Government Contract Cost Accounting

Trying to make sense of the government’s contract cost accounting rules? We demystify and help you apply them in a way that makes sense for your business and withstands the scrutiny of government audit.

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The government’s cost accounting rules can apply to government contractors of all shapes and sizes, in every industry. While anyone can read these rules, we help you understand why they exist, how to interpret them, and how the government enforces them. Having access to this deeper level of understanding helps our clients reduce risk, improve compliance effectiveness, and improve accounting simplicity. Effective cost accounting doesn’t necessarily require tedious complexity.

    The government’s cost accounting rules govern what costs the government will or won’t pay (i.e., cost allowability), and how much of those costs they’re willing to pay (i.e., cost allocability). Political and socio-economic policy frequently underpin the cost allowability rules. Which means “unallowable” costs represent items or activities that the government, as a steward of public funds, won’t pay regardless of whether or not the item is a routine business expense. And while the government will pay for allowable costs, it will only pay its “fair share” as determined by its cost allocability rules.

    Both of these concepts are important when either negotiating non-competitive contract prices (or price modifications), or performing cost-reimbursable contracts.  Explore the sections below to learn more about how we help clients distill the rules and keep it simple:

    • Cost Allowability
    • Cost Allocability
    • Incurred Cost Proposals (i.e., Annual Final Indirect Cost Rate Proposals)
    • Indirect Cost Structures

    Cost Allowability

    As is true in nearly every aspect of government contract cost accounting, few things are crystal clear. While a few areas of cost allowability are straight forward, others can be the subject of intense debate between contractors and auditors – especially where fines and penalties, CAS 405 noncompliances, and accounting system deficiencies are at stake.  To minimize costly audit findings and disputes, we analyze the facts and circumstances to establish artful policy statements, accounting practices, and supporting documentation for costs where allowability could be debatable.

    Our professionals offer a diverse background of perspectives from both industry and government, with relevant experiences including drafting unallowable cost policies, performing audit tests for unallowable costs in connection with incurred cost proposals, developing and providing training, assisting clients with routine audit inquiries and rebuttals of unallowable cost allegations, and helping clients prevail in complex negotiations and litigation regarding cost allowability matters. 

    Baker Tilly’s government contracting professionals approach each client’s circumstances with a fresh and unique perspective, and apply the cost principles from a variety of government regulations, including FAR Part 31, OMB Uniform Administrative Guidance, and agency FAR supplements in practical, defensible ways. The letter and spirit of each cost principle cannot be interpreted in a vacuum; our approach helps clients to develop policy statements and procedural guidelines that make sense in the context of the company’s culture, values, operating environment, customer/contract mix, employee regulatory awareness, level of management’s risk tolerance, and the government’s current and historical oversight emphasis.

    Our goal is to develop an appropriate balance between a contractor’s established business practices and the letter-of-the-law, while avoiding, or at a minimum mitigating, the risk of controversy or disputes.

    Cost Allocability

    Many of the FAR 31.205 cost principles incorporate extensive requirements of the Cost Accounting Standards (CAS) by reference. This robust set of rules govern a contractor’s cost allocations to contracts. CAS also governs a contractor’s measurement of certain costs, as well as the assignment of them to cost accounting periods. Importantly, certain CAS requirements differ from (or are not addressed by) Generally Accepted Accounting Principles, which often means that contractors need to maintain contract cost accounting records that differ from (but are reconcilable to) their financial accounting records. 

    We regularly assist contractors to assess their cost accounting systems and practices for adequacy and compliance with FAR and CAS. We have significant experience developing compliant cost accounting practices relative to all CAS standards, and the accounting system functionality to demonstrate compliance.

    Unlike FAR Part 31, the Cost Accounting Standards, when applicable to specific contracts, also come with onerous administrative requirements that are more confusing and cumbersome than the Standards themselves. In this regard, we help contractors determine CAS applicability, prepare complaint and adequate Disclosure Statements, evaluate the potential implications of (and disclosure requirements for) cost accounting practice changes and non-compliances, prepare general dollar magnitude (GDM) or detailed cost impact (DCI) analyses, and assist with negotiation and resolution of changes.

    To learn more about how we help clients tackle CAS compliance, check out these additional sections:

    • CAS Compliance
    • CAS Administration

    CAS Compliance

    When CAS applies (which can be a tricky question), the Standards govern how a contractor measures costs, assigns them to cost accounting periods, and allocates them to contracts.  The Standards aim to increase uniformity in cost accounting practices among government contractors, and establish consistency in cost accounting practices by individual government contractors over periods of time.  In theory, this increased uniformity and consistency should improve understanding and communication between contractors and the government, reduce contract disputes, improve contract administration effectiveness, and facilitate equitable contract settlements.  Baker Tilly can help your company turn this theory into reality.

    The trade-off for increased uniformity and consistency (beneficial to the government) is decreased autonomy and flexibility (detrimental for contractors).  CAS compliance can be burdensome and costly in today’s dynamic and competitive business environment.

    We help government contractors interpret and apply CAS in ways that make sense to their unique businesses and circumstances.  We understand not only the requirements, but also the core cost accounting principles and concepts upon which the Standards are based.  We can help your company achieve CAS compliance that preserves your sanity and some reasonable accounting flexibility. 

    CAS Administration

    Contractors that have one or more CAS-covered contracts must comply not only with some or all of the Standards, but also with the Federal Acquisition Regulation (FAR) Part 30 and CAS Board regulations regarding CAS administration. These administrative rules can be more controversial, convoluted, and cumbersome than the Standards themselves.

    Baker Tilly’s government contracting professionals help contractors effectively execute all aspects of CAS administration, including:

    • Determining CAS applicability
    • Preparing or revising Disclosure Statements
    • Evaluating and processing cost accounting practice changes and non-compliances
    • Administering CAS-covered subcontracts

    Getting it right the first time offers the highest probability of avoiding controversial audit issues, maximizing cost recovery, and minimizing administrative hassle.  Consulting with an expert might mean the difference between smooth sailing and endless aggravation.  If you’re facing important questions like those below, getting some expert advice will be a wise investment:

    • Does CAS apply to my contract? Do I need to prepare and file a CASB Disclosure Statement (Form CASB DS-1)?
    • How do I create a process to identify and track CAS-covered contracts and subcontracts?
    • What’s the best way to draft an initial (or revise an existing) Disclosure Statement?
    • How do I know if my Disclosure Statement is “adequate”?
    • How do I determine if changes in my business will cause adoptions of initial accounting practices, organizational changes, or cost accounting practice changes?
    • If I make changes, do they represent a single change or multiple cost accounting practice changes?
    • Are the cost accounting changes I’m making required changes, or unilateral changes?  How do I know if they’re desirable?
    • How do I evaluate and defend against asserted CAS non-compliances?
    • If I have a CAS noncompliance, how do I develop and evaluate potential alternative compliant practices to minimize cost impacts and interest?
    • How and when do I prepare a notification of cost accounting practice changes?
    • How and when do I prepare general dollar magnitude (GDM) or detailed cost impact (DCI) analyses?
    • How do I identify “affected” CAS-covered contracts?
    • What are some effective strategies and tactics to facilitate audit, negotiation, and resolution of cost accounting practice changes or noncompliances?
    • Do I need to (or how do I) evaluate the adequacy of subcontractor disclosure statements?
    • How do I minimize potential liability for subcontractor CAS noncompliances?

    Incurred Cost Proposals

    Our government contracting professionals help clients prepare adequate Incurred Cost Proposals (i.e., Final Indirect Cost Rate Proposals) that withstand audit scrutiny.  Although FAR 52.216-7, “Allowable cost and payment,” spells out the criteria for an “adequate” proposal, government auditors make up their own extra-regulatory “requirements” for an adequate proposal.  So the goalposts occasionally move without notice or explanation.

    After submission, we help our clients in the following important ways:

    • Guidance on how to manage the government’s audit
    • Audit liaison support
    • Counseling on entrance conferences, audit inquiries and data requests, and exit conferences
    • Research, analysis, and responses to preliminary audit issues
    • Responses to Statements of Conditions and Recommendations (SOCARS)
    • Strategies to resolve audit findings during negotiations with contracting officers.

    We have extensive experience working collaboratively with client personnel, and communicating effectively with government auditors and contracting officers.

    Indirect Cost Rate Structures

    As our client’s businesses change and evolve with their markets, new business pursuits, and post-merger integrations, they often ask us to re-evaluate their indirect cost rate structure.  In this regard, we first learn about the client’s business and strategic plans.  Then we analyze alternative indirect cost accounting scenarios to optimize cost recovery and competitiveness while ensuring compliance with applicable cost accounting rules and minimizing potential cost accounting practice changes. Our process provides useful insight into the true drivers of direct and indirect costs.

    Our clients also use our indirect cost rate models to develop forward pricing and provisional billing rates, reconcile indirect rates to the general ledger, demonstrate accounting system operating integrity (particularly helpful for clients that use Deltek Costpoint or Unanet), and perform what-if scenarios on the impacts of possible future accounting practice changes. Our models are also a valuable design document for new accounting system implementations.

    Some of the key items we consider include:

    • Defining direct costs, indirect costs, lines of business, segments, etc.
    • Understanding the client’s markets, competitive pressures, and strategic initiatives
    • Evaluating potential organizational changes to better align indirect costs with cost drivers
    • Assessing whether more preferable bases exist for allocating indirect costs to cost objectives.
    • Identifying opportunities to reclassify indirect costs as direct costs.
    • Assessing opportunities to create or eliminate service centers.
    • Assessing opportunities for realigning indirect cost pools by geographic region, by customer, by product/service line, etc.
    • Assessing opportunities to consolidate or create indirect cost pools.
    • Assessing the risk of cost accounting practice changes (as governed by CAS) and their cost impacts to contracts.
    • Assessing impacts of changes to business operations and management behavior.
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