if you decide to disclose. 

Consistency with CAS and your CAS disclosure statement as well as your latest negotiated forward pricing rates is mandatory. Any departure from these baselines will attract audit attention.
In many defective pricing instances what you knew and when you knew it becomes a factor.  Continually assess changing conditions that may dramatically impact your cost performance and manage them by taking corrective actions, developing workarounds and carefully communicating requirements to your subcontractors and suppliers. 

Remember under TINA you are required to perform cost/price analysis of your subcontractors if their work scope exceeds the $700k threshold. You must submit the results with your proposal to the government.  If a disclosure becomes necessary, make it sooner rather than later when the data may be under the cloud of a negative audit finding.

SUMMARY

 
Defective pricing actions by the government can have a severe impact on your past performance rating.  They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations. 

Sculpt and educate your auditor, contracting officers and government analysts on the specifics of your company business system and preserve its integrity over the long run to maximize your win potential and lower the risk of defective pricing claims by the government. 

A good rule of thumb is to consider every proposal as if it were under TINA compliance whether or not you must submit a “Certificate of Current Cost and Pricing” under TINA.  This will keep your business system sharp, your ethics and standards high and your past performance record clean.